ComplianceApril 03, 2024

Expert Insights: How businesses can comply with the Corporate Transparency Act

Although the Corporate Transparency Act (CTA) has been in effect since January 2024, many businesses are still not aware of the new law and its beneficial ownership information (BOI) reporting requirements. It is estimated that in this year alone, close to 32 million businesses will need to file a BOI report with FinCEN, a bureau of the U.S. Department of the Treasury. Failure to comply may result in significant civil and criminal penalties, which is why companies need to understand if and how the CTA applies to them and what they need to do to meet their compliance obligations.

In this edition of Expert Insights, Sandra Feldman, Publications Attorney for CT Corporation, covers which businesses must file a beneficial ownership information report and explains key terms such as beneficial owner, company applicant, and FinCEN Identifier. Sandra also goes into what information needs to be included in the report, how to file the report, and what businesses need to do to maintain compliance after the initial filing.

TRANSCRIPT

Greg Corombos: Hi, I'm Greg Corombos. Our guest in this edition of Expert Insights is Sandra Feldman, Publications Attorney for CT Corporation. Sandra joins us to discuss further details of the Corporate Transparency Act. The Act went into law on January 1 and requires small businesses to file a beneficial ownership information report or BOI report with a federal agency known as the Financial Crimes Enforcement Network. And Sandra, thanks so much for being with us again. We appreciate it.

Sandra Feldman: Thank you for having me, Greg. The last time we talked about the Corporate Transparency Act, or CTA was over a year ago, and at that time, it was just something that small businesses probably didn't worry too much about, because it seemed far off. And back then we really couldn't provide too many details about how reporting would actually work, because we hadn't seen the forms. And the platform where reports would be filed wasn't up yet. And we still had a lot of questions about BOI reporting in general. But the CTA is now in effect. And I'm happy to have this opportunity to talk once again, about BOI reporting under the Corporate Transparency Act, now that we have more information to share. 

Greg Corombos: Well, that sounds great. So let's get right into it. So although the reporting requirement is in effect, as we both mentioned, I understand that there are still quite a few businesses that are not aware of the Corporate Transparency Act, and that they may actually have to file a beneficial ownership information report. Is that right? 

Sandra Feldman: It’s very true. CT Corporation has conducted polls, and business groups have conducted surveys. And they show that still the majority of companies that may be subject to BOI reporting have no idea that this reporting requirement exists. And that's why podcasts like this [are] so important. We're trying to spread the word because there are some harsh civil and criminal penalties that can be imposed on both companies and individuals for violations of the CTA’s reporting requirements. 

Greg Corombos: Well, happy to help in that department. We don't want anybody to get in legal trouble here. So I heard that there was a court decision, saying the Corporate Transparency Act is unconstitutional. What can you tell us about that? 

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Is your company required to file a beneficial ownership report?

Sandra Feldman: Yeah, that's right. On March 1, the federal district court in Alabama ruled that the CTA was unconstitutional because it exceeds the constitutional limits on Congress's power. But what's important to know, and I want to emphasize this, is that the court enjoined the government from applying the CTA only to the plaintiffs in that case, who were one individual business owner and his companies and the members of the National Small Business Association as of March 1 2024, which is only about 65,000 companies. And the Treasury Department is appealing the decision [as well as] the Financial Crimes Enforcement Network, better known as FinCEN, which is the bureau in the Treasury Department that administers and enforces the CTA. They released the response in which they said that while the litigation is ongoing, they'll comply with the court's order and not enforce the CTA against the plaintiffs. However, they will continue to implement the Corporate Transparency Act, and that all reporting companies other than the plaintiffs are still required to comply with the law and file beneficial ownership information reports, which means according to FinCEN, there's still about 32 million companies that have to file a report this year.

Greg Corombos: Sandra, since the CTA is still being enforced, who actually has to file a beneficial ownership information report?

Sandra Feldman: Well, BOI reports have to be filed by what are called reporting companies. And there are two kinds of reporting companies, domestic and foreign. Domestic reporting companies are corporations, LLCs, and other entities created by filing a document with the Secretary of State or similar office, and that do not qualify for an exemption. Foreign reporting companies are corporations, LLCs, and other entities formed under the law of a foreign country and registered to do business in the United States by filing a document with the Secretary of State or similar office and that do not qualify for an exemption.

Greg Corombos: So who does qualify for an exemption? 

