We are writing to advise you of a new federal law that will affect many business entities that operate as either corporations, limited liability companies, limited partnerships, or limited liability partnerships.

In order to combat money laundering, fraud, financing of terrorist activities, and other illegal activity, Congress passed a law known as the Corporate Transparency Act (the “CTA”), which became effective as of January 1, 2024. After that date, entities that are not exempt are required to comply with the provisions of the CTA by filing a Beneficial Ownership Interest Report (“BOI Report”) with the Financial Crimes Enforcement Network (“FinCEN”) a branch of the United States Treasury. The BOI Report requires information (discussed in further detail below) about those who own and control privately owned organizations, so as to enable law enforcement agencies to access that information.

Compliance with this new law is mandatory for covered businesses. A company’s failure to file any required BOI Report (or a required updated report) can result in a civil delinquency penalty of $500 per day, and criminal penalties including imprisonment and a fine of up to a maximum of $10,000.  In addition to the company, senior officers of the company may face civil or criminal liability for violations of CTA.

Twenty-three types of businesses are exempt from the reporting obligations under the CTA.  The exemptions most likely to be applicable to our clients are as follows:

Large Operating Companies

A company does not actually have to be a particularly large company to qualify for the so-called “large operating companies” exemption. The CTA defines an exempt “large operating company” as one that:
(i) maintains at least 20 full time (working at least 30 hours per week) employees; AND
(ii) has reported more than Five Million Dollars ($5,000,000) in gross receipts or sales from US sources on the prior year’s federal income tax returns (such that a new business will not be able to meet this requirement).

NOTE: Employee headcounts must be determined on an entity-by-entity basis, and there is no ability to consolidate employee headcounts across multiple affiliated entities. However, a consolidated group that files a single consolidated tax return may aggregate its gross income for purposes of meeting the $5 million gross receipts/sales requirement for this exemption.

Subsidiary Exemption

If a parent company qualifies for an exemption from the CTA reporting requirements, then any wholly-owned subsidiaries of that parent will generally be exempt from the reporting requirement under the “subsidiary exemption.”

Financial Industry Companies

Certain financial companies that are already subject to substantial federal reporting obligations (such as banks, credit unions, insurance companies, securities brokers and dealers, and registered investment advisors) are exempt.

Nonprofit Organizations

Non-profit organizations described in Section 501(c) of the Internal Revenue Code (the “Code”), which are exempt from federal income tax under Section 501(a) of the Code, are exempt from the CTA.

If your company qualifies for an exemption, no BOI Report is required to be filed.  HOWEVER, entities that do not qualify for an exemption MUST file the BOI Report.   The information required to be disclosed on the BOI Report includes information about the entity AND the individuals who: (1) directly or indirectly hold a 25% or more ownership interest in the entity, (2) who are “senior officers” of the entity, or (3) who otherwise exert “substantial control” over the entity (regardless of whether that individual owns any interest in the entity).  The term “senior officer” includes the entity’s president, chief executive officer, chief financial officer, chief operating officer, general counsel/chief legal officer, and “any other person, regardless of title, who performs similar functions.”

WHAT SHOULD YOU DO NOW? 

It will be important for all business entities created prior to January 1, 2024 to promptly do two things: (1) determine whether the entity is subject to the CTA, or whether it qualifies for an exemption; and (2) if the entity is NOT exempt and is therefore subject to CTA, begin identifying all of the individuals who directly or indirectly hold a 25% or more ownership interest, who are senior officers, or who exert “substantial control” over the entity to enable the entity to file the required BOI Report.

The BOI Report is required to be filed by December 31, 2024 for all entities that were already in existence as of December 31, 2023 and are not exempt.   If you have an entity that was formed in the 2024 calendar year, a BOI Report is due within 90 days of the date of formation. For entities created on or after January 1, 2025, the initial BOI Report is due within 30 days of the formation date.

Importantly, if there is ANY subsequent change in the information that was required to be included in a BOI Report (such as a change in ownership or even a change in an owner’s address), an updated BOI Report must be filed no later than 30 days after the date on which the change occurred.   For that reason, we are recommending that entities that are required to file BOI Reports consider amending their operating agreements or other organizational documents to designate a person responsible for filing the BOI report and to mandate that all persons named in a BOI Report cooperate in:
(1) promptly providing all of the information required to be included in the BOI Report, and
(2) immediately advising the company of any change in their information, with certain sanctions if they fail to do so.

The failure to file any required BOI Report (or a required updated report) can result in a civil delinquency penalty of $500 per day, and criminal penalties including imprisonment and a fine of up to a maximum of $10,000.  In addition to the company, senior officers of the company may face civil or criminal liability for violations of CTA.

The BOI report MUST be filed electronically. The form used for filing the BOI Report became available as of January 1, 2024 and can be obtained or completed here: https://boiefiling.fincen.gov/, and filing instructions are available here: https://boiefiling.fincen.gov/help.  Each of the individuals identified in the BOI Report will also be required to provide proof of identity by uploading a copy of a driver’s license or a passport.  Once you have identified your direct or indirect 25% or greater owners, the persons who are your “senior officers,” and anyone else you who exerts “substantial control” over your company, and have obtained their proof of identity to upload, the BOI Report is fairly simple to complete.

The attorneys at Riley Bennett Egloff have been following the development of CTA. If you have questions as to whether your company qualifies for an exemption under CTA, if you need help in completing the BOI Report (including identifying your “beneficial owners”), or if you have any other questions regarding the CTA, please contact us and we will be happy to assist you.

This information is provided as an informational service of Riley Bennett Egloff.   It does not constitute legal advice and does not create any attorney-client relationship with any reader with whom an attorney-client relationship has not already been established.

© Riley Bennett Egloff LLP®

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Posted March 12, 2024,  by Blair R. Vandivier and John L. Egloff.