The Corporate Transparency Act

The Corporate Transparency Act (CTA) is a federal statute effective as of January 1, 2024 that requires that qualifying entities disclose certain identifying information, both about themselves and about their beneficial owners, to the Financial Crimes Enforcement Network of the Department of the Treasury (FinCEN). The purpose of the CTA is the prevention of fraud and other financial crimes.

What Entities are Subject to the CTA?

Generally, entities formed in the United States, including corporations, limited liability companies (LLCs), limited liability partnerships (LLPs), and limited partnerships (LPs), are subject to the CTA. Furthermore, entities formed in foreign countries, but registered to do business the U.S., are also subject to the CTA. However, the CTA does not apply to entities that qualify under any of the 23 statutory exemptions.[1]

Who is a Beneficial Owner for Purposes of the CTA?

Since the CTA requires disclosure of information relating to each “beneficial owner”, determining who qualifies as a beneficial owner is a crucial step in complying with the CTA. For purposes of the CTA, a “beneficial owner” is an individual who, either directly or indirectly, owns or controls 25% or more of the entity, or exercises substantial control over the entity.[2]

Indirect ownership or control of the ownership interests of an entity can refer to ownership or control either through another entity or even a trust. Trusts provide additional complexity as whether a trustee, beneficiary, or even a grantor qualifies as a beneficial owner is highly dependent on the trust instrument and the powers afforded to each of these respective parties.

Even if an individual is deemed to not be a direct or indirect owner of 25% of the entity, beneficial ownership status can still be attributed through “substantial control.” This typically applies to officers or directors of qualifying entities, to managers of manager-managed LLCs, and to trustees of trusts that manage entities.

Filing the Initial Report

Complying with the CTA requires that each entity file an initial Beneficial Ownership Information (BOI) Report with FinCEN, which can be accessed at https://boiefiling.fincen.gov/. This report must contain information about the qualifying entity, including the entity’s name, address, jurisdiction of formation, and Taxpayer Identification Number.[3] Additionally, the report must contain, for each beneficial owner (and for each “company applicant” depending on the date of formation) information including the individual’s name, date of birth, address, as well as corroborating photo identification.[4]

The deadline for filing the initial BOI Report depends on the date that the filing entity is formed (for domestic entities) or registered in a U.S. state (for foreign entities). For entities that are formed or registered before January 1, 2024, the BOI Report must be filed by January 1, 2025.[5] For entities that are formed or registered between January 1 and December 31, 2024, the BOI Report must be filed within 90 calendar days of the date that the entity receives actual notice that its creation has become effective, or public notice of its creation has been published, whichever is earlier.[6] Entities formed or registered on or after January 1, 2025 must file the BOI Report within 30 days of actual or public notice, whichever is earlier.[7]

Filing an Updated or Corrected Report

In addition to filing an initial BOI Report, qualifying entities must disclose any changes to any previously reported information about either the entity or any beneficial owners by filing an updated report, and must disclose any inaccuracies to an initial BOI Report by filing a corrected report. An updated report must be filed within 30 calendar days after the change occurs, and a corrected report must be filed within 30 days after the entity becomes aware, or has reason to know of, the inaccuracy.

Penalties for Failure to Comply

The CTA imposes both civil and criminal penalties against “any person” for willful violations, including for willfully providing false or fraudulent beneficial ownership information, or willfully failing to complete an initial, updated, or corrected BOI Report.[8] The statute’s broad language allows the imposition of civil and criminal penalties against both reporting entities as well as any individuals who cause the reporting entity to violate the CTA. The civil penalties for a CTA violation are $500 per day that the violation continues or has not been remedied, and the criminal penalties for a CTA violation include a $10,000 fine, imprisonment of not more than two years, or both.[9]

The Benefits of Obtaining a FinCEN Identifier

A FinCEN Identifier is a unique identifying number that FinCEN issues to individuals or entities upon request which can expedite the BOI Report filing process for beneficial owners of multiple CTA-subject entities, by allowing entities and individuals to submit the FinCEN identifier rather than the otherwise required information needed for each BOI Report. To obtain a FinCEN identifying number for either yourself or an entity, visit https://fincenid.fincen.gov/landing. For more information about the application, see the application filing instructions at https://fincenid.fincen.gov/assets/helpContent/FinCEN-ID-Instructions-20240101.pdf.

Current Legal Challenges to the CTA

The constitutionality of the CTA was challenged in National Small Business United v. Yellen, but despite the U.S. District Court for the Northern District of Alabama finding the CTA unconstitutional, it only enjoined enforcement as to NSBU members. The U.S. government has appealed the ruling, with the case likely headed to the Supreme Court and with no nationwide ruling to be entered until sometime in 2025. Until that time, the CTA will continue to be enforced for all other entities, with penalties accruing for those who fail to timely file a BOI Report.

For any questions or additional information please contact us at (310) 656-8000.

[1] 31 C.F.R. § 1010.380(c)(2)

[2] 31 C.F.R. § 1010.380(d)

[3] 31 C.F.R. § 1010.380(b)(1)(i)

[4] 31 C.F.R. § 1010.380(b)(1)(ii)

[5] 31 C.F.R. § 1010.380(a)(1)(iii)

[6] 31 C.F.R. §§ 1010.380(a)(1)(i)(A) and (ii)(A)

[7] 31 C.F.R. §§ 1010.380(a)(1)(i)(B) and (ii)(B)

[8] 31 U.S.C.A. § 5336(h)(1); 31 C.F.R. § 1010.380(g)

[9] 31 U.S.C.A. § 5336(h)(3)(A)