Corporate Maintenance obligations just expanded: Are you ready?

A new set of federal disclosure requirements have come into effect as of January 1, 2024. The Corporate Transparency Act (“CTA”) is a new federal law designed to combat money laundering, tax evasion, and other illicit financial activities by requiring “reporting companies” to disclose beneficial ownership information (“BOI”) about their “beneficial owners” to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of Treasury. FinCEN is also the entity that collects foreign bank account reports, commonly referred to as “FBARs”.

For new entities that are formed on or after January 1, 2024, the CTA filings are due 90 days following formation. This Memo describes in general terms what you need to do to comply with the CTA.

Overview

Subject to certain enumerated exemptions, the CTA will require corporations, limited liability companies, partnerships, and similar entities that are formed in (or registered to do business in) any of the states of the U.S. to identify their beneficial owners by providing information in an electronic report (a “BOI Report”) submitted to FinCEN.

In general, the CTA will apply to any entity that is formed in the U.S. (or to any foreign entity that is registered to do business in the U.S.) by the filing of a document with the appropriate state governmental office (each, a “Reporting Company”). The filing requirement will typically be triggered by a new Secretary of State filing.

The CTA provides for twenty-three (23) exemptions, and they should be reviewed carefully if a company believes it may qualify for and intends to rely on an exemption. Most of the exemptions apply to entities that are already subject to substantial federal reporting requirements (e.g. SEC-reporting entities, securities brokers and dealers, insurance companies, tax-exempt entities, subsidiaries of exempt entities, pooled investment companies, etc.). Importantly, large private companies are exempt if they (A) have an operating presence at a physical location in the U.S., (B) employ more than 20 full-time U.S. based individuals (not counting employees of affiliated entities), and (C) reported more than $5 million of revenue from U.S. sources on a consolidated basis to the IRS for the previous year. Also, inactive / dormant entities are also exempt from the reporting requirements.^[i]

Note that there are no exemptions for parent companies (for example, a holding company that owns only tax-exempt entities). Accordingly, even though some entities in a company structure may qualify for one or more exemptions, other entities in the structure may nonetheless have reporting obligations.^[ii]

In the absence of an exemption, a BOI Report must be made by the Reporting Company to FinCEN.

Reporting Company Date of Formation		BOI Report Filing Deadline
Before January 1, 2024	→	On or before January 1, 2025
On or after January 1, 2024, but before January 1, 2025	→	90 days following formation
On or after January 1, 2025	→	30 days following formation

The CTA provides for civil penalties (up to $500 per day) and criminal penalties (including imprisonment) for a willful failure to file. The CTA does not contain any provision for non-willful or negligence penalties.

We would be glad to help our clients assess how to comply with the CTA. In general, however, Fletcher Tilton PC is not responsible to make BOI Reports (including updates) unless we discuss this with you expressly.

Information Required to Complete BOI Report

Final rules have been issued setting out the information that must be included in the BOI Report.^[iii] The BOI Report will require extensive information, generally summarized as follows:

• Information on the Reporting Company:
  • The full legal name of the entity;
  • All trade and d/b/a names;
  • The street address of the Reporting Company’s principal place of business;
  • The jurisdiction of formation; and
  • The Federal taxpayer ID number of the Reporting Company.
• Personal identification for each individual beneficial owner and applicant:
  • The individual’s full legal name;
  • date of birth;
  • complete residential address (except in the case of a Company Applicant (defined below) who forms or registers a company in the course of his/her business such as a paralegal. For such individuals, the business street address should be reported).
  • A copy of one of the following: (a) a non-expired U.S. passport, (b) a non-expired state, local, or tribal identification document, (c) a non-expired state-issued document, or, if these are not available, (d) a non-expired foreign passport, which shall include a unique identifying number and issuing jurisdiction.

According to FinCEN, the information contained in the BOI Report will not be made available to the public. In general, FinCEN will disclose the information only to federal and state law enforcement agencies and regulators.

Beneficial Owners and Applicants

Beneficial owners include any individual who, directly or indirectly, (i) “exercises substantial control over the entity” (e.g., any senior officer) or (ii) “owns or controls 25 percent of the ownership interests of the entity”.

An individual is deemed to exercise “substantial control” if the individual satisfies any of the following factors:

• the individual serves as a senior officer of the company (CEO, CFO, COO, or general counsel, or any other officer who performs similar functions);
• the individual has authority over the senior officers or majority of the board of the company;
• the individual has substantial influence over the company’s important decisions (such decisions include those addressing the nature, scope, or attributes of the business, including the sale, lease, mortgage, or other transfer of any principal assets of the company; the reorganization, dissolution, or merger of the company; or major expenditures or investments, issuances of any equity, the incurrence of any significant debt, or approval of the operating budget of the company among others); or
• the individual has any other type of substantial control over the company.

Substantial control may be exercised directly or indirectly, and the applicable Reporting Company is required to assess substantial control up its chain of ownership.^[iv]

As used in the CTA, “ownership interest” is broadly construed to include any equity, stock, or similar interest (whether such interest confers voting rights or not), any capital or profit interests, any instrument convertible into equity, any option to purchase or sell ownership interests, or “any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.”^[v] For purposes of determining whether the twenty-five (25%) percent threshold has been met with respect to an individual, all (a) options or similar interests are deemed exercised, and (b) ownership interests are aggregated.

