Now is the winter of our discontent – so begins the opening Act from the Chronicles of the Corporate Transparency Act

Written by Mike Oliver

January 8, 2024

The Corporate Transparency Act went into full effect on January 1, 2024. For all existing “reporting companies” on 12/31/2023 – they must complete the filing by January 1, 2025.  New reporting companies formed in the US on and after 1/1/2024 must file within 90 days of formation. The filing is done at https://boiefiling.fincen.gov/fileboir – either by downloading a fillable PDF, or by completing the form online.

A “reporting company” is essentially any corporation or LLC formed by filing with an applicable State corporation office in the US, unless the entity is exempt (see https://www.fincen.gov/boi-faqs#C_2 for a list) – and that list has some oddball exemptions, for example, accounting firms are exempt, but not law firms, and “Venture capital fund adviser[s]” are also exempt.  So the first issue is that any existing or newly formed company must determine if it is exempt from this disclosure.

If a company is not exempt, now it must gather all the relevant documentation for “beneficial owners”.  A beneficial owner is:

  • “with respect to an entity, an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise … exercises substantial control over the entity [or] owns or controls not less than 25 percent of the ownership interests of the entity;”
  • but does not include “(i) a minor child, as defined in the State in which the entity is formed, if the information of the parent or guardian of the minor child is reported in accordance with this section; (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; (iii) an individual acting solely as an employee of a corporation, limited liability company, or other similar entity and whose control over or economic benefits from such entity is derived solely from the employment status of the person; (iv) an individual whose only interest in a corporation, limited liability company, or other similar entity is through a right of inheritance; or (v) a creditor of a corporation, limited liability company, or other similar entity, unless the creditor meets the requirements of subparagraph (A).”

See https://www.govinfo.gov/content/pkg/USCODE-2021-title31/pdf/USCODE-2021-title31-subtitleIV-chap53-subchapII-sec5336.pdf

Each beneficial owner and each “company applicant” has to report identification information and it is onerous: 

(A) The full legal name of the individual;

(B) The date of birth of the individual;

(C) A complete current address consisting of: (1) In the case of a company applicant who forms or registers an entity in the course of such company applicant’s business, the street address of such business; or (2) In any other case, the individual’s residential street address;

(D) A unique identifying number and the issuing jurisdiction from one of the following documents: (1) A non-expired passport issued to the individual by the United States government; (2) A non-expired identification document issued to the individual by a State, local government, or Indian tribe for the purpose of identifying the individual; (3) A non-expired driver’s license issued to the individual by a State; or (4) A non-expired passport issued by a foreign government to the individual, if the individual does not possess any of the documents described in paragraph (b)(1)(ii)(D)(1), (b)(1)(ii)(D)(2), or (b)(1)(ii)(D)(3) of this section; and

(E) An image of the document from which the unique identifying number in paragraph (b)(1)(ii)(D) of this section was obtained.

See https://www.federalregister.gov/d/2022-21020/p-1229

Unfortunately this affects nearly all of our corporate and business clients, the majority of which will not be exempt.  While I recognize that the purposes of this Act are laudable – to prevent, or least make easier to discover, funding of illegal activity (see note), the Act, like so many other laws and regulations, is going to be a major burden to small business with, in the author’s view, little benefit.  Criminals are going to either not report, report fraudulently, or avoid reporting by hiding under an exemption.

And to top it all off, the use of this Act to actually commit fraud has already started.  When you visit the main page, at the top, the site warns “Alert: FinCEN has been notified of recent fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the Corporate Transparency Act.” Sooner or later this database will also likely be breached and sensitive data leaked to hackers and other criminals for misuse.

 (note:  From the opening of the proposed rules for the CTA “Illicit actors frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the U.S. financial system. Not only do such acts undermine U.S. national security, but they also threaten U.S. economic prosperity: shell and front companies can shield beneficial owners’ identities and allow criminals to illegally access and transact in the U.S. economy, while creating an uneven playing field for small U.S. businesses engaged in legitimate activity.”)

 For assistance in compliance with the CTA, please contact Mike Oliver

 

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