The Corporate Transparency Act (CTA)¹ is landmark legislation that will significantly impact how privately held corporations, LLCs, and other entities report ownership information to the federal government. For decades, anonymous shell companies with hidden ownership have enabled financial crimes like money laundering, tax evasion, and terror financing. In response, Congress enacted the CTA in 2021 as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act for Fiscal Year 2021.

This sweeping legislation creates new federal reporting requirements for certain business entities to (i) report certain beneficial ownership information (BOI) to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and (ii) disclose information about who created the entity or registered it to do business in the U.S.

It is essential for all business advisors to understand these new reporting requirements so they can help their clients comply. This article provides an overview of key provisions, implementation timelines, and implications that business advisors and their clients need to understand.

Who (Must Report)?

The CTA mandates reporting for entities labeled as “reporting companies,” unless they are exempt. “Reporting companies” include corporations, LLCs, LLPs, and other entities created by filing official documents with a secretary of state or similar office.² The CTA places the reporting obligation on reporting companies, as opposed to on the beneficial owners directly.³

The CTA exempts 23 types of entities from its reporting requirements, which broadly encompass entities that are already highly regulated (e.g., publicly traded companies, banks and other financial institutions, registered investment companies and investment advisers, insurance companies, and specified tax-exempt entities).⁴ Large, U.S.-based operating companies (i.e., greater than 20 full-time employees and greater than $5 million in gross receipts or sales and physical presence in the U.S.) and inactive entities are also exempt; somewhat counterintuitively, there is no exemption for small companies.

What (Must Be Disclosed)?

Each reporting company that was formed prior to Jan. 1, 2024 (the Effective Date), must provide information regarding itself and its “beneficial owners.”⁵ Reporting companies formed on or after the Effective Date must also provide information regarding their “company applicants.” A “beneficial owner” is any individual who either (i) owns or controls at least 25% of the equity interests (including convertible instruments and options) in the reporting company or (ii) exercises substantial control over the reporting company (including senior officers).⁶ A “company applicant” includes both (i) the individual who directly files the document that forms or registers the reporting company and (ii) if more than one individual was involved in such filing, the individual primarily responsible for directing or controlling the filing.⁷

A reporting company must disclose the following information regarding itself and its business operations:⁸

• Full legal name;
• Any trade names or “doing business as” (DBA) name it operates under;
• Current address;⁹
• Jurisdiction of formation or registration; and
• Tax Identification Number (TIN) or Employer Identification Number (EIN).

A reporting company must disclose the following information regarding its beneficial owners and (if formed or registered after the Effective Date) its company applicants:¹⁰

• Full name;
• Date of birth;
• Current residential address (except a company applicant that is engaged in the business of forming entities can list its business address);
• A unique identification number from a non-expired identification document (i.e., a state-issued driver’s license, U.S. passport, a state or local government ID, Indian tribal document, or a foreign passport if no other identification document is available); and
• An image of the identification document supplying the unique identification number.

Although FinCEN is still developing the secure, electronic filing system for BOI reporting (referred to as “BOSS” and further described below) and the final form of the BOI report is not yet available, FinCEN has made a draft version of the form available as part of the notice-and-comment process.¹¹

When (Must It Be Reported)?

The CTA’s filing deadlines depend on whether the reporting company was already formed or registered prior to the Effective Date.¹² Reporting companies formed or registered before the Effective Date have until Jan. 1, 2025, to submit their initial BOI report. Reporting companies created on or after the Effective Date, must do so within 30 days of its formation or registration (under FinCEN’s current final rule, which may be amended; see below). Exempt entities that subsequently lose their exempt status must submit their initial BOI report within 30 days after loss of exemption.

On Sept. 28, 2023, FinCEN published a Notice of Proposed Rulemaking that, if finalized, would amend its current final rule to extend the reporting deadline for reporting companies formed or registered in 2024.¹³ Specifically, reporting companies formed or registered in 2024 would have 90 days (instead of 30 days) to submit their initial BOI reports. Reporting companies formed or registered on and after Jan. 1, 2025, would still be subject to the 30-day reporting deadline. FinCEN cited “the novelty of the BOI reporting requirement” and the benefit of giving reporting companies more time to understand their obligations and collect information as its rationale for proposing the extension.¹⁴

While the current Effective Date is Jan. 1, 2024, it would not be surprising if FinCEN seeks additional time and funding to implement the CTA, beyond the proposed extended reporting deadline just described. Further, during the summer, both houses of the U.S. Congress introduced (but have not passed) bills to delay the Effective Date.

