Prepare for the CTA: Beneficial Ownership Information Reporting Requirements

The Corporate Transparency Act (CTA) is part of the National Defense Authorization Act for Fiscal Year 2021, which was signed into law in the United States on January 1, 2021. The CTA aims to improve transparency by requiring certain business entities to report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury.

The primary goal of the CTA is to combat money laundering, terrorist financing, and other illicit activities by making it more difficult for individuals to anonymously control or financially benefit from U.S. companies. The act applies to corporations, limited liability companies (LLCs), and other similar entities created under the laws of a State or a foreign entity registered to do business in the United States.

Specifically, these reporting companies are required to submit a Beneficial Ownership Information (BOI) Report that includes details about the individuals who either directly or indirectly control the company or own 25% or more of the ownership interests in the company.

The act provides exemptions for certain types of companies, such as publicly traded companies, banks, and other financial institutions that are already subject to federal regulations requiring disclosure of beneficial ownership information.

The CTA represents a significant change in the U.S. anti-money laundering (AML) regulatory framework and has broad implications for both domestic and international businesses operating in the United States.

A Beneficial Ownership Information (BOI) Report is a filing requirement under the Corporate Transparency Act (CTA) in the United States. The report is submitted to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. The primary purpose of the BOI Report is to provide information about the "beneficial owners" of certain business entities, which include corporations, limited liability companies (LLCs), and other similar entities.

A "beneficial owner" in this context is generally defined as an individual who, directly or indirectly, either owns a significant stake (usually 25% or more) in the company or has substantial control over the company. The BOI Report is designed to identify the real individuals behind business entities, rather than just the legal entities themselves.

Specifically, the BOI Report requires the disclosure of:

• The full legal name, date of birth, current residential or business address, and an identification number (such as a passport or driver's license number) for each beneficial owner.
• Information about the reporting company itself, including its name, address, and the nature of its business activities.

The main goal of the BOI Report is to enhance transparency and prevent the misuse of U.S. businesses for illicit purposes such as money laundering, terrorist financing, and tax evasion. Companies subject to the CTA are obligated to file a BOI Report and update the information within a certain time frame if there are any changes. Failure to comply can result in civil and criminal penalties.

Domestic and Foreign Entities that are in existence as of January 1, 2024 or that are formed on or after January 1, 2024.

• Domestic Reporting Company: a corporation; a limited liability company; or other entity that is created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe
• Foreign Reporting Company: any entity that is a corporation, limited liability company, or other entity that is formed under the law of a foreign country and that is registered to do business in the United States by the filing of a document with a secretary of state or equivalent office under the law of a state or Indian tribe.

BOI (Beneficial Ownership Interest) Reports filed with FinCEN will report the identity of two categories of individuals as they relate to the Reporting Entity:

• the beneficial owners of the entity (required by all existing and new entities)

and

• the “company applicant” of the entity (individuals (up to 2) who have filed an application with specified governmental authorities to create the entity or register it to do business. (required only by new entities formed on or after January 1, 2024)

A Beneficial Ownership Information (BOI) reports four pieces of information about the Beneficial Owners, and in some cases, the Company Applicants

1. the individual's full legal name
2. date of birth
3. current residential or business street address
4. a unique identifying number from an acceptable identification document ( g., a passport)—or the individual's FinCEN identifier

Details on the Reporting Company Information to be Provided:

• Full legal name
• Any trade name or "doing business as" name
• Complete current address:
  • For US-based companies: Street address of the principal place of business
  • For non-US-based companies: Street address of the primary location in the US where the company conducts business
• State, Tribal, or foreign jurisdiction of formation (For foreign reporting companies: The State or Tribal jurisdiction where the company first registers)
• IRS Taxpayer Identification Number (TIN) or Employer Identification Number (EIN), or for foreign companies without a TIN, a tax identification number issued by a foreign jurisdiction

Beneficial Owner Information ( For every individual who is a beneficial owner of such reporting company) AND Company Applicant Information (up to 2 persons)

• Full legal name
• Date of birth
• Complete current address
• A unique identifying number from one of the following:
  • A non-expired US-issued passport
  • A non-expired identification document issued by a State, local government, or Indian tribe
  • A non-expired driver's license issued by a State
  • A non-expired passport issued by a foreign government (if the individual does not possess any of the documents above)
• An image of the document from which the unique identifying number was obtained

For companies formed after January 1, 2024, they must also provide information for up to 2 company applicants:

Company Applicant Information

• Full legal name
• Date of birth
• Complete current address
  • In the case of a company applicant who forms or registers an entity during such company applicant's business, the street address of such business; or
  • In any other case, the individual's residential street address
• A unique identifying number from one of the following:
  • A non-expired US-issued passport
  • A non-expired identification document issued by a State, local government, or Indian tribe
  • A non-expired driver's license issued by a State
  • A non-expired passport issued by a foreign government (if the individual does not possess any of the documents above)

A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025 to file its initial beneficial ownership information report.

