Beware of Corporate Transparency Act Scams and Fraud

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The Corporate Transparency Act’s (CTA) Beneficial Ownership Information reporting requirements are set to take effect on January 1, and bad actors are already using the CTA’s requirements to solicit unauthorized access to Personally Identifiable Information. To that end, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued a warning regarding such scams. FinCEN describes these efforts as follows:

“The fraudulent correspondence may be titled “Important Compliance Notice” and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests (emphasis added). Please do not respond to these fraudulent messages, or click on any links or scan any QR codes within them.”

Be on guard against such fraud and stay abreast of key developments involving this new law by visiting Varnum’s CTA Resource Center.

Corporate Transparency Act: Implications for Business Startups

Corporate Transparency Act: Implications for Business Startups
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Congress passed the Corporate Transparency Act (CTA) in January 2021 to provide law enforcement agencies with further tools to combat financial crime and fraud. The CTA requires certain legal entities (each, a “reporting company”) to report, if no exemption is available, specific information about themselves, certain of their individual owners and managers, and certain individuals involved in their formation to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury. The beneficial ownership information (BOI) reporting requirements of the CTA are set to take effect on January 1, 2024. Those who disregard the CTA may be subject to civil and criminal penalties.

A recent advisory explaining the CTA reporting requirements in further detail may be found here.

While the CTA includes 23 enumerated exemptions for reporting companies, newly formed businesses (Startups) may not qualify for an exemption before the date on which an initial BOI report is due to FinCEN. As a result, Startups (particularly those created on or after January 1, 2024) and their founders and investors, must be prepared to comply promptly with the CTA’s reporting requirements.

As an example, businesses may want to pursue the large operating company exemption under the CTA. However, among other conditions, a company must have filed a federal income tax or information return for the previous year demonstrating more than $5 million in gross receipts or sales. By definition, a newly formed business will not have filed a federal income tax or information return for the previous year. If no other exemption is readily available, such a Startup will need to file an initial BOI report, subject to ongoing monitoring as to whether it subsequently qualifies for an exemption or any reported BOI changes or needs to be corrected, in either case triggering an obligation to file an updated BOI report within 30 days of the applicable event.

Startups also should be mindful that the large operating company exemption requires the entity to (i) directly employ more than 20 full time employees in the U.S. and (ii) have an operating presence at a physical office within the U.S. that is distinct from the place of business of any other unaffiliated entity. Importantly, this means that a mere “holding company” (an entity that issues ownership interests and holds one or more operating subsidiaries but does not itself satisfy the other conditions of this exemption) will not qualify. Startups may want to consider these aspects of the large operating company exemption during the pre-formation phase of their business.

Fundraising often requires Startups to satisfy competing demands among groups of investors, which can lead to relatively complex capitalization tables and unique arrangements regarding management and control. These features may cause BOI reporting for Startups to be more complicated than reporting for other small and closely held businesses. Founders, investors, and potential investors should familiarize themselves with the CTA’s reporting requirements and formulate a plan to facilitate compliance, including with respect to the collection, storage and updating of BOI.

By ensuring all stakeholders understand the BOI reporting requirements and are prepared to comply, your Startup can avoid conflicts with current and potential investors and ensure that it collects the information that it needs to provide a complete and timely BOI report.

Varnum’s Corporate Transparency Act Taskforce of attorneys and other professionals can assist you. Contact your Varnum attorney or any member of Varnum’s CTA Taskforce to learn more.

Corporate Transparency Act’s Reporting Requirements: Impact on the Private Client

Cooperate Transparency Act: Impact on the Private Client
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Private clients and family offices commonly create legal entities, such as limited liability companies, limited partnerships and corporations, to facilitate investment, asset management, tax planning, business succession planning, privacy, liability protection and many other purposes.  Such planning will be impacted by disclosures required by the Corporate Transparency Act (CTA), set to take effect January 1, 2024. The CTA, enacted to combat illicit financial activities, brings significant regulatory changes and effectively creates a national registry for law enforcement and certain other entities of the beneficial ownership information (BOI) for many legal entities formed or registered in the U.S. (Reporting Companies).

A recent advisory explaining the CTA reporting requirements in further detail may be found here.

