Complying with the Reporting Obligations Under the Corporate Transparency Act: (Hard) Lessons Learned So Far PDF Free Download
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Kevin Shepherd
Shelbie Harvey
Complying With the
Reporting Obligations
Under the Corporate
Transparency Act: (Hard)
Lessons Learned So Far
October 24, 2024
Seminar 17
Brief Overview
•What is a “reporting company”?
•Who is a “beneficial owner”?
•What is a “company applicant”?
•What exemptions and exceptions
are available?
•What information must be
provided?
•How often are updates required?
•What are the compliance deadlines?
•What are the penalties for
noncompliance?
What is a “reporting company”?
•Two types: domestic reporting company and foreign reporting
company
•“Domestic reporting company” means any entity that is:
•A corporation;
•A limited liability company; or
•Other entity that is created by the filing of a document with a secretary of
state or similar office under the law of a State or Indian tribe (e.g., a Delaware
Statutory Trust).
What is a “reporting company”?
•“Foreign reporting company” means any entity that is:
•A corporation, limited liability company, or other entity;
•Formed under the law of a foreign country; and
•Registered to do business in any State or tribal jurisdiction by the filing of a
document with a secretary of state or similar office.
Who is a “beneficial
owner”?
•With respect to a reporting
company, “beneficial owner”
means any individual who,
directly or indirectly, either:
•Exercises “substantial
control” over the reporting
company; or
•Owns or controls at least
25% of the ownership
interests of the reporting
company.
Who is a “company applicant”?
•A company applicant is the individual who directly files the document
that creates a reporting company and the individual who is primarily
responsible for directing the filing of such document.
•There can be up to 2 company applicants per reporting company.
•This term only applies to reporting companies created or registered
on or after January 1, 2024.
•In many instances, a lawyer or paralegal may be considered a
company applicant.
What exemptions are available?
•As to a reporting company, there are 23 exemptions:
•Large Operating Company –1) shows $5M or more in domestic gross sales or
receipts on the prior year’s tax return; 2) directly employs 20 or more full time
employees in the US; and 3) has a physical operating presence in the US.
•Inactive Company –formed before 2020 + generally does not own assets or
conduct business operations.
What exemptions are available?
•Subsidiaries of Certain Exempt Companies –most entities that are wholly
owned, directly or indirectly, by another exempt reporting company are also
exempt (there are limitations and ambiguities here).
•A number of other exemptions are available to entities that (generally) are
subject to other regulatory schemes (e.g., tax exempt entities, securities
reporting issuers, insurance companies).
What exceptions
are available?
•As to a beneficial owner, there are five
exceptions:
•A minor child (although the personal
information of a parent or guardian has
to be reported);
•A nominee, intermediary, custodian, or
agent of another individual;
•An employee acting solely as an
employee;
•An individual whose only interest in a
reporting company is a future interest
through a right of inheritance; and
•A creditor of the reporting company.
What information must be provided?
•An initial report of a reporting company must include:
•Full legal name of the reporting company (plus DBA/trade names);
•Street address of the principal place of business;
•Jurisdiction of formation;
•EIN or Tax ID number; and
•Complete list of beneficial owners and company applicants (if applicable).
What information must be provided?
•For each beneficial owner and each company applicant, the following
information must be provided:
•Full legal name and birthdate;
•Current residential address (for beneficial owners) or business/residential
address (for company applicants); and
•Unique identifying number from an unexpired driver’s license or passport and
an image of the same.
•Individuals may separately obtain a FinCEN ID number that can be
used on the reporting company form in lieu of providing the
information outlined above.
What are the compliance deadlines?
Looming Initial Report Submission Deadline
•Initial report for pre-2024 reporting
companies due by January 1, 2025
•Submissions to date have fallen
dramatically short of FinCEN’s
projections
•69 DAYS until the deadline—tick,
tick, tick….
What are the penalties for noncompliance?
•Reporting violations:
•Civil penalties of not more than $500 for each day that violation continues. Penalty amount
subject to annual inflation adjustment! For 2024, amount is $591.
•Criminal fine of not more than $10,000 or 2 years’ imprisonment, or both.
•Willful failure standard.FinCEN will consider all facts and circumstances surrounding the
situation.
•Beneficial owner or company applicant can be held liable and face penalties if they willfully cause
areporting company to fail to report complete or updated BOI.
•Unauthorized disclosure or use violations:
•Civil penalties of not more than $500 for each day that violation continues.Penalty amount
subject to annual inflation adjustment as noted above.
•Criminal fine of not more than $250,000 or 5years’ imprisonment, or both.
•While violating another federal law or as part of apattern of any illegal activity involving more
than $100,000 in a12 month period, afine of not more than $500,000 or 10 years’
imprisonment, or both.
•Willful violation standard (see above).
Recent Case Law
•As of September 18, 2024, 8 federal
cases have been filed challenging the
constitutionality of the CTA (Alabama,
Ohio, Maine, Virginia, Oregon, Michigan,
Texas, and Massachusetts).