Sandra Feldman: Well, there are 23 kinds of entities that are exempt. And most of them are entities that are already highly regulated by the government, particularly those that file reports that name beneficial owners, and include, among others, publicly traded companies, public utilities, financial institutions, insurance companies, public accounting firms, and certain tax exempt entities. And an entity that's exempt doesn't have to file anything to obtain exempt status. It just doesn't file a BOI report. Although if it qualifies for an exemption after filing its initial report, it would have to file an updated BOI report to indicate that it's now exempt. 

Greg Corombos: What about companies that aren't already highly regulated? Are there any exemptions for them?

Sandra Feldman: Well the exemption that a company that isn't in one of those highly regulated industries has the best chance of qualifying for what is called a large operating company exemption. A large operating company is a company that has more than 20 full-time employees in the United States, that operates from a physical office in the United States, and that filed for federal income tax or information return for the previous year demonstrating at least $5 million in gross receipts or sales from United States sources. And the company must meet all three requirements to qualify for the exemption.

Greg Corombos: So for those that don't qualify for an exemption, let's talk about compliance. When does the initial report have to be filed by those companies that have to file one? 

Sandra Feldman: Domestic reporting companies created before January 1, 2024, and foreign reporting companies that registered to do business before January 1 2024, have to file their initial report by January 1, 2025. Reporting companies created or first registering to do business in 2024 have to file within 90 calendar days of first receiving notice that the company was created or registered. And that goes from 90 calendar days to 30 calendar days for reporting companies created or first registering to do business in 2025 and beyond.

Greg Corombos: Now for companies that do have to file a BOI report, what information has to be reported?

Sandra Feldman: In the initial BOI report, all reporting companies have to set forth certain basic information about the company, namely its legal name, DBA names, principal place of business address, jurisdiction of formation, and in a case of a foreign company, the jurisdiction where it first registered to the business, and its IRS Taxpayer Identification Number. Reporting companies also have to provide four pieces of personal information about all of their beneficial owners, which is their name, date of birth, residential address, and a unique number and the issuing jurisdiction taken from a passport, driver's license, or state or local issued ID. And they also have to upload an image of the document the number comes from. Reporting companies created or first registered to do business on or after January 1, 2024, also have to provide personal information about their company applicants. However, [with] a beneficial owner or company applicant that has obtained a FinCEN identifier, the reporting company can report their FinCEN identifier instead of each piece of information. 

Greg Corombos: Alright, that may be some terminology that's new to a listener here. So what's a FinCEN identifier? 

Sandra Feldman: I'm glad you asked. It's an option that FinCEN gives the beneficial owners and company applicants. They can go on FinCEN’s website and file an application with FinCEN that sets forth their personal information, and FinCEN will give them a 12-digit number called a FinCEN Identifier. And then they can provide that number to the reporting company. And the reporting company can include that number in its BOI report, instead of the individual's personal information. Getting a FinCEN identifier is voluntary. But it may be something that someone who's a beneficial owner or company applicant for a lot of reporting companies might be interested in, or [that] someone who for whatever reason, just doesn't want to give their personal information to the company. However, there is a significant drawback, because once the beneficial owner or company applicant gets a FinCEN Identifier, they become obligated to file an updated application with FinCEN whenever their personal information changes. And that obligation continues even after they're no longer a beneficial owner or company applicant. And FinCEN has indicated they're considering a way for an individual to deactivate their FinCEN identifier, but so far, they haven't done it.

Greg Corombos: Alright, let's dig into some more of the key information here. Sandra. All of this is fantastic information. Who are beneficial owners and company applicants?

Sandra Feldman: Let's start with the beneficial owner. The beneficial owner is defined as an individual who directly or indirectly either exercises substantial control over a reporting company, or owns or controls at least 25% of its ownership interest. And there is no maximum number of beneficial owners a reporting company can have, and all must be reported. And note that this is an either or test. An individual who exercises substantial control, for example, a senior officer or a significant decision maker, is a beneficial owner even if that individual doesn't own any of the reporting company's ownership interests. And similarly, an individual who owns 25% of a reporting company is a beneficial owner, even if the individual doesn't exercise any control.

Greg Corombos: What about a company applicant? How's that defined?