Under the CTA, Reporting Companies include limited liability companies, corporations, and any other entities created by the filing of a document with a secretary of state or other similar office, whether or not the legal entity engages in any business or other commercial activity. If a legal entity meets the definition of a Reporting Company and does not qualify for an exemption, the Reporting Company will be obligated to disclose to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) specific information about itself and the BOI of its beneficial owners and company applicants, including their full name, date of birth, complete address, and other identifying information. The CTA defines “beneficial owner” as an individual who either, directly or indirectly, exercises substantial control over the Reporting Company or owns or controls at least 25% of the ownership interests of the Reporting Company.

A trust itself is not a Reporting Company if it is not created by the filing of a document with a secretary of state or other similar office (which is often the case). Regardless, if a trust exercises substantial control over the Reporting Company or holds an ownership interest in a Reporting Company and the other requirements are met, at least one individual associated with the trust will be a beneficial owner. The CTA contains specific rules under which an ownership interest held by a trust or similar arrangement is attributed for determining the individual(s) subject to the BOI disclosure requirement. The Reporting Company should attribute such ownership as follows:

  • To any individual trustee that has “the authority to dispose of trust assets.”

  • To any individual beneficiary who “(i) is the sole permissible recipient of income and principal, or (ii) has the right to demand a distribution of or withdrawal substantially all the assets from the trust.”

  • To any individual grantor or settlor who “has the right to revoke the trust or otherwise withdraw the assets of the trust.”  

For many trusts, more than one individual will meet these criteria, and, in such cases, each individual’s BOI must be reported. Even if a trust owns or controls less than 25% of the ownership interests of the Reporting Company, the Reporting Company must assess whether the trustee exercises substantial control over the Reporting Company, such as through board representation.

As noted above, certain Reporting Companies are exempt from the CTA, including certain tax-exempt entities, certain entities subject to other federal reporting, and certain large operating companies. Additionally, certain individuals who may otherwise qualify as a beneficial owner will not be required to disclose BOI if an exception applies, including minor children (if applicable, the Reporting Company may instead report information about the parent or legal guardian of the minor child). The failure to timely comply with the reporting requirements could result in civil and criminal penalties.    

The disclosure of BOI for private clients and family offices may be counter-productive to privacy and other goals and may in some circumstances necessitate further analysis and planning. Each private client, family office, and small business owner should prepare now.  Varnum’s Corporate Transparency Act Taskforce of attorneys and other professionals can assist you. Contact your Varnum attorney or any member of Varnum’s CTA Taskforce to learn more.

Corporate Transparency Act Reporting Requirements: What Steps Can Companies Take Now?

Corporate Transparency Act Compliance: Key Steps Companies Can Take Now
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Congress passed the Corporate Transparency Act (CTA) in January 2021 to provide law enforcement agencies with information that may be used to combat financial crime and fraud. The CTA requires certain legal entities (each, a “reporting company”) to report, if no exemption is available, specific information about themselves, certain of their individual owners and managers (“beneficial owners”), and certain individuals involved in their formation (“company applicants”) to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury.

A recent advisory explaining the CTA reporting requirements in further detail may be found here.

Reporting companies formed or registered in the U.S. on or after January 1, 2024 that do not qualify for an exemption will need to comply with the new CTA reporting requirements promptly upon formation or registration, while non-exempt reporting companies in existence before January 1, 2024 will need to file an initial report on or before January 1, 2025. Reporting companies will be required to file updated reports within 30 days of any change to the reported information and must promptly correct any inaccuracies in their disclosure to avoid penalties.

Fines of $500 per day can be levied for failure to timely comply with the new reporting requirements. Criminal penalties (including imprisonment) are also available to regulators in certain circumstances, including where a person willfully fails to file the required reports.

Existing companies should familiarize themselves with the CTA’s reporting requirements and formulate a plan to facilitate compliance. Actionable steps that businesses can take now include the following:

  1. Get organized.
    Businesses should determine whether their legal entities will be required to file reports with FinCEN under the CTA and, if so, what information they will need to collect in order to comply. This will require a review of your legal entity structure chart, current capitalization table(s), governing documents, and equity and debt documents. While ownership and control may be relatively straightforward for certain companies, others will require a more detailed analysis. Each legal entity within an affiliated group must be assessed.