•None have affected broad compliance
obligations and have provided relief only
to those directly involved in such cases.
•Update on oral argument in 11th Circuit
on September 27, 2024. Likely next
steps?
Proposed Legislation
•Legislation proposed to extend the filing
deadline for pre-2024 reporting
companies from January 1, 2025 to
January 1, 2026.
•Status of current legislation/rider to
National Defense Authorization Act of
2025?
•Time is running out for a legislative
solution
•H.R. 9045 would exempt certain HOAs
from the CTA’s reporting obligations—
bill is languishing in a House Committee.
New FinCEN Rule Regarding Transfers of Real
Estate –Effective December 1, 2025
•FinCEN has adopted a new rule that will require disclosure of the transferor
and transferee(s) and the individuals and the beneficial owners of entities
involved as transferee in the transfer of residential real estate or land that
is to be developed or used for residential real estate, excluding transfers
solely to individuals.
•The new rule is limited to transactions of property designed for one-to-four
family occupancy, or land acquired with that intent, and in which no
mortgage financing is provided by afinancial institution(s) subject to Anti-
Money Laundering and Suspicious Activity Report reporting obligations.
•New rule’s definitions are not perfectly aligned with CTA’s definitions.
•Another rule relating to commercial real estate is expected.
Quirky Issues and Pitfalls
•Subsidiary Exemption –
•The entity’s ownership interests must be controlled or wholly owned, directly or indirectly, by any of the
enumerated 18 exempt entities. Note that “wholly” modifies “owned,” but does not modify “controlled.”
•The question thus arises whether a subsidiary whose ownership interests are partially controlled by an
exempt entity qualifies for the exemption.
•FinCEN narrowly interpreted the exemption as follows (FAQ L.6):
•“If an exempt entity controls some but not all of the ownership interests of the subsidiary, the
subsidiary does not qualify. To qualify, a subsidiary’s ownership interests must be
fully, 100 percent
owned or controlled by an exempt entity.”
•FinCEN explained that “control of ownership interests means that the exempt entity entirely controls
all of the ownership interests in the reporting company, in the same way that an exempt entity must
wholly own all of a subsidiary’s ownership interests for the exemption to apply.”
Quirky Issues and
Pitfalls
•Large Operating Company
Exemption –
•$5M in domestic gross sales
or receipts can be as set forth
on a consolidated return.
•Because disregarded LLCs do
not file their own income tax
return, and because LLCs
cannot be part of an affiliated
group of corporations filing a
consolidated tax filing return,
disregarded LLCs may not be
able to meet the
requirements for the
exemption.
Quirky Issues and Pitfalls
•Reporting Companies Owned by a Corporate Trustee –
•When a trust owns the equity of a reporting company, the identification of
individual beneficial owners becomes more complicated.
•Based on the underlying trust agreement, a trustee, grantor or beneficiary
may be considered a beneficial owner.
•When a trustee is not an individual but a corporate entity (e.g., bank or
private trust company), the beneficial ownership of the corporate trustee
must be analyzed.
•If certain conditions are met, the corporate trustee can be disclosed in lieu of
individuals but, in many cases, employees carrying out duties on behalf of the
corporate trustee may be considered beneficial owners.
Quirky Issues and Pitfalls
•Reporting company that has completed the process of formally and
irrevocably dissolving after January 1, 2024 needs to file a beneficial
ownership information report with FinCEN (FAQ C.13).
•FinCEN’s view creates numerous practical and legal issues:
•If entity has been dissolved, who exactly will be around to file the report post-
dissolution?
•Who will be reported as beneficial owners of the dissolved entity? FinCEN
says no need to report historical beneficial owners!
•What does “formally and irrevocably” dissolved mean?
Quirky Issues and Pitfalls
•How does a reporting company deal with a recalcitrant LLC member
who refuses to provide required information to the reporting
company to facilitate a timely filing with FinCEN?
•Certification requires that information in report be true, accurate, and
complete
•Incomplete BOI report submissions not allowed
State-Level “Mini”
CTA Laws
•New York LLC Transparency Act –
LLC disclosure obligations begin
in 2026.
•Massachusetts, Maryland and
California may follow suit.
•Some states already require
statements of information to be
filed that include certain
beneficial ownership details.
Practical Approach to Compliance
•Step 1: Take an inventory of the entities within the reporting company
structure.
•Step 2: Determine whether any exemptions apply and if those exemptions
flow down to wholly owned subsidiaries.
•Step 3: Identify beneficial owners for non-exempt entities; are any
exceptions available?
•Step 4: Inform beneficial owners of obligations and collect required
information (or direct the individuals to obtain FinCEN ID numbers).
•Step 5: Complete the beneficial ownership report through FinCEN’s online
portal (or consider engaging a third-party vendor to assist).
•Step 6: Develop a plan for keeping your organization current with
submitting required updates.
Questions?