For purposes of the ownership test, an individual may directly or indirectly control an ownership interest through a contract or other relationship, including joint ownership with one or more other persons of an undivided interest through another individual acting as a nominee, intermediary, custodian, or agent on behalf of such individual or through ownership or control of intermediary entities.^[vi] With respect to a trust that is deemed a Beneficial Owner under the Ownership Test, the following individuals are deemed a Beneficial Owner:

1. a trustee of the trust or other individual who has authority to dispose of trust assets;
2. a beneficiary of the trust, if (a) such beneficiary is the sole permissible recipient of income and principal from the trust or (b) if such beneficiary has the right to demand a distribution of or withdraw substantially all of the assets from the trust; and/or
3. a grantor or settlor of a trust, if such individual has the right to revoke the trust or otherwise withdraw the assets of the trust.^[vii]

Notwithstanding the foregoing, there are five (5) exceptions for when an individual who otherwise would be a beneficial owner of a Reporting Company is exempt: (i) a minor child if the company provides information about a parent or legal guardian; (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; (iii) an employee, acting solely as an employee, whose substantial control over or economic benefits from such entity are derived solely from the employment status of the employee and who is not a senior officer; (iv) an individual whose only interest is a future interest through a right of inheritance; and (v) a creditor.

It is important to note that these terms are intentionally broad, consider a variety of arrangements and ownership interests and will likely be broadly construed. A Reporting Company will always have at least one owner with substantial control and possibly several with such control, even if no individual holds a twenty-five (25%) percent interest.

In addition to identifying and providing information regarding its beneficial owners and those who exercise substantial control, when entities are formed after January 1, 2024 they will also need to submit information about their “Company Applicants”. The CTA defines Company Applicants as one of two (2) individuals: (i) the individual who directly files the formation or registration document of the Reporting Company, and (ii) the individual who is primarily responsible for directing such filing. While there may be multiple individuals who can meet the definition of a Company Applicant, only two individuals will be reported by the Reporting Company to FinCEN. Reporting Companies that were formed prior to January 1, 2024, will not need to identify and report their Company Applicants.

The Filing Process

We realize that you may work with other service providers who may form legal entities on your behalf. Going forward, if Fletcher Tilton is handling all aspects of a transaction on behalf of a client, we will check whether there is a reporting requirement under the CTA. In other cases, it will be important to specify who is responsible to conduct this BOI Report analysis. If we are not forming the entity, you will need to confirm which service provider is handling the analysis and who will be responsible for submitting the BOI Report with FinCEN.

If we discuss this with you expressly, Fletcher Tilton may assist you with preparing and submitting the BOI Report. We would charge for this work at our regular hourly rates. We may use a third-party vendor to assist with the filing.

The information that you submit to FinCEN is likely to change and it may change frequently. For example, one of the beneficial owners might move to a new residential address. Please know that an entity is required to notify FinCEN in the event there is any change to its BOI Report on file.

We strongly advise you to establish an internal process for detecting changes that may affect the BOI Report.

If Fletcher Tilton assisted you with the initial BOI Report, you could ask us to update the filing and you could send the updated information to us. To be sure, Fletcher Tilton is not responsible to make updated BOI Reports, unless we expressly agree to assist with the update, and we acknowledge receipt of all necessary information.

Of course, Fletcher Tilton is not responsible for detecting changes that require an update to be filed.

In addition to the CTA at the federal level, please be aware that certain states may be enacting similar beneficial owner disclosure legislation, sometimes with different disclosure requirements. Going forward, you may want to check on the requirements of each state where you form an entity.

Conclusion

Please contact any of your lawyers at Fletcher Tilton if you have questions. We appreciate the privilege of providing legal services to our clients.

This memo is for educational purposes and provides a general summary of the CTA and its requirements, and is not intended to, and does not, provide legal, compliance or other advice to any individual or entity. It does not establish an attorney-client engagement. Please reach out to your Fletcher Tilton PC contact for assistance regarding the application of the Corporate Transparency Act to your specific situation.

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^[i] The full list of exemptions is available at 31 U.S.C. §5536(a)(11).

^[ii] Generally, the interposition of one or more exempt entities in a chain of entity ownership will not shield ultimate Beneficial Owners from the Beneficial Ownership Information reporting obligations of Reporting Companies down the chain. However, under and subject to the limitations of 31 CFR 1010.380(b)(2)(i), if an individual is the Beneficial Owner of a Reporting Company exclusively due to ownership interests the Beneficial Owner holds in exempt entities (that is, exempt entities that, in turn, have an ownership interest in a Reporting Company), the related report may include the names of such exempt entities in lieu of personal information about such Beneficial Owner.

^[iii] The rules are available at 31 C.F.R. §1010.380.

^[iv] Substantial Control may be exercised over a Reporting Company "through: (A) board representation; (B) ownership or control of a majority of the voting power or voting rights of the reporting company; (C) rights associated with any financing arrangement or interest in a company; (D) control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company; (E) arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or (F) any other contract, arrangement, understanding, relationship, or otherwise." 31 CFR 1010.380(d)(1)(ii).

^[v] See 31 C.F.R. §1010.380(d)(2)(i).

^[vi] See 31 C.F.R. §1010.380(d)(2)(ii).

^[vii] See 31 C.F.R §1010.380(d)(2)(ii)(C)