This is going to be a little different than most of our blogs but it’s really critical, so bear with me.
We sent this notification as a correspondence to current clients of the firm this month, and we also want to make sure everyone who reads this but might not be current clients, or clients at all, is aware of some important changes that require action before the end of this year.
The Corporate Transparency Act of 2020, as amended (the “CTA”), mandates certain businesses (generally all small businesses) comply with new governmental reporting requirements. The law took effect on January 1, 2024, but if you formed your company before the effective date, then you have until the end of this year to comply. Since there are active lawsuits seeking to enjoin or delay implementation of the CTA, we specifically chose to wait until later in the year before reaching out. However, 2024 is running down and we want to ensure you have the information so that you can develop a game plan going into the last quarter of the year.
The purpose of this notification is to explain the CTA at a high level and to encourage you to carefully review the CTA’s reporting requirements to determine whether any business entities that you own, manage, invest in, work for, or operate will be subject to these new regulations and require you to file beneficial ownership information (“BOI”) reports. Please be aware that non-compliance with the CTA can cost you over $500/day in fines (up to $10k in criminal penalties) and even jail and prison time. This notification is not meant to provide you or your company specific advice on CTA compliance, but rather act as an initial resource. As of September 10, 2024, the information we provide here is accurate to the best of the firm’s ability, but since FinCEN (defined below) has provided additional answers and updates all year, the firm can’t warrant the information in this notification.
The CTA was added to HR 6395, also known as the National Defense Authorization Act, in 2020 after over a decade of various implementation efforts by Congress. It’s designed to prevent money laundering, terrorism financing, and other financially related crimes in shell or shadow entities by even shadowier figures. The CTA regulations are overseen by a little-known bureau of the U.S. Department of Treasury—the Financial Crimes Enforcement Network (“FinCEN”). FinCEN has implemented reporting procedures through an online database where you must enter your information to comply with the CTA.
Here are the terms you need to know. A business that falls under the CTA is considered a “reporting company,” and its “beneficial owners” (including, in most cases, senior officers of a company, as well as other employees who exercise “substantial control” of a company as defined under the CTA) are the people who must file a BOI report with FinCEN. Remember, the goal of the CTA is to identify essentially who is running the show and profiting behind the scenes for law enforcement and national security purposes.
Your business may also fit under certain enumerated exemptions (twenty-three (23) of them to be exact), but please be aware that each exemption has a specific test that accompanies it and whether your business fits the test is a factual matter. More on that below.
Deadlines You Should Know
If your business (and/or you personally in your capacity as an owner, manager, or executive with decision-making authority) is subject to filing a BOI report with FinCEN, please be aware of the following deadlines:
- A reporting company formed on or before December 31, 2023 must file their initial BOI report by December 31, 2024.
- A reporting company formed on or after January 1, 2024 must file their initial BOI report within ninety (90) days of legal formation.
- A reporting company formed on or after January 1, 2025 must file their initial BOI report within thirty (30) days of legal formation.
- Also, in the event any information included in the BOI report changes (including, without limitation, change in ownership, change of address, change in exemption status, legal name change), updated information must be filed with FinCEN within thirty (30) days of the change.
What You Should Do
1. Reporting Company or Exempt? Confirm if your business is a “reporting company” under the CTA or if your business falls under one of the twenty-three (23) exemptions from the reporting requirements.
- Reporting Company: The CTA defines a “reporting company” as corporations, limited liability companies, or any other entity (certain kinds of trusts, for example) created by the filing of a formation document with their state’s secretary of state or other commission registry (known as the Arizona Corporation Commission, or ACC, here in AZ). A reporting company also includes businesses registered to conduct business outside of the state or country of its jurisdiction (known as foreign entities).
- Exemptions: Generally, exempt businesses are those who are already regulated, including public companies, financial institutions, registered money transmitting businesses, registered investment advisors and investment companies, certain accounting firms, public utility companies, 501(c) organizations, and certain political organizations. “Bigger” business exemptions are those who meet all of the following criteria: (1) employ more than twenty (20) full-time employees in the U.S., (2) have a previous year’s tax return with more than $5 million of “gross receipts or sales in the aggregate,” and (3) operate at a physical office located in the U.S. If you are unsure if your business fits in an exemption or meets FinCEN’s test, err on the side of reporting.
2. Beneficial Owners and Company Applicants. Understand who your “beneficial owners” are, including officers and employees who exercise “substantial control,” as well as who the company applicants are for businesses formed beginning this year.
- Beneficial Owners: Beneficial owners are any individual (like an owner, member, or shareholder of a business) who “directly or indirectly” either (1) exercises “substantial control” over a reporting company, or (2) owns or controls at least twenty-five percent (25%) of the ownership interests or shares of the reporting company. Trustees and beneficiaries of trusts (except minors until they are of age), as well as spouses under community property state laws (like Arizona has) are also considered beneficial owners.
- Substantial Control: The term “substantial control” of a reporting company includes, without limitation, (1) a senior officer, (2) an individual above or having authority over senior officers (i.e., board of directors), and (3) an individual who directs, determines, or has substantial influence over important “decisions” (i.e., the nature or scope of the business, including the sale, lease, mortgage, or other transfer of any assets; the business’s reorganization, dissolution, or merger; major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of operating budgets; the selection or termination of business lines or ventures, or geographic focus of the business; the entry into or termination, or the fulfillment or nonfulfillment of significant contracts; amendments of any governance documents).
- New Company Applicants: For reporting companies formed on or after January 1, 2024, company applicants (the individual(s) (up to two (2) applicants) primarily responsible for directing or controlling the filing of the formation document for a new company) are required to report to FinCEN as well. Company applicants must be included in a reporting company’s initial BOI report, but are not required to update this information. Company applicants may include CPAs, lawyers, paralegals, business consultants, or other professionals who help form a new legal entity.
3. CTA Compliance Officer. Designate a trusted person within your company as the “CTA Compliance Officer” to manage information gathering, initial reporting, and filing any updates required by FinCEN.
4. Amend Records and Agreements. Update all of your legal business records, operating agreements, employment agreements, and company policies. We are happy to help with these amendments and have already been using CTA provisions in operating agreements, shareholder agreements, and executive employment agreements.
5. File BOI Reports. Timely file your BOI report with FinCEN or seek professional help to manage it for you. We will not be assisting clients with the filing of actual BOI reports, but we do have great referral sources we will be happy to recommend to you. If you want to do it yourself, here is the link to file a BOI report with FinCEN: https://boiefiling.fincen.gov/fileboir. Additionally, in lieu of providing direct information to the reporting company, beneficial owners and other individuals required to report to FinCEN under the CTA may file their information directly with FinCEN and obtain a FinCEN “identifier” for the reporting company to include in its BOI report. FinCEN identifiers can be obtained here: https://fincenid.fincen.gov/landing.
6. Update Filings. Continuously file updates with FinCEN as changes occur. We see this as one of the big risks you must monitor and update.
In light of the CTA and its obligations for those who actually prepare and file organizational documents, we are no longer assisting clients with forming entities. We have a list of providers who form entities and assist in the BOI filing process. We continue to work with clients on operating agreements and other required documents.
We encourage you to visit FinCEN’s website and learn more about the CTA and BOI reporting requirements. FinCEN has provided Frequently Asked Questions and other helpful resources on its website here: https://www.fincen.gov/boi.
Don’t hesitate to reach out with any questions. This is definitely a very big change, so I recommend that you don’t let this go until December. We are always here to assist you.
