Navigating the New Law Requiring Small Businesses to Disclose Full Beneficial Ownership

2024 Reporting Requirements for Small Businesses Pursuant to the CTA

If you have significant control over the operations of or own twenty-five (25%) or more of a company that makes less than five million dollars ($5,000,000) per year, you may be subject to new reporting requirements under the Corporate Transparency Act (“CTA”). The CTA, which took effect January 1, 2024, establishes beneficial ownership information (“BOI”) reporting requirements for certain corporations, limited liability companies, and other entities created in or registered to do business in the United States. Businesses that were formed prior to January 1, 2024, and that are subject to the CTA’s reporting requirements have one year to register and report BOI to the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) which regulates the law. Businesses that were formed after January 1, 2024, and that are subject to the CTA must submit their initial report within ninety (90) days of organization or incorporation.  

Here is the link to the FinCEN BOI Submission Portal. 

Policy Rationale for the Passage of the CTA: 

The CTA amends the federal Bank Security Act and is designed to assist law enforcement in identifying bad actors who may be hiding or benefiting from criminal activities through shell companies and opaque business structures. In essence, the CTA provides a mechanism for government agencies and law enforcement to ascertain who the real parties of interest in a business are, the identities of individuals directing and controlling the activities of the business, and the identities of the owners of the business. Although most businesses in the U.S. are legitimate, criminals can use companies to provide cover for money laundering, corruption, tax evasion, fraud, and other crimes. A specified goal of reporting on the BOI is to protect innocent and legitimate businesses, especially small businesses, from the harm that illegal actors may cause. 

Importantly, the CTA establishes that BOI is confidential and may not be disclosed except as authorized under the CTA and the Access Rule. FinCEN is authorized to disclose BOI under specific circumstances to six categories of recipients: (1) U.S. Federal agencies engaged in national security, intelligence, or law enforcement activity; (2) U.S. State, local, and Tribal law enforcement agencies; (3) foreign law enforcement agencies, judges, prosecutors, central authorities, and competent authorities (foreign requesters); (4) financial institutions using BOI to facilitate compliance with customer due diligence (“CDD”) requirements under applicable law; (5) Federal functional regulators and other appropriate regulatory agencies acting in a supervisory capacity assessing financial institutions for compliance with CDD requirements under applicable law; and (6) Treasury officers and employees. Each category of authorized user is subject to specific security and confidentiality requirements, in line with the CTA, to protect the security and confidentiality of BOI. The general public will not be able to access this information via a FOIA request or otherwise.  

Important Terms to Know: 

A “Business” subject to CTA reporting requirements is referred to as the “Reporting Company”. Business is defined as a corporation, LLC, or other similar entity that is created by the filing of a document with a secretary of state or similar office under State law or Indian Tribe; or formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.  

The applicant or the applicants who made the initial filing with the Secretary of State, are referred to as “Company Applicants”. 

The “Beneficial Owner” of a Reporting Company is an individual who has at least a twenty-five percent (25%) ownership interest in the Reporting Company or who exercises “Substantial Control” (as defined below). This can be established through ownership interest, actions, or both.  

Ownership interests can include equity interests, capital and profit interests, convertible instruments, options, warrants, arrangements related to voting, proprietorship interests, “future conversion of ownership interests,” and a catch-all provision which includes “any other instrument, contract, arrangement, understanding, relationship or other mechanisms to establish ownership.” 

FinCEN defines “substantial control” in its Final Rule using a non-exhaustive list of examples demonstrating its intended definition. Specifically, an individual has substantial control if the individual, including but not limited to: (1) serves as a senior officer (see definition below); (2) has authority over the appointment of any senior officer or a majority of the board of directors, or such similar body; (3) directs, determines, or has substantial influence over important decisions of the Reporting Company; (4) or has any other form of substantial control, a catch all phrase. According to FinCEN, specific examples of important decisions as it relates to “substantial control” include major expenditures or investments, approval of equity assurances, compensation, entering into significant contracts, approval of operating budgets, and changes to governing documents.  “Senior officer” is defined in this context as any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function. 

Reporting Requirements: 

The CTA requires Reporting Companies to report to FinCEN information about themselves, as well as information about two categories of individuals: (1) the Beneficial Owners of the Reporting Company; and (2) the Company Applicants, who are the individuals who filed a document to create the Reporting Company or register it to do business in the United States. When submitting the required information to FinCEN, Reporting Companies must file a Beneficial Ownership Information Report (BOIR). They must also file an updated BOIR to reflect any changes to required information previously submitted to FinCEN. 

