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After several attempts to enact similar legislation, Congress passed the Corporate Transparency Act (“CTA” or the “Act”) as an addendum to the National Defense Authorization Act of 2021. President Trump vetoed the legislation, but Congress overrode the veto. The effective date was moved several times but is now January 1, 2024. Filings under the Act are considered delinquent beginning January 1, 2025.
The CTA applies to both domestic and foreign entities. The Act requires “Reporting Companies” (i.e., those created by filing a formation document with the secretary of state or similar office, such as corporations and LLCs, or those formed under the law of a foreign country and registered to do business in the U.S.) to disclose their “Beneficial Owners.”
A Beneficial Owner is an individual who directly or indirectly exercises substantial control over the entity or owns or controls not less than 25% of the ownership interest of the entity. Certain types of people are not considered beneficial owners, such as minor children, custodians, non-senior employees of the reporting company, an inheritor, or a creditor. The Beneficial Ownership Information (BOI) disclosure includes full legal name, date of birth, current residential and business address, and Financial Crimes Enforcement Network (“FinCEN”) identifier or unique identifying number.
The Act specifies that certain companies are exempt from its provisions, such as banks, credit unions, SEC-reporting companies, insurance companies, and public accounting firms. Likewise, entities employing more than 20 full-time employees in the U.S., with federal income tax returns filed in the previous year demonstrating more than $5M US in gross receipts or sales, and operating with a physical presence at an office within the U.S. are exempt.
“Company Applicants” must also submit disclosures to Reporting Companies for submission. A Company Applicant is the individual who submits the paperwork to form or amend a corporate filing – in other words, the lawyer.
Starting January 1, 2024, the Corporate Transparency Act requires any non-exempt entity that is newly created on or after that date to submit a BOI report with FinCEN within 90 days after the entity’s formation.
Non-exempt entities formed before January 1, 2024 must file their first BOI report by January 1, 2025. If an entity has a change of beneficial ownership or needs to correct inaccurate information after filing the initial BOI report, it must file an additional BOI report within 30 days.
The law provides steep penalties for failure to comply: $591/day, up to $10,000 maximum fine per violation, and up to 2 years in jail. And, these penalties stack.
Reporting is done online through the FinCEN website.
So, what does this mean for lawyers? In addition to making sure we service our clients who are subject to the Act, we also need to determine whether it applies to our firms, and what our obligations are. The Act does NOT exempt law firms, staff of law firms, or lawyers that file or maintain companies. It does not exempt mom-and-pop companies. And ignorance of the law is no defense.
For more in-depth information about the Act, to whom it applies, reporting requirements, and practical tips for protecting yourself and your clients, check out AIM’s on-demand webinar “The Corporate Transparency Act” presented by Birmingham attorney Tripp Watson.