The U.S. Corporate Transparency Act (the “CTA”) was passed into law on January 1, 2021, as part of the National Defense Authorization Act for Fiscal Year 2021. The CTA is about to take effect. Now is the time for Colorado business owners to get ready for it.

The Congressional intent of the CTA is to collect beneficial owner information (“BOI”) from U.S. businesses in an effort to combat money laundering, terrorist funding, and other illicit activity. Under the CTA, BOI must be reported in a timely and complete manner to the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). FinCEN can then share the information with other federal agencies, including the FBI and IRS, thus providing government officials with critical data they say is needed to combat crime. 

The CTA applies to the beneficial owners of most entities that are created by the filing of a document with the Colorado Secretary of State and similar government offices throughout the country. The CTA also affects companies that are formed under the law of a foreign country and registered to do business in the U.S. While a wide net is cast in an effort to identify beneficial owners nationwide, certain businesses are expressly exempt from the CTA’s filing requirements.

There is no denying that the CTA creates a mammoth new filing requirement. Some commentators and legal experts have begun to refer to the CTA as a “regulatory burden” for millions of small businesses with the potential for “significant” impact. Others have said that the CTA is the “most significant piece of federal legislation affecting businesses” since the passage of the U.S. securities laws. 

The filing requirements are mandatory for all covered businesses. Noncompliance can result in civil penalties up to $500/day, criminal fines up to $10,000, and up to two (2) years in prison. This is Why the CTA is meant to be taken seriously. Read on for the Who, What, When, Where, and How.

Who must file a BOI report?

There are two types of BOI reporting companies: domestic and foreign. 

A domestic reporting company is a corporation, limited liability company (LLC), or any entity 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. (The reference to “Indian Tribe” is taken directly from the statute.)  

A foreign reporting company is a corporation, LLC, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office. 

FinCEN acknowledges that these definitions will likely include, in addition to corporations and LLCs, entities such as limited liability partnerships (LLPs), limited liability limited partnerships (LLLPs), business trusts, and most limited partnerships (LPs) because such entities are typically created by a filing with a secretary of state or similar office.

To be clear, the BOI reporting rule does not apply to certain trusts and other entities that do not involve, at their creation, the filing of a document with a secretary of state or similar office. 

There are also 23 types of entities that are expressly exempt from the definition of reporting company. These include, for example, certain types of banks, credit unions, governmental authorities, public utilities, insurance companies, accounting firms, tax-exempt entities, inactive entities, large operating companies with more than 20 full-time U.S. employees, and subsidiaries of other exempt entities. The CTA’s exemption provisions are detailed, with many defined terms and cross-references to other statutes and rules. Whether an entity is exempt from the CTA’s filing requirements will require careful review.

Although 23 types of entities are exempt from the definition of reporting company, they could nevertheless meet the definition of “beneficial owner” of an entity that is not exempt from the definition of reporting company, as described below. As a result, determining whether entities (like trusts) fall within the CTA’s broad reach may prove to be a challenge.

Who Practical Tip: Business owners are encouraged now to determine whether an entity is a BOI reporting company and whether any exemptions apply. Business owners also may need to inquire whether an entity – even if otherwise exempt as a reporting entity – is nevertheless a beneficial owner of a reporting company. If it is, then an assessment will need to be made whether the individuals who own or control such an entity must be included in the reporting company’s BOI report.

What information must be reported?

All reporting companies, whether created before or after the regulations come into effect, are required to file a BOI report with FinCEN. 

Domestic reporting companies must each file a single report with FinCEN that identifies itself by name, any trade name(s), principal address, formation jurisdiction, and taxpayer identification number. The report must also include four pieces of information about each of the reporting company’s beneficial owners: 

1. The full legal name of the individual; 
2. The date of birth for the individual;
3. The residential street address of the individual; and
4. A unique identifying number from an acceptable identification document along with an image of such document that includes a photograph of the individual. Acceptable sources of a unique identifying number must not be expired. Acceptable sources include passports issued by the U.S., identification documents issued by a state, local government, or Indian Tribe, drivers licenses issued by a state, and passports issued by a foreign government. 

If an individual provides their four pieces of information to FinCEN directly, the individual may obtain a unique “FinCEN identifier,” which can be provided to FinCEN on a BOI report in lieu of the required information about the individual. The process for obtaining a FinCEN identifier is still being developed at the agency level.

The broad sweep of the CTA is apparent from the definition of “beneficial owners.” It is defined in the final BOI reporting rule as those individuals who own or control at least twenty-five percent (25%) of the interests in an entity (aggregated) or who otherwise exercise “substantial control” over the entity. 

Ownership: There can be more than one owner of a reporting company. Ownership includes equity in the reporting company and other forms of interest, including capital or profit interests, partnership interests, convertible instruments, warrants or rights, or other options or privileges to acquire equity, capital, or other interests in a reporting company. Ownership also includes any such interest held by a person that an individual has an ability to control, or through a trust. All interests are aggregated in comparison to the undiluted ownership interests of the reporting company.