Who Has to Report? 

Reporting Companies include corporations, LLCs, and other entities created in or registered to do business in the United States. In essence, unless you are an exempt company type (listed below) your business is likely subject to the CTA’s reporting requirements. Notably, a company does not need to comply with the CTA if it is a “large operating company” which has more than five million dollars ($5,000,000) in gross receipts for the previous year (as reflected in filed federal tax returns), at least one physical office in the U.S., and at least twenty (20) employees in the U.S. 

There are twenty-three (23) specific types of companies that are exempt from BOI and other required CTA reporting: 

1. Securities reporting issuer (i.e., an issuer of a class of securities registered under the Securities Exchange Act of 1934 or is required to file supplementary and periodic information under that law). 

2. Governmental authority  

3. Bank 

4. Credit Union 

5. Depository institution holding company 

6. Money services business 

7. Broker or dealer in securities  

8. Securities exchange or clearing agency 

9. Other Exchange Act registered entity 

10. Investment company or investment adviser 

11. Venture capital fund adviser 

12. Insurance company 

13. State-licensed insurance producer 

14. Commodity Exchange Act registered entity  

15. Accounting firm  

16. Public utility  

17. Financial market utility  

18. Pooled investment vehicle  

19. Tax-exempt entity 

20. Entity assisting a tax-exempt entity 

21. Large operating company (see above)  

22. Subsidiary of certain exempt entities  

23. Inactive entity  

Exempt businesses are generally large, more highly regulated companies. If you do not fall within one of these exemptions, you are likely subject to the CTA’s reporting requirements.   

It is also important to conduct internal diligence within your company to understand who would be classified as a Beneficial Owner. As stated above, a Beneficial Owner is anyone who has more than a twenty-five percent (25%) ownership interest, or who has a “controlling interest” in the Reporting Company.  

What Information Must Be Reported? 

An initial report of a Reporting Company shall include the following information:  

For the Reporting Company:  

1. The full legal name of the Reporting Company;  

2. Any trade name or “doing business as” name of the Reporting Company;  

3. A complete current address consisting of:  

1. In the case of a Reporting Company with a principal place of business in the United States, the street address of such principal place of business; and  

2. In all other cases, the street address of the primary location in the United States where the Reporting Company conducts business;  

4. The State, Tribal, or foreign jurisdiction of formation of the Reporting Company;  

5. For a foreign Reporting Company, the State or Tribal jurisdiction where such company first registers; and  

6. The Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) of the reporting company, or where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction;  

For every individual who is a Beneficial Owner of such Reporting Company, and every individual who is a Company Applicant with respect to such Reporting Company:  

1. The full legal name of the individual;  

2. The date of birth of the individual;  

3. A complete current address consisting of:  

1. In the case of a Company Applicant who forms or registers an entity in the course of such Company Applicant’s business, the street address of such business; or  

2. In any other case, the individual’s residential street address;  

4. A unique identifying number and the issuing jurisdiction from one of the following documents (i.e., passport or driver’s license number):  

1. A non-expired passport issued to the individual by the United States government;  

2. A non-expired identification document issued to the individual by a State, local government, or Indian tribe for the purpose of identifying the individual;  

3. A non-expired driver’s license issued to the individual by a State; or  

4. A non-expired passport issued by a foreign government to the individual, if the individual does not possess any of the documents described above; and  

5. An image of the document from which the unique identifying number listed above was obtained. 

When Is My Initial Report Due? 

A (U.S. or foreign) company that was created or registered before January 1, 2024, has one (1) year to file its initial report with FinCEN, making it due by January 1, 2025.  

A company that was created or registered on or after January 1, 2024, and before January 1, 2025, must file its initial BOI information report within ninety (90) calendar days after receiving notice that its creation or registration is effective. 

Requirements for Updating and Correcting Reported Information: 

A Reporting Company has thirty (30) days to report and correct information submitted that it later learns to be inaccurate.  Accordingly, it may be advisable to initiate periodic questionnaires with employees to inform them of the requirements to make sure all reportable information is up to date. There are significant penalties for untimely, inaccurate, or fraudulent information reported. 

If you have other questions, or you would like help filing your reports, contact Feldman Legal Advisors at info@feldmanlegaladvisors.com.