By: Alex Tsianatelis, Rudolph Friedmann LLP
The organization of a legal entity offers many advantages to business owners, including the opportunity for limited liability. Unfortunately, these same legal entities can also be used to mask illegal activity and launder illegally gotten money. In an effort to combat white collar crimes and security threats to the United States, the Federal Government recently enacted the Corporate Transparency Act (“CTA”) as part of the Anti-Money Laundering Act of 2020. These acts are part of the National Defense Authorization Act.
Broadly, the CTA requires that a legal entity disclose and report to the Federal Government what is referred to as beneficial ownership information (“BOI”). Legal entities that are required to file BOI reports include, but are not limited to, limited liability companies, corporations and entities created by the filing of a document with a secretary of state or similar office under the law of a State or Indian Tribe, entities formed under the law of a foreign country that are registered to do business in any State or tribal jurisdiction with a secretary of state or similar office under the law of a State or Indian Tribe. Some of the legal entities that are excepted from the BOI filing requirement are publicly traded companies, governmental entities, public utilities, certain financial institutions including insurance companies, 501(c) tax-exempt organizations, large operating companies with more than 20 full-time employees and more than $5,000,000 in operating revenue, and wholly owned subsidiaries of exempt entities. The CTA includes additional exceptions and defines with specificity many of the exceptions.
The BOI report format requires a legal entity’s “beneficial owners” and “company applicant(s)” to provide personally identifiable information (“PII”). However, only those entities who are domestic reporting companies created in the United States on or after January 1, 2024 or foreign reporting company’s first registered to do business in the United States on or after January 1, 2024 are required to report their “company applicant” information.
A beneficial owner of an entity includes an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise: exercises substantial control over the reporting company; or owns or controls at least 25% of the reporting company’s ownership interests. A company applicant is the individual who directly files the document that creates or registers the legal entity with a governmental entity and if more than one person is involved in the filing, a company applicant may also be the individual who is primarily responsible for directing or controlling the filing. The PII to be submitted by beneficial owners and company applicants includes: full legal name; date of birth; residential address or business address of applicants if made in the course of their business; unique identifying number and an image from one of the following non-expired documents or a Financial Crimes Enforcement Network (“FinCEN”) Identifier number: United States passport, State driver’s license, other government issued documentation, or foreign passport only if the person does not have the preceding documents. FinCen is a department of the U.S. Treasury Department.
For existing entities registered prior to January 1, 2024, the CTA provides a 1-year grace period to file a BOI report. The final deadline for such reporting period is January 1, 2025. For entities organized between January 1, 2024 and January 1, 2025, an entity must report within ninety (90) days of formation/registration. For entities registered after January 1, 2025, an entity must file its BOI report within 30 calendar days of registration. Failure to file BOI reports during those timelines may result in serious penalties including civil penalties of $591.00 per day or criminal penalties of up to $10,000 and 2 years in prison.
It is important to note that the duty to file is on the registered or formed entity, unless an exception applies, but the responsibility for filing will likely be the responsibility of the legal entities’ founders, executives, or other personnel they designate. It is strongly advised that each legal entity, with the advice of its legal counsel, examine the CTA to determine if they are required to file a report and whether they are excepted from providing the same.