A reporting company created or registered on or after January 1, 2024, will have 30 days to file its initial beneficial ownership information report. This 30-day deadline runs from the time the company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier.

A Beneficial Owner of an entity is defined as either:

1. “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.”

Or

2. Any individual who exerts substantial control of the entity. Substantial controlled is defined in 3 ways:
   • anyone who provides the entity service as a senior officer of a reporting company;
   • authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors (or similar body) of a reporting company;
   • and direction, determination, or decision of, or substantial influence over, important matters affecting a reporting company.

In summary:

A beneficial owner is an individual who either:

Has substantial control over a company, typically as a senior officer or through decision-making authority, such as appointing senior officers or a majority of the board, or significantly influencing important company matters, or

Owns or controls at least 25% of the company's ownership interests, including equity, capital or profit interests, convertible instruments, and other rights to acquire interests in the company.

This can apply directly or indirectly, accommodating various business structures and management styles.

In trusts, the beneficial owner may be the trustee, an individual with authority over trust assets, a beneficiary with certain rights, or a grantor or settlor who can revoke the trust or withdraw its assets.

Ownership interest is calculated by comparing an individual's total interests to all of the company's outstanding interests, with specifics depending on the type of interest issued. Options and similar interests are treated as exercised during this calculation. The rule is designed to be clear yet flexible for different ownership structures, as per the CTA's requirements.

In Detail:

An individual is deemed to have "substantial control" over a reporting company if they serve as a senior officer, possess authority over senior officer appointments or the removal of a majority of the board of directors, or can significantly influence important company decisions. Exceptions are corporate secretary and treasurer roles, which generally yield minimal control over the company. Substantial control can be direct or indirect and is adaptable to diverse business structures and management styles.

Ownership is defined by a minimum of 25% control of a company's ownership interests, which include equity, capital or profit interests, convertible instruments, and other rights to acquire company interests. Debt instruments are considered if they allow the holder rights equivalent to other specified types of interests, including conversion to such interests. These definitions are usually straightforward, but complex business structures or financial arrangements might necessitate extra scrutiny and professional advice.

Trust assets are deemed to be owned or controlled by trustees and individuals with authority over trust assets, as well as by beneficiaries under certain conditions or grantors or settlors who can revoke the trust or withdraw its assets.

The calculation of total ownership interests is based on an individual's total interests relative to the company's total outstanding interests, including specific guidelines for entities issuing capital and profit interests, shares, and a catch-all provision for entities that don't fit the previous categories. Options and similar interests are considered exercised in these calculations. The rule provides clarity and flexibility for various ownership structures, marking a departure from the approach of the 2016 CDD Rule in line with CTA requirements.

WHO IS NOT CONSIDERED A BENEFICIAL OWNER:

• Minor Child, provided that parent or guardian is reported
• An individual acting as a Nominee, Intermediary, Custodian, or Agent on behalf of another individual
• an individual acting solely as an employee of a reporting company in specified circumstances
• an individual whose only interest in a reporting company is a future interest through a right of inheritance
• a creditor of a reporting company

An individual can exercise substantial control over a reporting company in four different ways. If the individual falls into any of the categories below, the individual is exercising substantial control:

• The individual is a senior officer (the company’s president, chief financial officer, general counsel, chief executive office, chief operating officer, or any other officer who performs a similar function).
• The individual has authority to appoint or remove certain officers or a majority of directors (or similar body) of the reporting company.
• The individual is an important decision-maker for the reporting company. See Question D.3 for more information.
• The individual has any other form of substantial control over the reporting company as explained further in FinCEN’s Small Entity Compliance Guide (see Chapter 2.1, “What is substantial control?”).

