Beneficial ownership information reporting
Issue
The Corporate Transparency Act (CTA), enacted in 2021, requires the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) to collect beneficial ownership information (BOI) from millions of entities, mainly startups and small businesses.
The new Corporate Transparency Act requirements begin January 1, 2024, and business entities subject to the rules will face significant new reporting and recordkeeping obligations.
Background
What is the Corporate Transparency Act?
The purpose of the CTA is to aid in law enforcement’s efforts to combat illicit financing and its ill effects by increasing transparency into the beneficial owners of certain corporate entities. To accomplish this objective, the rules require companies to report their beneficial owners at the time of formation and periodically thereafter. Beneficial owners are the people who control a company or hold ownership in it, either individually or through a collective legal entity.
Beneficial ownership information (BOI) reporting requirements
Reporting companies: The CTA’s covered entities, or reporting companies, include certain domestic and foreign companies that are formed or registered to do business in the U.S., including corporations, limited liability companies (LLCs), and other legal entities.
Entities exempt from reporting: The BOI rules specifically provide a list of exemptions. Those exemptions include large operating companies that employ more than 20 people in the U.S., have revenue over $5 million, and have a physical office in the U.S., along with issuers registered with the Securities and Exchange Commission (SEC), registered investment companies, investment advisers, broker-dealers, registered VCs, among others.
What they report:The reporting companies are required to report the name, birthdate, address, and provide an identification document (like a passport or driver’s license) for all “beneficial owners”—anyone who exercises substantial control over the reporting company, or who owns or controls at least 25% of it. In addition, each company must report those same details for its “company applicant,” the individual who is primarily responsible for registering the company to do business in the United States.
Corporate Transparency Act filing dates: Companies formed before January 1, 2024, will have until January 1, 2025, to make their initial CTA filings with FinCEN. And companies launched after December 31, 2023, will only have 30 days from the date of formation with a state to make their initial CTA filings.
After the initial filings, companies will have 30 days to file any updates, corrections, or changes to previously filed BOI reports. This would include any changes to an owner’s legal name, address, or other required details.
Penalties: The penalties for noncompliance include civil penalties up to $500 per day, and criminal penalties up to $10,000 and/or two years of imprisonment.
Corporate Transparency Act changes: Implications for start-ups and small businesses
The CTA aims to cover companies that do not have an existing regulatory reporting regime in place with the government. In effect, the CTA mandate and its reporting requirements will apply to the startup ecosystem and small businesses (the majority of LLCs, partnerships, business trusts, and other non-public corporations) because large and publicly owned companies are exempt from reporting. In some cases, such as with public companies, this is because those companies are already regulated with layers of required government filings.
Corporate Transparency Act compliance guidelines
FinCEN is undertaking its three-phase approach to implement the Corporate Transparency Act. The first phase, BOI reporting requirements, has been finalized; the other rules are still in the proposed or development phase.
The implementation rules are as follows:
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BOI Reporting Requirements
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BOI Access & Safeguards
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BOI Collections
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Pending: Proposed Rule
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Pending: Proposed Rule
Policy outlook
The CTA has been the subject of bipartisan scrutiny because of its fast-approaching implementation date and lack of clarity and guidance on the filing process leading up to January 1, 2024.
Business, banking, and finance organizations have testified in Congress about their concerns for small businesses. Specifically, stakeholders are concerned that FinCEN’s slow rulemaking process does not provide small businesses ample time to understand the rules, nor does it allow third-party providers to offer simple ways for companies to comply.
Carta urges FinCEN to ensure that the final rulemaking includes clear methods for reporting companies to easily comply directly, and to enable appropriate assistance from intermediaries. Providing simple reporting mechanisms and allowing partners to support compliance will help reporting companies to comply more effectively and accurately, furthering the goals of the CTA.
Bottom line
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Carta is working to get clarity on how companies can best comply, how intermediaries like Carta can help support broader compliance, including through scoping a compliance regime with our partners for reporting companies on our platform.
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The CTA will be a substantial shift in the reporting obligations for companies, especially startups—reporting companies need to start preparing.
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