    Keep in mind that there is no exemption for holding companies. Many private businesses are legally structured with one or more operating entities under a holding company. If applicable, careful attention should be given to the requirements of the large operating entity exemption for assessing its availability.

  2. Make a plan for filing your initial BOI Report, if necessary.
    If your business is subject to BOI reporting requirements, you will need to consider how to collect and handle the information from direct and indirect owners, senior officers and others in control of the business. This task may present certain practical challenges that you should be ready to address, including:

    Such individuals may be reluctant to provide their personal information as part of a BOI Report on privacy grounds. There is currently no statutory or regulatory relief for failure to file a complete BOI report on the grounds that one or more required persons refused to provide the required disclosure, so their failure to cooperate will prevent the reporting company from complying with the CTA. The company may wish to consider what actions it is willing and able to take to compel compliance, including repurchase of equity or termination and removal of noncompliant persons.

    Such individuals may be willing to provide disclosure to FinCEN but not to the reporting company itself. FinCEN will allow individuals to provide their disclosure directly to FinCEN and obtain a unique FinCEN identifier. The individual may then provide the FinCEN identifier to the reporting company in lieu of the underlying information. With respect to changes to such individual’s information, the burden shifts from the company to the individual to file any updated reports.

    Certain of the information required to be included in BOI Reports may constitute personal identifiable information (PII) that is entitled to special protection or that triggers further reporting or compliance obligations on the part of the entity that collects and stores it. Reporting companies may prefer to engage a third-party service provider or ask their beneficial owners or company applicants to obtain FinCEN identifiers to minimize this risk.

    The Beneficial Ownership Secure System (BOSS), which FinCEN is creating to collect and store BOI Reports, will be accessible by reporting companies; however, third-party service providers may help facilitate compliance by allowing required persons to provide their information separately from the company filing and by storing their personal information. You may wish to consider whether the additional features provided by these service providers will help your company in its compliance efforts.

  3. Make a plan for monitoring events that may require you to file an initial or updated BOI Report.
    You will need to continuously monitor for changes that may trigger reporting requirements. Reporting companies will need to promptly report any change in information reported to FinCEN, including changes in beneficial ownership and control. Beneficial owners will need to provide updates to their names, addresses, or filed government documents. Companies with complex beneficial ownership structures may want to designate a CTA compliance officer who can monitor these issues and provide the necessary training to individuals whose cooperation will be required to facilitate compliance.
  4. Dissolve any inactive entities before January 1, 2024 to avoid unnecessary costs.
    There is a limited exemption from BOI reporting requirements for inactive entities, but entities do not qualify if, among other things, they (i) were formed on or after January 1, 2020, (ii) are owned in whole or in part by a foreign person, or (iii) hold assets or equity interests. Unless this or another exemption from BOI reporting requirements applies, you may wish to consider dissolving entities that you do not intend to use in the future to avoid incurring unnecessary costs under the CTA.
  5. Form new entities now that you believe will be needed after January 1, 2024.
    Entities formed or registered in the U.S. prior to January 1, 2024 will not be required to file an initial BOI Report until January 1, 2025, and they will not be required to disclose their company applicants. Therefore, if you intend to engage in a transaction or restructuring, or any new business that will involve the creation of one or more new entities, you may wish to form those entities before January 1, 2024.
  6. Review and, if appropriate, amend your governance documents to facilitate CTA compliance.
    To comply with BOI reporting requirements, reporting companies will need to collect and report up-to-date information with respect to each of their beneficial owners. Reporting companies should consider amending their shareholder agreements, operating agreements and/or other governance documents to require affirmative cooperation with respect to CTA compliance obligations. Recourse for any failure to provide or update reporting information should also be considered, including by way of indemnification.
  7. Reach out to Varnum.
    Varnum’s Corporate Transparency Act Taskforce stands ready to assist you with every stage of the compliance process. Please contact us if you are interested in engaging Varnum to represent you regarding compliance or reporting under the Corporate Transparency Act.

Corporate Transparency Act: ESOP and Deferred Compensation Implications

Corporate Transparency Act: ESOP and Deferred Compensation Implications
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Congress passed the Corporate Transparency Act (the CTA) in January 2021 to provide law enforcement agencies with further tools to combat financial crime and fraud. The CTA requires certain legal entities (each, a “reporting company”) to report, if no exemption is available, specific information about themselves, certain of their individual owners and managers (“beneficial owners”), and certain individuals involved in their formation (“company applicants”) to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury.

