Understanding the Corporate Transparency Act (CTA) and Beneficial Ownership Information (BOI) Filings

The Corporate Transparency Act, enacted in January 2021, aims to combat financial crimes like money laundering and tax evasion by requiring certain businesses to report their beneficial owners to the Financial Crimes Enforcement Network. This initiative enhances transparency in corporate structures and helps prevent the misuse of shell companies for illicit activities.

Who Needs to File?

Starting January 1, 2024, the CTA mandates that many corporations, limited liability companies (LLCs), and similar entities file a Beneficial Ownership Information (BOI) report with FinCEN. This requirement applies to both domestic entities and foreign entities registered to do business in the United States. The goal is to provide authorities with accurate information about who truly owns and benefits from these entities.

Penalties for Non-Compliance

Failing to comply with the CTA’s BOI reporting requirements can result in significant penalties. Civil penalties may include fines of up to $500 per day for each day the violation continues. Criminal penalties can include fines up to $10,000 and imprisonment for up to two years.

Exemptions from Filing

The CTA outlines 23 specific exemptions to the BOI reporting requirement. These exemptions include:

1. Securities Issuers: Entities registered under the Securities Exchange Act of 1934.
1. Governmental Authorities: Entities established under the laws of the United States, an Indian Tribe, a State, or a political subdivision thereof.
1. Banks: Entities defined in the Federal Deposit Insurance Act.
1. Credit Unions: Entities defined in the Federal Credit Union Act.
1. Bank Holding Companies: Entities defined in the Bank Holding Company Act of 1956.
1. Money Services Businesses: Entities registered with FinCEN under 31 U.S.C. 5330.
1. Brokers or Dealers in Securities: Entities registered under the Securities Exchange Act of 1934.
1. Securities Exchanges or Clearing Agencies: Entities registered under the Securities Exchange Act of 1934.
1. Other Exchange Act Registered Entities: Entities registered under the Securities Exchange Act of 1934.
1. Investment Companies or Advisers: Entities registered under the Investment Company Act of 1940 or the Investment Advisers Act of 1940.
1. Venture Capital Fund Advisers: Entities exempt from registration under the Investment Advisers Act of 1940.
1. Insurance Companies: Entities defined in the Investment Company Act of 1940.
1. State-Licensed Insurance Producers: Entities authorized by a State and subject to State regulation.
1. Commodity Exchange Act Registered Entities: Entities registered under the Commodity Exchange Act.
1. Accounting Firms: Entities registered under the Sarbanes-Oxley Act of 2002.
1. Public Utilities: Entities regulated by a State or Federal agency.
1. Financial Market Utilities: Entities designated by the Financial Stability Oversight Council.
1. Pooled Investment Vehicles: Entities operated or advised by an exempt entity.
1. Tax-Exempt Entities: Entities described in section 501(c) of the Internal Revenue Code.
1. Entities Assisting Tax-Exempt Entities: Entities that operate exclusively to provide assistance to tax-exempt entities.
1. Large Operating Companies: Entities with more than 20 full-time employees, over $5 million in gross receipts or sales, and a physical office in the U.S.
1. Subsidiaries of Certain Exempt Entities: Entities wholly owned by one or more exempt entities.
1. Inactive Entities: Entities in existence for over a year, not engaged in active business, and meeting other specific criteria.

Determining Beneficial Ownership Under the CTA

The Corporate Transparency Act (CTA) defines a “beneficial owner” as any individual who meets one or both of the following criteria:

1. Ownership Interest: An individual who owns or controls at least 25% of the reporting company.
1. Substantial Control: An individual who exercises substantial control over the company.

Ownership Interest Test

This test evaluates whether an individual holds a significant ownership stake in the reporting entity. Ownership interest can include equity shares, voting rights, profits, or other forms of stake in the business. For example, in a company with 1,000 shares, an individual holding 250 or more shares would meet the 25% threshold.