The landscape of corporate legislation and governance is always evolving, and this year is no different. On January 1, 2024, the Corporate Transparency Act (CTA) went into effect, which will impact the regulation of small businesses in Butler County and elsewhere. Enacted by Congress in 2021 as part of the National Defense Authorization Act, the CTA aims to thwart financial crimes such as money laundering and terrorist financing by demanding greater transparency around the ownership of companies. It is extremely important that all companies determine if the CTA applies to them and, if so, how to comply with this new regulation.
The CTA requires “Reporting Companies” to submit a Beneficial Ownership Information (BOI) Report with the United States Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). A Reporting Company is defined as most types of entities, including corporations, limited liability companies, and limited partnerships. A sole proprietorship is not within the definition of a Reporting Company. Entities employing more than 20 people with over $5 million in gross receipts or sales, and possessing a physical office within the U.S., are exempt. This means that if your company has less than 21 full-time employees and generates less than $5,000,000 annually, you need to file a BOI with FinCEN.
There are exemptions that apply to many different types of companies. Entities that are regulated by the federal government such as banks, insurance companies, and publicly traded companies are exempt. Companies that are regulated by the U.S. Securities and Exchange Commission, like investment advisory firms and broker dealers are also exempt. Accounting firms are exempt. Nonprofit companies are exempt. And any company that was created prior to January 1, 2020, that is inactive, that does not own any assets, and that has not had a change in ownership in the preceding twelve-month period, is exempt from the filing requirements of the CTA.
If your company is not exempt from the CTA, your company will be required to submit information regarding your company’s “beneficial owners” to FinCEN. You do this by first obtaining an identification number from FinCEN and then submitting a BOI Report through the FinCEN website.
The definition of “beneficial owner” is extremely complicated, but it is generally defined as any individual who exercises considerable control over an entity, like officers and directors, or someone who owns 25% or more of the entity. Also, anyone who has substantial influence over important decisions of the reporting entity, including financial and legal matters, is defined as a “beneficial owner.” And someone who owns stock options, profit interests, or a convertible debt instrument is also a “beneficial owner.” A minor child with an ownership interest in an entity is not required to submit their information in a BOI Report, provided the parent or legal guardian’s information is submitted.
Any person meeting the definition of “beneficial owner” must provide their full legal name, date of birth, address, and identification number from a passport, driver’s license, or other government-issued ID in the BOI Report.
Any entity created on or after January 1, 2024, must report their “company applicants” to FinCEN. A “company applicant” is any individual who directly files, either physically or electronically, the document
that created the entity with the secretary of state of similar office. A “company applicant” is also any individual who is primarily responsible for directing or controlling the filing of the document creating the entity. This person is a “company applicant” even though the individual did not actually file the document with the secretary of state of similar office.
While the law went into effect in January, different businesses will have different compliance timelines. If your company existed before January 1, 2024, your company will have a full calendar year to submit its BOI Report. Entities formed on or after January 1, 2024, and before January 1, 2025, will have 90 calendar days to comply, while any entities formed on or after January 1, 2025, will have 30 days to comply.
If you currently own a company that is exempt and at some point, your company loses its exempt status, your company must submit the BOI Report within 30 days. Additionally, if there are any changes in the required information about your company or its “beneficial owners” in a BOI Report that your company filed, your company must file an updated BOI Report within 30 days. If you become aware of any incorrect information in the BOI Report that your company filed, your company must file a corrected BOI Report within 30 days of learning about the incorrect information.
Failure to adhere to the CTA’s requirements can result in significant civil and criminal penalties, with a maximum fine of $500 for every day that the violation continues, up to $10,000, and imprisonment for up to two years. These fines and penalties may be imposed on the senior officers of a Reporting Company. There are no penalties for filing a BOI Report with incorrect information, as long as a corrected BOI Report is filed within 90 days of when the original BOI Report was filed.
The CTA is indicative of a trend in business regulation of more transparency, whether it comes from a local, state, or federal regulation, and having the information required to be submitted in a BOI Report readily accessible and a policy or procedure to provide it, will become a best-practices standard.
At The Lynch Law Group, we are committed to offering timely and precise legislative insights to the business leaders in our region. We are available to assist you in managing annual corporate governance, complying with corporate regulations, and ensuring the continued, long-term health of your company. If you’re interested in learning more about how the new CTA may affect your company or how to comply with it, contact Daniel P. Lynch at dlynch@lynchlaw-group.com or by calling (724) 776-8000.
