For the first time in U.S. history, the federal Corporate Transparency Act ("CTA") requires all business entities formed or registered to do business in the United States to disclose information about their ownership structure. Under the CTA, a business entity must report to the U.S. Department of the Treasury (FinCEN) personal identifying information about its existing ultimate beneficial owners, executives and other control individuals and update this reporting when any previously reported information changes. The new CTA reporting requirements have no cut-off date, applying to all business entities regardless of when formed. Substantial civil and criminal penalties may be imposed for failure to comply with CTA reporting obligations.
Complying with the CTA requires significant advanced planning and effort. First of all, every business entity has to determine whether it qualifies for a CTA exemption. If not, the entity is treated as a "Reporting Company" and required to file a beneficial ownership information report (a "BOI Report") with FinCEN. To complete its initial BOI Report, a Reporting Company should be able to look up its entire organizational structure and gather personal identifying information (e.g., name, DOB, residential address and passport/driver’s license) from all individuals (natural persons only) who directly or indirectly own 25 percent or more of or exercise "substantial control" over the Reporting Company (the "Beneficial Owners"). The rules for calculating ownership percentages and determining "substantial control" are complex and should be applied at every level in a multi-tier ownership structure. Furthermore, after coming into initial CTA compliance with the filing of its initial BOI Report, a Reporting Company should monitor its entire ownership and organizational structure on an ongoing basis, as any direct or indirect change may require the filing of an updated BOI Report (some as simple as hiring or firing a C-suite officer).
CTA establishes tight deadlines for filing BOI Reports. A Reporting Company formed after December 31, 2023 must file its initial BOI Report within 30 days of formation (or if formed during 2024, within 90 days of formation). A Reporting Company formed on or before December 31, 2023 has until January 1, 2025, to file its initial BOI Report. If there is a change in any information previously reported about a Reporting Company or any Beneficial Owner, the Reporting Company must file an updated BOI Report within 30 days.
Despite its simple name, the CTA has deep implications on business. Many everyday transactions (such as raising capital, third party stock sales, trustee substitutions and even home address changes) have the potential to trigger an updated BOI Report. Individual transaction participants may be surprised to find that they have become Beneficial Owners and therefore should reveal identifying personal information to a Reporting Company and, more ominously, the U.S. government. Quite understandably, many may be reluctant to do so. So, when planning for any transaction, a reporting company should be prepared to meet these challenges, especially in light of the tight filing deadlines for BOI Reports.
Herrick is ready to guide and advise you with respect to your obligations under the CTA.