As the CTA comes into effect, there are many important considerations for businesses and this advisory focuses on two: ESOPs and deferred compensation.

For companies that are not exempt from the CTA’s reporting requirements, a crucial aspect of the company’s compliance is assessing its beneficial owners. This key term goes beyond equity ownership. A “beneficial owner” is any individual who, directly or indirectly, (1) owns or controls at least 25% of the ownership interests of the reporting company (by vote or value) or (2) exercises substantial control over the reporting company.

An individual’s ownership interest will be determined by examining ownership of equity, stock or voting rights; capital or profits interests; convertible instruments (as if converted); options or privileges (as if exercised); and any other instrument, contract, arrangement, understanding, relationship or mechanism used to establish ownership. Reporting companies will need to “look through” ownership interests held by intermediary companies to identify the individuals who beneficially own such interests. Special rules apply to interests held by trusts.

An individual will exercise substantial control over the reporting company if such person is:

  • a senior officer of the reporting company;
  • a person who has the authority to appoint or remove certain officers or a majority of the board of directors;
  • a person who directs, determines or has substantial influence over important decisions of the reporting company, including decisions about its business, finances or structure; or
  • a person who otherwise exercises substantial control over the reporting company.

Any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer or chief operating officer is a “senior officer.” On the other hand, whether an individual serving on the board of directors (or equivalent body) exercises substantial control over the reporting company is a question that must be analyzed under the above criteria on a director-by-director basis.

Employee Stock Ownership Plan (ESOP) Implications

ESOP ownership of a company, in whole or in part, does not automatically change the analysis or conclusion about whether the company must file reports under the CTA. However, ESOPs can impact the CTA analysis for non-exempt reporting companies in two ways. First, the ESOP trustee may be a beneficial owner for purposes of the CTA because an ESOP trustee may have the right to exercise certain aspects of control over the company, such as the right to appoint or remove board members. Not all ESOP trustees will be beneficial owners. Rather, ESOP companies should conduct an analysis of whether reporting requirements are triggered based on the specific circumstances. Second, an ESOP participant may be a beneficial owner for purposes of the CTA because a participant may be allocated shares that exceed 25% of the voting power or value of the company. As with the ESOP trustee, an analysis of the specific circumstances relating to the company’s capitalization table and ESOP will be important to determining if reporting is required and if so, what that reporting requires.

Deferred Compensation Implications

In many circumstances, deferred compensation and executive compensation (such as options, phantom stock and stock appreciation rights) will not change the reporting requirements under the CTA, but there are a few potential exceptions. First, deferred compensation could result in an individual owning (by vote or value) 25% or more of the company, triggering reporting requirements about that individual. Second, if the value of a company cannot be determined with enough certainty, reporting requirements can include individuals who own 25% or more of any class of equity (equity is broadly defined for this purpose and will include not only stock and ownership units, but also options, convertible instruments and other similar agreements and arrangements). If deferred compensation is designed in a way that creates a new class of equity, those who have 25% or more of that class of equity may need to report under the CTA. In many circumstances, with advanced planning, deferred compensation can be drafted to avoid creating a new class of equity, helping to simplify the CTA compliance analysis.

Conclusion

If your company maintains an ESOP, or awards deferred compensation or equity compensation, you should consider how this could impact your company’s CTA compliance. The analysis may evolve over time as an entity’s circumstances change and additional CTA guidance is released.

Varnum’s Corporate Transparency Act Taskforce of attorneys and other professionals can assist you. A recent client advisory explaining the CTA reporting requirements may be found here. Contact a member of Varnum’s Employee Benefits and Executive Compensation Team or any member of Varnum’s CTA Taskforce to learn more.

Corporate Transparency Act Reporting Requirements: Is Your Nonprofit Organization Exempt?

Corporate Transparency Act Reporting Requirements: Is Your Nonprofit Organization Exempt?
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Congress passed the Corporate Transparency Act (CTA) in January 2021 to provide law enforcement agencies with further tools to combat financial crime and fraud. The CTA requires certain legal entities (each, a “reporting company”) to report, if no exemption is available, specific information about themselves, certain of their individual owners and managers (“beneficial owners”), and certain individuals involved in their formation (“company applicants”) to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury.