In addition to the initial reporting requirements just described, reporting companies must continuously update or correct their BOI reports within 30 days of any change in the reported information—such changes to the company’s name, address or home jurisdiction, and changes to beneficial ownership upon a transfer, issuance, or the death of a beneficial owner.¹⁵ There is no materiality threshold for reporting changes; therefore, all changes require an updated BOI report.¹⁶

If a reporting company knows of or suspects inaccuracies in its BOI report, it is obliged to file a correct report within 30 days.¹⁷ A “safe harbor” provision exempts reporting companies from liability for misinformation if a corrected report is filed within 90 days of the erroneous report.

As mentioned above, FinCEN is still developing the electronic filing system that reporting companies will use to submit their BOI reports. FinCEN does not currently plan to accept BOI reports prior to the Effective Date.¹⁸

Where (Does the Reported Information Go)?

FinCEN will securely warehouse BOI reported under the CTA in a nonpublic database known as the Beneficial Ownership Secure System (BOSS).¹⁹ Access to this data will be strictly controlled and granted on a case-by-case basis (other than authorized officers and employees of the Department of the Treasury, who will have unique access to BOSS to carry out their duties and for tax administration purposes).²⁰

Federal agencies may access this data for matters involving national security, intelligence, or law enforcement. Similarly, state and local law enforcement agencies may access this information via court authorization as part of a criminal or civil investigation. Additionally, financial institutions, with reporting company consent, may be able to access the database for customer due diligence requirements under the law. Federal and state regulators may also access BOSS for compliance and administration purposes.

FinCEN has engaged in a separate rulemaking process and issued a proposed rule that would regulate who has access rights to BOSS and under what circumstances, and outline data security protocols to safeguard BOI reported under the CTA.²¹ Although comments on the proposed rule were due by Feb. 14, 2023, FinCEN has not yet issued a final rule.

Penalties

Failure to report carries civil and criminal penalties.²² Willful non-reporting can result in a fine of up to $500 per day (capped at $10,000) and up to two years imprisonment. Knowingly disclosing BOI is subject to even more draconian penalties (i.e., $500 per day, capped at $250,000, and up to 5 years imprisonment). Failure by reporting companies to disclose correct information can also be penalized, and this can extend to individuals who influence the reporting company not to report, as well as senior officers of the reporting company in charge at the time of non-compliance. As mentioned above, the CTA has a safe harbor provision for reporting companies that voluntarily rectify inaccuracies in submitted BOI reports within 30 days of detection and no more than 90 days after submission of the report.²³ However, this safe harbor does not cover any inaccuracies corrected after 90 days, deliberate evasion attempts, or known inaccuracies at the time of submission.

Implications for Reporting Companies & Their Advisors

To comply, reporting companies will need to implement policy, process, and system changes to collect and report BOI. They must properly identify beneficial owners and company applicants and maintain up-to-date identification documentation. Reporting companies with frequent ownership changes will need to be especially prudent with monitoring and reporting. Additional compliance costs and burdens, including employee training on CTA duties and retention of third-party providers, likely will be incurred.

Advisors, like attorneys and accountants, hold an integral role in assisting reporting companies with adhering to CTA reporting rules and timelines. Key responsibilities may include:

• Identifying which clients are subject to CTA reporting requirements based on formation or registration date, ownership structure, and eligibility for exemptions;
• Informing clients of new reporting requirements under the CTA and timelines for compliance (i.e., explaining the breadth of the definition of “beneficial owners”);
• Assisting clients with gathering necessary information on all beneficial owners ahead of reporting deadlines and maintaining documentation to demonstrate compliance;
• Staying updated on reporting requirements as FinCEN releases additional guidance;
• Recommending that clients establish processes to collect ownership details for future reporting needs; and
• Encouraging clients to reach out to you or legal advisors with any questions or need for advice on reporting procedures.

Conclusion

While certain regulations and an electronic filing system are still forthcoming, advisors and businesses need to understand the key provisions, timelines, and implications of this far-reaching legislation.

The CTA ushers in a new era of federal beneficial ownership reporting that will impact nearly all privately held entities. Accountants and other advisors will be at the forefront of the compliance effort, helping businesses grasp and align their practices with these new transparency rules. With the right preparation and guidance, advisors can help clients successfully navigate these rapidly developing rules and avoid any penalties for non-reporting. Through diligent observance of the CTA requirements, they can bolster legal protections and the financial integrity of their business clients. Furthermore, by partnering with their clients in compliance, advisors contribute to reinforcing financial transparency and security across the U.S. business ecosystem.

