Mid-year assessment: Are you in good shape on CTA compliance?

June 20, 2024 Published Works

The Corporate Transparency Act (CTA) will require most privately-owned entities to file Beneficial Ownership Information (BOI) reports with FinCEN no later than January 1, 2025. The purpose of this Client Alert is to check in with you on whether your entities have already filed, and (if not) to see whether you will need any assistance in determining your filing obligations or in pulling together the information you will need for your report(s).

If you already have made a thorough assessment of your various entities and have filed BOI reports for all of those that are not exempt entities or excluded entities under the CTA, then you can stop reading. Most companies, though, haven’t yet filed because (a) the reports are not yet due for entities formed before 2024, and (b) all of this is new and complicated.

For those clients who have not yet thoroughly assessed their filing obligations, we suggest the following sequence of questions.

First, identify the number of entities in play.

  • How many of my entities file Secretary of State annual reports? This is usually a good proxy for how many entities might need to file BOI reports[1] – bear in mind BOI reports are entity-by-entity filings and don’t apply just to your primary entity.

Second, determine if any of those entities qualify for an exemption, keeping in mind that most companies do not qualify.

  • Do I employ in-house counsel? Companies that are large enough or regulated enough to employ in-house counsel will often qualify as “exempt entities” under one or more of the 23 exemption categories in the CTA. If you do employ in-house counsel, ask them whether any of your affiliated entities will need to file BOI reports. If you do not employ in-house counsel, ask:
  • Did my entities’ most recent federal income tax return show at least $5 million in gross receipts or sales? If so, at least one of your entities may qualify for the “large operating company” exemption. But the details matter. The $5 million threshold applies on a consolidated basis but excludes foreign sales. And the entity itself (not the consolidated group) must continuously employ at least 21 full-time employees (30+ hours per week) in the U.S. If both tests are met, then each direct or indirect wholly-owned subsidiary of that entity might qualify for the “subsidiary of exempt company” exemption. But a parent company or brother-sister affiliate that does not itself employ at least 21 full-time U.S. employees will not qualify for this exemption, and generally must file a BOI report.

Third, for each non-exempt entity determine what individuals need to be covered by that entity’s BOI report. For each covered individual, the report must include five items of PII (personally identifiable information).

  • Which associated individuals are senior officers and/or directors? A reporting company’s senior officers (president, chief executive officer, chief operating officer, chief financial officer, in-house general counsel, or any other officer who performs a similar function) are covered. Each other member of the entity’s board of directors (or equivalent) also is a covered, with rare exceptions. (Consult with counsel if you think a particular director should be omitted.)
  • Does any outside investor control 25%+ of any class of stock (or other equity interest)? If so, then you must identify all individuals associated with that investor who ultimately control how the investor would vote on a major matter submitted to a vote of shareholders/owners.
  • Does anyone else exert substantial influence (contractually or practically) on major decisions of the company (excluding independent advisors hired by the company)? For example, if there is a lender who exerts significant control or an outside lawyer who plays a quasi-officer role, then that loan officer or lawyer might be covered.

Fourth, determine whether the necessary PII is readily available.

  • Do I anticipate any resistance in obtaining copies of driver’s licenses or U.S. passports from any of my covered individuals? Of the five items of PII, this is the most difficult. The other four are usually shown on the license/passport: full legal name (including middle name if any); date of birth; primary residence address (street, not PO Box); and I.D. number on the license or passport. However, we suggest you specifically confirm that the residence address is current. Not everyone updates their license/passport for this, even though they are supposed to.

Fifth, determine if you need help.

  • After answering the four prior sets of questions, do I feel confident I have what I need for filing? Once you have all necessary information, the filing process itself is surprisingly simple. But as the prior questions suggest, determining which entities must file and gathering all required information for each filing entity can be complicated and challenging.

The next few months can fly by quickly, so please don’t wait until the last minute to grapple with these new requirements. Your Verrill attorney can help you determine which of your entities are “reporting companies” under the CTA and which of them are exempt or excluded. Your Verrill attorney has access to a team of Verrill lawyers and paralegals who have studied the CTA (and FinCEN’s pronouncements) in detail and who can help you deal with nuances or impediments you encounter.

In particular, you may want to add provisions to your entities’ governance documents which will give the entities further leverage to obtain necessary PII from officers, directors, and owners. And you may want to appoint a “CTA officer” with responsibility for CTA compliance generally.

Once you successfully file BOI reports for all your reporting companies, you will then need to monitor for changes in any of the filed information. The appointment of a new officer or director, the departure of a prior officer or director, an individual’s change of residence, the expiration of an individual’s driver’s license/passport – all of these (and more) trigger the need to file a new report within just 30 days of the date the company learns of the change.

Concluding Note: This article presents a simplified overview that we hope will be helpful to clients across a wide spectrum of contexts. There are many subtopics, however, that we have not discussed here, such as FinCEN IDs, company applicants, the “inactive entity” exemption, the treatment of non-U.S. entities, complexities surrounding business trusts, and so forth. For further details, we suggest you visit our CTA Compliance landing page, which will direct you to articles that discuss the CTA mandates in much greater detail.

[1] Most trusts or general partnerships don’t need to file BOI reports, but also generally don’t need to file annual reports with a Secretary of State. We treat these as “excluded entities” because the CTA’s definition of a “reporting company” reaches only those entities that are formed through a filing with the Secretary of State. Trusts and general partnerships are legal relationships that arise as a matter of law, generally without first needing to file with a Secretary of State. A limited partnership, by contrast, requires a Secretary of State filing before it will be legally recognized as a limited partnership under the law of the State of formation.