Nonprofit organizations are “reporting companies” under the CTA and must assess whether an exemption applies. All reporting companies that are not exempt and formed on or after January 1, 2024 will need to comply with the CTA’s new reporting requirements in 2024, and those in existence before January 1, 2024 will have to file an initial report on or before January 1, 2025.

There is a three-pronged exemption for tax-exempt entities. Specifically, the following types of tax-exempt entities are exempt from the CTA’s reporting requirements:

  • Organizations described in IRC 501(c), determined without regard to IRC 508(a);
  • Certain political organizations; and
  • Certain non-exempt charitable or split interest trusts.

The first prong encompasses all IRC 501(c) organizations, including most charities, schools and other educational institutions, churches and other religious organizations, private foundations, social welfare organizations, labor organizations, trade associations, chambers of commerce, and social clubs. Notably, this prong applies without regard to whether the qualifying organization has filed an application for recognition of tax-exempt status pursuant to IRC 508(a).

Significantly, nonprofit status by itself is insufficient to qualify for this exemption: the organization must also be described in IRC 501(c). This could mean that defective drafting of a nonprofit’s Articles of Incorporation could inadvertently trigger the reporting disclosures of an organization that might otherwise qualify for exemption from those requirements.

Nonprofit organizations that lose their IRC 501(c) exempt status could also inadvertently become subject to the CTA’s reporting requirements. For example, this could occur if the organization fails to file its annual information return (IRS Form 990) for three consecutive years. In situations like this, the CTA provides such organizations a period of 180 days in which to reactivate their exempt status before the CTA reporting obligations are triggered. However, that is a relatively short window of time.

Keep in mind, too, that other types of tax-exempt entities exist but fall outside the exemption from the CTA’s reporting requirements. For example, homeowner and condominium associations covered by IRC 528 fall outside the CTA’s exemption for tax-exempt entities.

Nonprofit organizations and their Boards of Directors and Trustees should prepare now and familiarize themselves with the CTA, as fines of $500 per day can be levied for failure to timely comply with the new reporting requirements if not exempt. Criminal penalties (including imprisonment) are also available to regulators in certain circumstances, including where a person willfully fails to file any required report.

Varnum’s Corporate Transparency Act Taskforce of attorneys and other professionals can assist you. A recent client advisory explaining the CTA reporting requirements may be found here – contact your Varnum attorney or any member of Varnum’s CTA Taskforce to learn more.

Is Your Community Association Prepared for the Corporate Transparency Act?

Prepare your community association for the Corporate Transparency Act.
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Congress passed the Corporate Transparency Act (CTA) in January 2021 to provide law enforcement agencies with further tools to combat financial crime and fraud. The CTA requires certain legal entities (each, a “reporting company”) to report, if no exemption is available, specific information about themselves, certain of their individual owners and managers (“beneficial owners”), and certain individuals involved in their formation (“company applicants”) to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury.

In certain states, including Florida and Michigan, condominium and homeowner associations are commonplace. Such associations are “reporting companies” under the CTA, and there may not be an exemption for them.

Management firms that assist and manage such associations are also “reporting companies” under the CTA, and unless they qualify for a “large operating company” exemption based on their employee numbers and revenue, there may be no exemption available for these entities.

These associations and other reporting companies formed on or after January 1, 2024 will need to comply with the CTA’s new reporting requirements in 2024, and those companies in existence before January 1, 2024 will have to file an initial report on or before January 1, 2025.

The required disclosures include:

    • For the “reporting company” itself, basic corporate information such as full legal name, all fictitious names, complete address, state of formation, and taxpayer identification number;

    • For each “beneficial owner” of the entity, which in the case of associations may include directors and officers (full-time, part-time or volunteer), community association managers and agents of third-party management firms, each such individual’s full legal name, date of birth, residential address, and information from (along with an image of) the individual’s unexpired U.S. passport, state driver’s license or other government-issued identification document; and

    • For each “company applicant” of an entity formed on or after January 1, 2024, which would include any person who filed or directed the filing of a document creating the entity, substantially the same disclosures required of a beneficial owner.