Tristin S. Taylor is an associate at Baird Holm LLP. Taylor’s practice focuses on corporate transactions and general corporate matters. He counsels businesses of all sizes on a variety of matters, including entity formation, corporate governance, strategic transactions, and regulatory compliance. Adam M. Ripp is also an associate at Baird Holm LLP, representing businesses of all sizes on a variety of corporate transactions and general corporate matters. His practice focuses on strategic merger, acquisition, and divestiture transactions, as well as regulatory compliance, particularly in the banking sector and regarding antitrust matters. Ripp also regularly advises clients in a variety of industries through the entity formation process, corporate reorganization and succession matters, contract negotiations and disputes, and corporate governance issues. For more information, contact Taylor at ttaylor@bairdholm.com or Ripp at aripp@bairdholm.com.

Endnotes

1. 31 U.S.C. § 5336 (West 2023).
2. FinCEN has not specified all types of entities that might be considered reporting companies, but it expects that the term will be interpreted broadly and include limited liability partnerships, statutory business trusts and most limited partnerships, as formation of those entities generally requires a filing with a secretary of state. However, entities such as sole proprietorships and certain partnership and trusts may not fall within this category.
3. 31 U.S.C. § 5336(b)(1)(A).
4. 31 C.F.R. § 1010.380(c)(2) (West 2023). Note that, as currently written, the CTA provides limited relief for tax-exempt entities, with exemptions specifically applying only to (i) nonprofit organizations described in Section 501(c) of the Internal Revenue Code (IRC) and exempt under IRC Section 501(a), (ii) tax-exempt political organizations described in IRC Section 527(e)(1) and exempt under IRC Section 527(a), and (iii) charitable and split-interest trusts described in IRC Section 4947(a). Id.
5. 31 C.F.R. § 1010.380(b).
6. 31 C.F.R. § 1010.380(d). Frequently Asked Questions, Fin. Crimes Enforcement Network (Sept. 29, 2023), Questions D.2 & D.4, https://www.fincen.gov/boi-faqs.
7. 31 C.F.R. § 1010.380(e). No reporting company will have more than two company applicants. Frequently Asked Questions, supra note 6, Question E.1.
8. 31 C.F.R. § 1010.380(b).
9. The reporting company’s address must reflect either its main business location in the U.S, if applicable, or its primary U.S business site. Using a P.O. box or addresses of corporate agents or third parties is prohibited.
10. 31 C.F.R. § 1010.380(b).
11. Agency Information Collection Activities; Proposed Collection; Comment Request; Beneficial Ownership Information Reports, 88 Fed. Reg. 2,760 (Mar. 20, 2023); Frequently Asked Questions, supra note 6, Question B.5. The comment period for the proposed action has closed.
12. 31 C.F.R. § 1010.380(a)(1).
13. Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024, 88 Fed. Reg. 66,730 (Sept. 28, 2023). The comment period for the proposed action closes on October 30, 2023. One day later, on September 29, 2023, FinCEN published two 30-day notices seeking comment (1) on the mechanism that FinCEN intends to use to collect beneficial ownership information from reporting companies and (2) on the application that FinCEN intends to require individuals to use to obtain a FinCEN identifier (which identifier is voluntary). Agency Information Collection Activities; Submission for OMB Review; Comment Request; Beneficial Ownership Information Reports, 88 Fed. Reg. 67,443 (Sept. 29, 2023); Agency Information Collection Activities; Submission for OMB Review; Comment Request; Individual FinCEN Identifier Application, 88 Fed. Reg. 67,449 (Sept. 29, 2023). The comment period for these notices closes on October 30, 2023.
14. Id. at 66,731.
15. 31 C.F.R. § 1010.380(a)(2).
16. Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59,498, 59,524 (Sept. 30, 2022). No updated report is required for termination or dissolution of a reporting company. Id. at 59,514.
17. 31 C.F.R. § 1010.380(a)(3).
18. Frequently Asked Questions, supra note 6, Question B.1.
19. Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. at 59,508–09.
20. 31 U.S.C. § 5336(c)(2)(B), (c)(5).
21. Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifiers for Entities, 87 Fed. Reg. 77,404 (Dec. 16, 2022).
22. 31 U.S.C. § 5336(h); 31 C.F.R. § 1010.380(g).
23. 31 U.S.C. § 5336(h)(C)(i); 31 C.F.R. § 1010.380(a)(3).