Navigating the Corporate Transparency Act: What Businesses Need To Know

Beginning January 1, 2024, many businesses will be affected by a new federal reporting requirement known as the Corporate Transparency Act (the “Act”) that requires certain companies to report their beneficial owners. The report is called a BOI report, or beneficial ownership information report.

Who are Reporting Companies:
The Act broadly applies to “reporting companies” including corporations, limited liability companies (LLCs), and entities organized under U.S. laws.  This includes foreign companies registered to do business in the U.S.

Who is Exempt:
Businesses are exempt from submitting a BOI report if they employ over 20 full-time U.S. employees, have a U.S. office in which they regularly conduct business, and report over $5 million in U.S. income.  In addition, there are 23 specific types of companies that are exempt from the reporting requirements.

Who is a Beneficial Owner:
Reporting companies must disclose beneficial owners who are individuals with at least a 25% ownership interest, or those individuals who exercise substantial control over the company.

What is Substantial Control:
An individual exercises substantial control over the company if it (1) is a senior officer, (2) has the authority to appoint or remove officers or a majority of directors, (3) is an important decision-maker, or (4) has any other form of substantial control over the company.

Who is a Company Applicant:
Businesses created or registered after January 1, 2024, will need to report its company applicant(s).  The company applicant is the individual who directly filed the document that created the company filed with the California (or other state’s) Secretary of State and, if there is one, the person who directed the filing of the document.

What is the required Reporting Information:
The reporting company needs to provide its name, fictious business or trade name (DBA), address of the principal place of business in the U.S., and the name of the state in which it was formed. Beneficial owners and company applicants need to provide their legal name, date of birth, residential street address, identifying number from, e.g., a non-expired driver’s license or passport, and a copy of the non-expired identification.

What is the Timing:
Companies that already exist as of January 1, 2024, must file their initial disclosure by January 1, 2025. Companies created or registered between January 1, 2024, and January 1, 2025, have 90 days after receiving notice of their creation or registration to file their BOI report. Companies created or registered on or after January 1, 2025, will have 30 days from the date of notice of their creation or registration to file their report. Companies must file an updated BOI report within 30 days of any change to the information provided.

What about Trusts:
Individuals may be deemed beneficial owners if they hold ownership interests (substantial control or 25%) in a reporting company through a trust or similar arrangement. This can include trustees, beneficiaries with current specific rights, and grantors with revocation rights. Holders of a future interest through inheritance are excluded.

What are the Penalties for Noncompliance:
Non-compliance can result in significant fines and penalties but correcting inaccurate information within 90 days may offer a safe harbor.

Conclusion:
Understanding and complying with these changes is essential. Reach out to us for guidance as you prepare for this regulatory shift.