Deadline Approaching for Corporate Transparency Act

The deadline for most companies created before January 1, 2024, to file their initial beneficial ownership information report (a “CTA Report”) under the Corporate Transparency Act (the “CTA”) is rapidly approaching. That deadline is December 31, 2024. This Burke Warren client alert will recap the requirements discussed in our prior alerts linked below and correspondence to our clients and contacts, to help you focus on what needs to be done if you haven’t complied by now.

What Companies Must File CTA Reports?

The CTA’s filing obligations apply to “reporting companies,” which include practically every corporation, limited liability company and other entity created by the filing of a document with a public official, unless one of the 23 exemptions listed on fincen.gov applies. Most of the exemptions are extremely narrow. While the exemption for a “Large Operating Company” (“LOC”) is not narrow, the exemption depends on meeting several requirements which must be carefully analyzed. If you think your company might satisfy the requirements of the LOC exemption or any other exemption, please reach out to your Burke Warren contact attorney or a member of our CTA Compliance Team listed on the right side of this alert for guidance.

De Minimis Companies Are Not Exempt

Please keep in mind that there is no CTA exemption for companies that are seemingly insignificant and engage in virtually no activity. For example, a single-member LLC existing solely to hold title to a house would not qualify for the “inactive entity” exemption and must file a CTA Report.

What is a CTA Report?

A CTA Report is filed through the online portal of the Financial Crimes Enforcement Network ("FinCEN"), the agency within the Department of the Treasury charged with enforcing the CTA. There is no fee for filing a CTA Report. Each reporting company is required to provide the following information in its CTA Report:

1. Its full legal name
2. Any trade names or "doing business as" names
3. Its EIN or other tax identifier
4. Its complete current U.S. business address
5. Its jurisdiction of formation (state, tribal, or foreign)
6. The following Beneficial Ownership Information (“BOI”) for each beneficial owner of the reporting company:
   1. Full legal name
   2. Date of birth
   3. Complete current residential street address
   4. A unique identifying number from an acceptable identification document (e.g., passport, driver’s license or other government-issued identification document)
   5. An image of the non-expired governmental identification that supplies such unique identifying number, which must be uploaded to the FinCEN website

An individual may obtain a personal FinCEN ID number which can be reported in lieu of the BOI information listed in 6(a) through (e) above. Having a FinCEN ID number facilitates multiple filings where an individual is a beneficial owner of several reporting companies.

Who is a Beneficial Owner?

There are two distinct tests for who is a beneficial owner. A “beneficial owner” is any individual who, directly or indirectly:

• Exercises substantial control over a reporting company, OR
• Owns or controls at least 25% of the ownership interests of a reporting company.

The first test for being a beneficial owner is whether an individual directly or indirectly holds “substantial control” over the reporting company. While there are certain categories such as “senior officers” of a reporting company who are clearly regarded as having substantial control, the test can be complicated and very fact-dependent, often requiring review of the reporting company’s organizational documents (e.g., the operating agreement of an LLC). Under this test, an individual can be a beneficial owner under the CTA despite having no actual ownership interest in the reporting company.

The second test focuses on the individuals who directly or indirectly own or control 25% or more of the “ownership interests” in a reporting company. The term “ownership interests” includes stock and LLC interests, as well as options, warrants and in some instances even debt. Therefore, a shareholder in a corporation holding 20% of the outstanding shares who holds an option to acquire an additional 10% of the shares would be considered to be the owner of a 30% interest and above the 25% reporting threshold. As another example of the potential subtlety of the test, if an individual who personally owns a 10% interest in an entity also controls other ownership interests in the entity (e.g., a parent serving as trustee for children under three trusts each owning a 5% interest), the percentage of ownership controlled by that individual would be the total (in the foregoing example 10% + 5% +5% +5% = 25%).

In many cases, the analysis of which individuals are deemed beneficial owners is quite simple and straightforward, and in other cases it is complicated. Please consider your situation as soon as possible and contact your Burke Warren attorney or a member of our CTA Compliance Team listed on the right side of this alert for guidance.

Act Now!

There are severe penalties imposed for failing to file a required CTA Report with FinCEN in a timely manner. Consequently, it is critical for you to review every entity in which you have a direct or indirect ownership interest or over which you directly or indirectly exercise any control. The deadline for making the analysis and filing the initial CTA Report for each reporting company created before January 1, 2024 is December 31, 2024, so please review your situation as soon as possible and contact your Burke Warren attorney or a member of our CTA Compliance Team listed on the right side of this alert for assistance.

Corporate Transparency Act (January 2024)

New Corporate Transparency Act Requires Reporting of Company Owners to FinCEN (January 2021)