Financial Institutions and Markets:

• Bank
• Credit union
• Depository institution holding company
• Money services business
• Broker or dealer in securities
• Securities exchange or clearing agency
• Other Exchange Act registered entity
• Commodity Exchange Act registered entity
• Financial market utility
• Pooled investment vehicle (defined as: )
  • Any investment company, as defined in section 3(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(a)); or
  • Any company that:
    • Would be an investment company under that section but for the exclusion provided from that definition by paragraph (1) or (7) of section 3(c) of that Act (15 U.S.C. 80a-3(c)); and
    • Is identified by its legal name by the applicable investment adviser in its Form ADV (or successor form) filed with the Securities and Exchange Commission or will be so identified in the next annual updating amendment to Form ADV required to be filed by the applicable investment adviser pursuant to rule 204-1 under the Investment Advisers Act of 1940 (17 CFR 275.204-1

Government and Public Entities:

• Governmental authority
• Public utility
• Tax-exempt entity
• Entity assisting a tax-exempt entity

Insurance Companies:

• Insurance company
• State-licensed insurance producer

Securities and Investment Entities:

• Securities reporting issuer
• Venture capital fund adviser
• Investment company or investment adviser
  • Investment company or investment adviser is Any entity that is:
    • An investment company as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3), or is an investment adviser as defined in section 202 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2);

and

• Registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.).

Other Entities:

• Accounting firms
• Large operating company (must meet three criteria)
  • “employs more than 20 employees on a full-time basis in the United States”;
  • “filed in the previous year federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate,” including the receipts or sales of other entities owned by the entity and through which the entity operates; and
  • “has an operating presence at a physical office within the United Stat
• Inactive entity (an entity that meets all of the following criteria: )
  • Was in existence on or before January 1, 2020;
  • Is not engaged in active business;
  • Is not owned by a foreign person, whether directly or indirectly, wholly or partially;
  • Has not experienced any change in ownership in the preceding twelve month period;
  • Has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding twelve month period; and
  • Does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.
• Subsidiary of certain exempt entities

An entity is exempt from filing BOI reports with FINCEN if it qualifies as an 'Inactive Entity,' as defined by meeting ALL of the following six conditions:

1. The entity was in existence on or before January 1, 2020.
2. The entity is not engaged in active business.
3. The entity is not owned by a foreign person, whether directly or indirectly, wholly or partially. “Foreign person” means a person who is not a United States person. A United States person is defined in section 7701(a)(30) of the Internal Revenue Code of 1986 as a citizen or resident of the United States, domestic partnership and corporation, and other estates and trusts.
4. The entity has not experienced any change in ownership in the preceding twelve-month period.
5. The entity has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding twelve-month period.
6. The entity does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity

An entity qualifies for this exemption if all six of the following criteria apply:

1. The entity employs more than 20 full time employees, when applying the meaning of full-time employee provided in 26 CFR 54.4980H-1(a) and 54.4980H-3. In general, “full-time employee” means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with an employer.
2. More than 20 full-time employees of the entity are employed in the “United States,” as that term is defined in 31 CFR 1010.100(hhh).
3. The entity has an operating presence at a physical office within the United States. “Operating presence at a physical office within the United States” means that an entity regularly conducts its business at a physical location in the United States that the entity owns or leases and that is physically distinct from the place of business of any other unaffiliated entity.
4. The entity entity filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales. If the entity is part of an affiliated group of corporations within the meaning of 26 U.S.C. 1504, refer to the consolidated return for such group.
5. The entity reported this greater-than-$5,000,000 amount as gross receipts or sales (net of returns and allowances) on the entity’s IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form.
6. When gross receipts or sales from sources outside the United States, as determined under Federal income tax principle, are excluded from the entity’s amount of gross receipts or sales, the amount remains greater than $5,000,000.

Foreign pooled investment companies qualify for this exemption if both of the following criteria apply:

Criteria #1.

The entity is a pooled investment vehicle if either of these statements apply to the entity:

• Is an investment company, as defined in section 3(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(a);

or

• Is a company that would be an investment company under that section but for the exclusion provided from that definition by paragraph (1) or (7) of section 3(c) of that Act (15 U.S.C. 80a-3(c)); and is identified by its legal name by the applicable investment adviser in its Form ADV, (or successor form) filed with the Securities and Exchange Commission or will be so identified in the next annual updating amendment to Form ADV required to be filed by the applicable investment adviser pursuant to rule 204-1 under the Investment Advisers Act of 1940 (17 CFR 275.204-1).

Criteria #2: 

The entity is operated or advised by any of these types of exempt entities:

• Bank, as defined in Exemption #3;
• Credit union, as defined in Exemption #4;
• Broker or dealer in securities, as defined in Exemption #7;
• Investment company or investment adviser, as defined in Exemption #10; or
• Venture capital fund adviser, as defined in Exemption #11

(the definitions to meet these exemptions are included in the next FAQ)

Special rule for foreign pooled investment vehicles.