Reporting companies will also be required to file updated reports within 30 days of any change to the reported information and must promptly correct any inaccuracies in their disclosure to avoid penalties.

Community association managers, boards of directors and management firms should prepare now and familiarize themselves with the CTA’s new reporting requirements, as fines of $500 per day can be levied for failure to timely comply with the new reporting requirements. Criminal penalties (including imprisonment) are also available to regulators in certain circumstances, including where a person willfully fails to file the required reports.

Varnum’s Corporate Transparency Act Taskforce of attorneys and other professionals can assist you. Our CTA Taskforce recently published an advisory explaining the CTA reporting requirements, and we are hosting a complimentary webinar on Wednesday, November 8 to address the requirements in further detail.

Please contact your Varnum attorney or any member of Varnum’s CTA Taskforce if you have any questions about how the Corporate Transparency Act may impact you.

Corporate Transparency Act’s Reporting Requirements: Is Your Company Prepared?

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To give law enforcement additional tools to fight financial crime and fraud, Congress passed the Corporate Transparency Act (CTA). The CTA requires certain legal entities (each, a “reporting company”) to report, if no exemption is available, specific information about themselves, certain of their individual owners and managers (“beneficial owners”), and certain individuals involved in their formation (“company applicants”) to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury.

As the first of three rulemakings required by the CTA, FinCEN issued the Beneficial Ownership Information Reporting Requirements final rule (BOI Rule) on September 30, 2022. More recently, FinCEN released a Small Entity Compliance Guide and a list of Frequently Asked Questions, both of which FinCEN has continued to update. FinCEN intends to issue additional materials and guidance.

The BOI Rule imposes new and significant reporting burdens on affected companies. As a business owner or manager, you may need to prepare now.

When do the new reporting requirements come into effect?

  • The BOI Rule is set to take effect on January 1, 2024.
  • Reporting companies created or registered to do business in the United States prior to January 1, 2024 must file their initial BOI Reports by January 1, 2025.
  • Reporting companies created or registered to do business in the United States during calendar year 2024 will have 90 days after receiving notice of the company’s registration or creation to file their initial BOI Reports under the BOI Rule.
  • Reporting companies created or registered to do business in the United States on or after January 1, 2025 will have 30 days after receiving notice of the company’s registration or creation to file their initial BOI Reports under the BOI Rule. 

Which entities are subject to the new reporting requirements?

An entity is classified as a “reporting company” if it is any of the following and does not qualify for a specific exemption:

  • A corporation, limited liability company, or other entity created under the laws of a U.S. state or Indian tribe by the filing of a document with a secretary of state or similar office under the law of a U.S. state or Indian tribe.
  • An entity created under the laws of a foreign country and registered to do business in any U.S. state or tribal jurisdiction by filing a document with a secretary of state or similar office of the U.S. state or Indian tribe.

Whether trusts and partnerships qualify as “reporting companies” depend on statutes, regulations and procedures of the state or tribe under whose laws they were formed.

Which entities are exempt from the new reporting requirements?

A reporting company is exempt only if it falls into one of twenty-three prescribed exemptions, including SEC reporting companies, insurance companies, financial institutions, broker-dealers, investment companies and advisers, and other publicly registered entities.

Exemptions of particular interest to privately held companies include:

  • Large operating companies that directly employ more than 20 full time employees in the United States, have an operating presence at a physical office in the United States, and have filed a federal income tax return or information return demonstrating more than $5 million in gross receipts or sales from sources within the United States;
  • Subsidiaries of certain exempt entities, where the entity’s ownership interests are held, directly or indirectly, by certain enumerated exempt entities; and
  • Inactive entities formed prior to January 1, 2020, not engaged in active business or owned in whole or in part by a foreign person, which has not undergone a recent change in control and holds no assets (including interests in any other legal entity).

Additionally, there is a three-pronged exemption for tax-exempt entities. Specifically, the following types of tax-exempt entities are exempt from the CTA’s reporting requirements:

  • Organizations described in IRC 501(c), determined without regard to IRC 508(a);
  • Certain political organizations; and
  • Certain non-exempt charitable or split interest trusts.

