Corporate Transparency Act—Overview and Initial Steps to Be Taken

The Corporate Transparency Act became effective January 1, 2024 and will require more than 30 million U.S. entities to register in 2024 with FinCEN (a bureau of the U.S. Treasury Department). Most large companies and institutions are exempt from these requirements, as are most tax-exempt organizations. Most small businesses, however, are deemed to be “Reporting Companies” under the Act and therefore must register with FinCEN and provide personally identifiable information (PII) about its key managers and significant owners.

Registration with FinCEN is accomplished online, by filling out and filing a Beneficial Ownership Information (BOI) report. For Reporting Companies formed before January 1, 2024, the deadline for filing the initial BOI report is January 1, 2025. For Reporting Companies formed after 2023, the BOI report should be filed very soon after formation—90 days for entities formed in 2024 and 30 days for entities formed after 2024.

Common exemptions from Reporting Company status include:

• SEC-reporting companies;
• Banks, broker-dealers, and various other regulated entities;
• Any business entity that reported more than $5 million of U.S.-source revenue (including on a consolidated basis wherever applicable) on its most recent tax return or information return, except that the entity will not qualify unless it consistently employs at least 21 full-time U.S. employees (not counting independent contractors and not counting employees in a subsidiary or other affiliated entity); and
• Wholly-owned subsidiaries of an exempt entity (with certain exceptions).

Additionally, general partnerships and trusts are typically excluded from the definition of a Reporting Company and thus generally do not need to file BOI reports.

Special rules apply to non-U.S. entities that are doing business in the U.S. Most of them will need to file BOI reports.

Once an entity files a BOI report, it must file a new report within 30 days after any change in the information on its most recent BOI report. For many companies, these updating requirements will prove more challenging than the requirement to file the initial BOI report.

Here is a generic list of steps our clients can take to begin to assess the effects of the Corporate Transparency Act on their business.

STEP ONE: Determine if your primary entity is exempt or excluded from Reporting Company status.

• If your primary entity is exempt, then its wholly-owned subsidiaries will also be exempt, but a parent company or brother-sister affiliate might not be exempt.
• If your primary entity is a Reporting Company under the Act, then each subsidiary, parent company, and brother-sister affiliate likely also is a Reporting Company and must file its own BOI report.

STEP TWO: For each entity that is (or might be) a Reporting Company, you will need to identify all Beneficial Owners of the entity. These consist of:

• The following principal officers of the entity (a functional test): president, chief executive officers, chief financial officer, chief operating officer, and (if any) chief legal officer;
• Each other individual who owns or controls (directly or indirectly) at least 25% of the equity value or voting power of the entity; and
• Each other individual who sits on the board (or equivalent body, if any) or who otherwise has significant influence (formal or informal) over important decisions by the entity.

STEP THREE: The Reporting Company’s BOI report must include five pieces of PII for each individual who is deemed a Beneficial Owner: full legal name; date of birth; street address of current residence; identification number from a valid, non-expired driver’s license or passport; and a legible digital image of that driver’s license or passport. Alternatively, if an individual obtains a FinCEN ID number by registering with FinCEN (and providing all that same PII), then the entity’s BOI report need only provide the FinCEN ID number for that individual (and not her PII).

STEP FOUR: If the Reporting Company was formed after 2023, be aware that the BOI report also must include similar PII for up to two “Company Applicants,” those being the individual who filed the formation paperwork and also (typically) the individual who supervised submission of the filing. If Verrill formed the entity, we will identify the Company Applicants and provide FinCEN ID numbers for each.

STEP FIVE: Recognize that these new requirements are complicated and can raise difficult questions and impose significant burdens. Please consult with your Verrill attorney well before the filing deadlines noted above.

RESPONSIBILITY FOR COMPLIANCE WITH THE CORPORATE TRANSPARENCY ACT FALLS ON THE ENTITY AND ITS MANAGEMENT. ALTHOUGH OUR FIRM WILL NOT MAKE BOI REPORT FILINGS FOR A CLIENT, WE ARE AVAILABLE IF ASKED IN A TIMELY MANNER TO ASSIST THE CLIENT IN UNDERSTANDING WHETHER AN ENTITY IS DEEMED A ‘REPORTING COMPANY’ UNDER THE ACT AND IN UNDERSTANDING WHO ARE THE ENTITY’S ‘BENEFICIAL OWNERS.’ FOR CLIENTS THAT ANTICIPATE DIFFICULTY IN GETTING ONE OR MORE BENEFICIAL OWNERS TO PROVIDE NECESSARY PII, WE CAN ADVISE MANAGEMENT ON DIFFERENT WAYS TO ENCOURAGE COOPERATION AND COMPLIANCE.