Sandra Feldman: Well, a company applicant is defined as an individual who directly files the document that creates a register as the reporting company. And if more than one individual is involved in the filing, [it is] the individual who's primarily responsible for controlling or directing the filing. To determine who's primarily responsible for directing or controlling the filing of the creation or registration document, FinCEN says that you have to look at who made the decisions about the filing of the document, such as how the filing was managed, what content the document includes, and when and where the filing occurs. So a reporting company may have one company applicant, if the direct filer and primary controller of the filing are the same individual, or two, if they are not the same, but never more than two. And once again, it's only reporting companies created or first registered on or after January 1, 2024, who report information about company applicants. 

Greg Corombos: What happens, though, if after a reporting company files a BOI report, the information the company reported changes. 

Sandra Feldman: If there’s a change in the information that the reporting company reported about the company, or there's a change in who its beneficial owners are, or if it reported the personal information of its beneficial owners and that information changes, the reporting company must file an updated BOI report within 30 calendar days [of] the change. And a reporting company does not have to update any personal information reported about its company applicants. 

Greg Corombos: Alright, we've talked about what if something changes, but what if the company files a report and then you discover there was actually an error? What happens then?

Sandra Feldman: If there is an error in any of the information reported about the company, its beneficial owners, or its company applicants, the reporting company has to file a corrective report within 30 calendar days of when it became aware of or had reason to know about the error. 

Greg Corombos: Does a reporting company have to file an annual BOI report? 

Sandra Feldman: No, it doesn't. There's no annual filing requirement for reporting companies. BOI reporting consists of an initial report, an updated report when the information we discussed changes, and the corrected report if the company made an error and its previously filed record. 

Greg Corombos: Let's get to logistics. Now how are beneficial ownership information reports filed? 

Sandra Feldman: All BOI reports are filed electronically with FinCEN. There's no state filing and no filing fee. The report can be filed by anyone the reporting company authorizes to file on its behalf. And there aren't separate report forms for the initial updated and corrected reports. There's just one BOI report form. And the reporting company indicates whether it's filing an initial report, updating a prior report, or correcting a prior report. And for updated and corrected reports, the entire BOI report has to be filled out. You don't just provide the changes, you resubmit all of the information. 

Greg Corombos: Where does someone go to file a BOI report for a reporting company?

Sandra Feldman: They can file the BOI reports directly with FinCEN by going to FinCEN’s BOI E-Filing portal, which is located on FinCEN’s website. There, they'll be given a choice of submitting a PDF version of the form or an online version. Another option FinCEN gives you is to file a report using a third-party service provider. And that's a vendor with its own BOI filing platform. And if you choose this option, you will go to the third-party service provider’s website instead of FinCEN’s, where you will complete the report, which the third party service provider will then file for you with FinCEN. And I would be remiss in not pointing out that CT Corporation is a third-party service provider. And we have an easy to use and secure BOI filing solution for single-entity filers and multi-entity filers. There are many added benefits to CT Corporation’s filing solution, including that it allows you to track your filings, make edits more easily, and save time overall.

Greg Corombos: So much good information here. Sandra, any final thoughts?

Sandra Feldman: Only that this has just been a brief review of the BOI reporting requirements. There's a lot more involved. And I could probably spend an hour just explaining who a beneficial owner is. So I wanted to close by directing the listeners to some places where they can get more information. FinCEN’s website is a good place to start. They have a small entity compliance guide and FAQs, which I think will be very helpful. I also hope everyone will check out the CTA resources on CT Corporation’s website, where we have webinars, articles and even a quiz to help people determine if they have to file. That's about it. And once again, I'd like to thank you for the opportunity to raise awareness about beneficial ownership information reporting under the Corporate Transparency Act

Greg Corombos: Well, it's our pleasure to get this critical information out to the business owners. So Sandra, obviously, compliance with the Corporate Transparency Act is critical. And I think you've really helped us understand what's happening here and how to stay compliant. So thank you very much for your time today. 

Sandra Feldman: Thank you. 

Greg Corombos: Sandra Feldman is a Publications Attorney at CT Corporation. I'm Greg Corombos reporting for Expert Insights. For more information on this topic, please call CT at 844-878-1800.

Sandra Feldman
Publications Attorney
Sandra (Sandy) Feldman has been with CT Corporation since 1985 and has been the Publications Attorney since 1988. Sandy stays on top of the most pressing and pertinent business entity law issues that impact CT customers of all sizes and segments.
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