The first prong encompasses all IRC 501(c) organizations, including most charities, schools and other educational institutions, churches and other religious organizations, private foundations, social welfare organizations, labor organizations, trade associations, chambers of commerce, and social clubs. Notably, this prong applies without regard to whether the qualifying organization has filed an application for recognition of tax-exempt status pursuant to IRC 508(a).

Keep in mind, however, that other types of tax-exempt entities exist but fall outside the exemption from the CTA’s reporting requirements. For example, homeowner associations, including condominium associations, covered by IRC 528 are not exempt from these requirements.

Note that if a reporting company is relying on an exemption and subsequently loses that exemption, it must file a report to stay compliant within 30 days of the loss of the exemption. However, if a qualifying tax-exempt entity loses its IRC 501(c) status, the organization has a 180-day grace period during which it will continue to be deemed an IRC 501(c) organization solely for purposes of the exemption.

Importantly, there is no separate exemption for holding companies – FinCEN expressly declined to provide for one. For example, if a large operating company is owned by an entity that does not qualify for a prescribed exemption and is a reporting company, the parent (or holding company) will need to file BOI Reports even though its subsidiary (the large operating company) does not.

FinCEN also clarified that a parent company may not file a single BOI Report on behalf of its group of companies – each reporting company that is not exempt must file its own report. Therefore, it is imperative to assess each legal entity within an affiliated group for CTA purposes.

What information must be provided by or on behalf of reporting companies?

A nonexempt reporting company must submit to FinCEN a report (a “BOI Report”) containing specific information about itself and each of its beneficial owners and certain company applicants:

  • The reporting company must provide its legal name, all trade names or DBAs, a complete address for the reporting company’s principal place of business in the United States, its jurisdiction of formation or first place of U.S. registration, and its employer identification number (EIN) or taxpayer identification number (TIN).
  • The reporting company must provide, for each beneficial owner and company applicant, his or her full legal name, date of birth, complete U.S. residential (or, for certain company applicants, business) address, and information from (along with an image of) the individual’s unexpired U.S. passport, state driver’s license or other government-issued identification document.

Reporting companies created or registered to do business in the United States prior to January 1, 2024 are exempt from the requirement to provide disclosure with respect to company applicants.

Who qualifies as a “beneficial owner”?

A “beneficial owner” is any individual who, directly or indirectly, (1) owns or controls at least 25 percent of the ownership interests of the reporting company or (2) exercises substantial control over the reporting company.

An individual’s ownership interest in the reporting company will be determined by examining ownership of equity, stock or voting rights; capital or profits interests; convertible instruments (as converted); options or privileges (as exercised); and any other instrument, contract, arrangement, understanding, relationship or mechanism used to establish ownership. Reporting companies will need to “look through” ownership interests held by intermediary companies to identify the individuals who beneficially own such interests. Special rules apply to interests held by trusts.

An individual may exercise substantial control over the reporting company if such person is:

  • a senior officer of the reporting company;
  • a person who has the authority to appoint or remove certain officers or a majority of the board of directors;
  • a person who directs, determines or has substantial influence over important decisions of the reporting company, including decisions about its business, finances or structure; or
  • a person who otherwise exercises substantial control over the reporting company.

Any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer or chief operating officer is a “senior officer.” On the other hand, whether an individual serving on the board of directors (or equivalent body) exercises substantial control over the reporting company is a question that must be analyzed under the above criteria on a director-by-director basis.

Among other areas of concern, it may be challenging for a reporting company to identify the individuals with substantial influence over important decisions of the reporting company. Importantly, “substantial control” is determined independently from the “ownership interests” determination. FinCEN expressly contemplates a situation where a reporting company is structured such that multiple individuals (e.g., LLC members) exercise “essentially equal authority” over important decisions, in which case each such individual likely has substantial influence even though no single individual directs or determines them.

There is no limit to the number of beneficial owners of each reporting company that may be subject to reporting requirements under the BOI Rule.

Who qualifies as a “company applicant”?

A “company applicant” is:

  • the individual who directly filed the document (either physically or electronically) causing the reporting company to be created or registered to do business in the United States; and
  • if more than one individual was involved in the filing, the individual primarily responsible for directing or controlling such filing.

In no event will a reporting company have more than two company applicants.

Does a reporting company need to update FinCEN when any reported information changes?