If an entity meets the criteria of Exemption #18 and is formed under the laws of a foreign country, the entity is subject to a separate reporting requirement. These companies are referred to as “foreign pooled investment vehicles” in the Reporting Rule and their reporting requirement is explained in Chapter 4.2 of this Guide. See special rule at 1010.380(b)(2)(iii).

Chapter 4.2:

3. Foreign pooled investment vehicle:

You do not need to report information about each beneficial owner and company applicant if your company was formed under the laws of a foreign country and would be a reporting company if not for the pooled investment vehicle exemption (Exemption #18).

If this special rule applies, you must report one individual who exercises substantial control over the company. You do not need to report any company applicants. If more than one individual exercise substantial control over the company, you must report information about the individual who has the greatest authority over the strategic management of the company

FinCEN will permit Federal, State, local, and Tribal officials, as well as certain foreign officials who submit a request through a U.S. Federal government agency, to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement. Financial institutions will also have access to beneficial ownership information in certain circumstances, with the consent of the reporting company. Those financial institutions’ regulators will also have access to beneficial ownership information when they supervise the financial institutions.

Only reporting companies created or registered on or after January 1, 2024, will need to report their company applicants.

A company that must report its company applicants will have only up to two individuals who could qualify as company applicants:

1. The individual who directly files the document that creates or registers the company; and
2. If more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing.

The following flowchart can help identify the company applicant.

If a person has reason to believe that a report filed with FinCEN contains inaccurate information and voluntarily submits a report correcting the information within 90 days of the deadline for the original report, then the Corporate Transparency Act creates a safe harbor from penalty. However, should a person willfully fail to report complete or updated beneficial ownership information to FinCEN as required under the Reporting Rule, FinCEN will determine the appropriate enforcement response in consideration of its published enforcement factors.

The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure.

Providing false or fraudulent beneficial ownership information could include providing false identifying information about an individual identified in a BOI report, such as by providing a copy of a fraudulent identifying document.

Additionally, a person may be subject to civil and/or criminal penalties for willfully causing a company not to file a required BOI report or to report incomplete or false beneficial ownership information to FinCEN.

For example, an individual who qualifies as a beneficial owner or a company applicant might refuse to provide information, knowing that a company would not be able to provide complete beneficial ownership information to FinCEN without it. Also, an individual might provide false information to a company, knowing that information is meant to be reported to FinCEN

Upcoming Webinar: We will be hosting a webinar dedicated to the Corporate Transparency Act between October 17, 2023 - October 31, 2023. Click this link to register to receive the invite as well as other information related to the CTA. Click here to register to receive CTA information.

Consult with Us:  email CTA@hco.com or reach out to your team to learn more.

Official Guidelines: FinCEN Small Business Resources

Legal Advice:  Consult your legal expert well-versed in compliance regulations for a comprehensive understanding.

H&CO is proud to offer a comprehensive solution to help your organization navigate the regulatory requirements of the Corporate Transparency Act (CTA).

As your CTA compliance partner, our comprehensive suite of services includes:

• CTA Compliance Consulting: We will examine your organizational structure(s) to determine your exact compliance obligations under the CTA regulations. Our detailed analysis will also identify any potential exemptions from filing that your organization(s) may be eligible for. Upon the completion of our thorough review, we will provide a clear, comprehensive summary of your filing obligations and deadlines.
• Beneficial Ownership Assessment: We will help your organization identify who your beneficial owners are based on the criteria stipulated in the CTA. This includes assessing substantial control and ownership interest thresholds, taking into consideration the attribution rules.
• Company Applicant Identification: We will assist in identifying the company applicants, considering whether they are individuals directly involved in the filing process, who are primarily responsible for directing or controlling the filing.
• BOI Reporting and CTA Compliance: Our team will prepare and file the Beneficial Ownership Information (BOI) reports on your behalf, ensuring all necessary details are accurately and sufficiently provided within the guidelines and deadlines specified.
• FinCEN Identifier Application: Where applicable and beneficial, we will assist clients in applying for a FinCEN Identifier. This would include supporting them in gathering the necessary identifying information (the four pieces required for an individual BOI report or the initial report for reporting companies).
• Continuous Support: Our team will provide ongoing advisory support on CTA rules, regulatory updates, and best practices to maintain compliance, including guidance on certification and due diligence requirements.

For more information, please contact cta@hco.com