Yes, and this aspect of the BOI Rule will require active monitoring of relevant information. Reporting companies will be required to report any change in the information required to be reported within 30 days after the date on which the change becomes effective. Changes that may require an updated BOI Report include:

  • Any change to the legal or trade name of the reporting company, or any new trade name.
  • Any change of the “beneficial owners” of the reporting company, which could occur as a result of the death, resignation or replacement of an officer or director; a change in equity ownership (including via sale transaction); an equity owner turning 18 years of age; or a change to certain provisions of the governance documents of the reporting company.
  • Any change of name, address or unique identifying number (e.g., driver’s license or passport number) as reported to FinCEN for any beneficial owner.
  • The loss of an exemption previously held by the reporting company, or a reporting company gaining exempt status.

Companies that fail to submit timely updates may be subject to criminal and civil penalties. Liability extends to senior officers, as well as those who willfully cause a company not to file a required BOI Report or to report incomplete or false information to FinCEN.

FinCEN has clarified that a mere change to the “type” of ownership interest held by a beneficial owner (e.g., conversion of preferred stock to common stock) will not require an updated BOI Report because the type of ownership interest is not information that is required to be reported.

How do I file?

BOI Reports must be completed and submitted to FinCEN via online portal that remains under development, referred to as the Beneficial Ownership Secure System (BOSS). FinCEN has reported that information collected and stored on BOSS will not be publicly available or subject to public information requests and will be securely maintained.

Reporting companies may submit information to BOSS directly or via third-party service provider.

When a filing is made, the reporting company must certify that its report is true, correct, and complete. FinCEN has noted its expectation that reporting companies will “verify” the information they receive from their beneficial owners and company applicants before reporting it to FinCEN.

What are the penalties for failing to satisfy the new reporting requirements?

Persons who fail to meet these new reporting requirements or who engage in unauthorized disclosure of reported information may be subject to civil or criminal penalties:

  • A person who willfully fails to file a correct and complete initial BOI Report or an updated BOI Report required by law is subject to a fine of $500 per day, up to a maximum fine of $10,000, and is subject to imprisonment for up to two years.
  • A person who knowingly discloses reported information without authorization is subject to a fine of $500 per day, up to a maximum fine of $250,000, and is subject to imprisonment for up to five years.

If a person voluntarily submits a report correcting inaccurate information within 90 days of the deadline for the original report, the person may benefit from a safe harbor from penalty. However, the willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information, is not protected by the safe harbor. Note that senior officers of an entity that fails to file a required BOI report may be held accountable.

For example, according to FinCEN, providing false or fraudulent beneficial ownership information could include providing false identifying information about an individual identified in a BOI report, such as by providing a copy of a fraudulent identifying document.

Additionally, if an individual who qualifies as a beneficial owner or a company applicant refuses to provide required information, or if such an individual provides false information to a company knowing that information is meant to be reported to FinCEN, that person may be held accountable.

What should I do to prepare my company to comply with these reporting requirements?

Get organized – make sure you have your company’s current capitalization table, governing documents, and equity and debt documents. You will need to account for contractual rights of control and ownership, in addition to outstanding ownership interests.

Make a plan – if your company is subject to the reporting requirements, you will need to consider how to collect the required information from direct and any indirect owners and others. You will also need to continuously monitor for changes that may trigger reporting requirements. Companies with complex beneficial ownership structures may want to designate a CTA compliance officer.

Reach out to Varnum – contact your Varnum attorney or any member of Varnum’s CTA Taskforce to learn more and for assistance with:

  • assessing whether your entity is a reporting company, whether it qualifies for an exemption, and what individuals may qualify as beneficial owners and company applicants;
  • reviewing and updating governance documents and internal control procedures so that your company can timely collect and report the required information to FinCEN; and
  • making arrangements for submitting to FinCEN any required BOI Reports.

By engaging Varnum, you will also receive updates on any rule changes or newly issued guidance, as well as other developments that may affect the timing and scope of CTA reporting requirements.

Companies may also consult FinCEN’s BOI website at www.fincen.gov/boi for additional information, including its Small Entity Compliance Guide and list of Frequently Asked Questions.

Please contact your Varnum attorney or any member of Varnum’s CTA Taskforce if you have any questions about how the Corporate Transparency Act may impact you or your business.

Originally published on October 4, 2023. Revised on December 13, 2023.