Substantial control: There can be more than one individual who exercises “substantial control” of a reporting company. The definition of control is far-reaching and includes, for example, voting rights and informal arrangements. The final rule sets forth three specific indicators of control: (1) service as a senior officer of a reporting company, (2) authority over the appointment or removal of any officer or dominant majority of the board of directors (or similar body) of a reporting company, and (3) direction, determination or decision of, or substantial influence over, important matters of a reporting company, including, for example, the sale, lease, or transfer of any principal assets of the reporting company, the entry into or termination of significant contracts, major expenditures and investments by the entity, and compensation schemes for senior officers. In short, a beneficial owner is a person who stands behind the entity and directs its actions. To this end, the final rule includes within the definition of control “[a]ny other form of substantial control over the reporting company.” The final rule makes clear that individuals will not be permitted to hide “behind formalisms.”

Beneficial owners can, in some cases, include trustees, grantors, settlors, trust beneficiaries, and individuals in similar roles, as well as entities otherwise exempt from the definition of reporting company, as discussed above. 

Excluded from the definition of beneficial owners are the following:

1. minor children;
2. individuals acting as nominees;
3. employees acting solely as employees and not as senior officers;
4. individuals whose only interest in a reporting company is a future interest through the right of inheritance; and 
5. a reporting company’s creditors. 

With respect to minor children, the reporting company must nevertheless provide information of a parent or legal guardian.

When this law was initially passed, it was widely expected that reporting companies would have to identify their formation agents, also known as company applicants, which would include: (1) the persons who directly file the document that creates an entity or, in the case of a foreign reporting company, the document that first registers the entity in the U.S., and (2) the individual who is primarily responsible for directing or controlling the filing of the relevant document by another. The final BOI reporting rule abandons this requirement for entities created before the effective date of the new rule. However, newly created entities (i.e., those created after January 1, 2024) will be required to report company applicant information, but they will not be required to update it.

What Practical Tip: Now is the time to identify all beneficial owners for each BOI reporting company and gather the information that will need to be reported to FinCEN. 

When is a BOI report due?

The effective date for the reporting rule is January 1, 2024. The reporting deadlines flow from the effective date as follows:

• For Existing Companies: Reporting companies created or registered before January 1, 2024, will have one year – until January 1, 2025 – to file their initial BOI reports. 
• For New Domestic Companies: Domestic reporting companies created on or after January 1, 2024, will have 30 days to file their initial BOI reports. The 30-day period is calculated based on the earlier of the following triggers: (1) the company’s receipt of actual notice that its creation has become effective, or (2) a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the domestic reporting company has been created.
• For New Foreign Companies: Foreign reporting companies registered on or after January 1, 2024, will have 30 days to file their initial BOI reports. The 30-day period is calculated based on the earlier of the following triggers: (1) the date on which it receives actual notice that it has been registered to do business, or (2) the date on which a secretary of state or similar office first provides public notice of the registration.

In addition to the initial reports, certain follow-up reports are required: 

• For Changes:  Reporting companies will have 30 days to report changes to the information in their previously filed BOI reports. The 30-day period commences on the date the change becomes known.
• For Corrections:  Reporting companies will have 30 days to correct inaccurate information in previously filed BOI reports. The 30-day period commences when the reporting company becomes aware or has reason to know of the inaccuracy of information in earlier reports.
• For Companies No Longer Exempt: Companies that were exempt but no longer meet the exemption criteria will be given the longer of the remaining days left in the one-year filing period or the 30-calendar day period. 

When Practical Tip: The soonest possible date a BOI report will be due is January 31, 2024. That date is fast approaching. For reporting companies in existence prior to January 1, 2024, the soonest possible date is December 31, 2024.

Where and How is a filing made?

FinCEN has been engaged in the development of an effective infrastructure to administer the CTA’s filing requirements, including a new information system that will be used to store beneficial ownership information. FinCEN dubs this new information system “BOSS” – the acronym for its new Beneficial Ownership Secure System.

FinCEN plans to release a set of rules concerning the mechanics of filing (including the forms to use and where to file) and access protocols (by the FBI, IRS and others) in September 2023, “well in advance of the effective date of the BOI reporting rule.” 

Where and How Practical Tip: Keep a watchful eye out for the new filing rules and access protocols. 

Resources

FinCEN’s website offers high level information concerning the CTA at www.fincen.gov/boi. The site includes summaries of reporting dates, frequently asked questions, filing forms (to come), and the current status of the U.S. government’s rulemaking process. In addition, FinCEN plans to provide reporting companies with final compliance and guidance documents. These may include a “Small Entity Compliance Guide” pursuant to Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996. We encourage each Colorado business to register for FinCEN updates through the agency’s website.

At least one enterprising company is beginning to advertise services to assist businesses with their CTA filings. There will undoubtedly be a fee charged for these services. 

Finally, but importantly, Colorado businesses can turn to their legal counsel for help in answering questions about the CTA, including whether a business is a reporting company, and identifying the beneficial owners of a reporting company.

This mammoth filing requirement is here. Get ready for it.

Mulliken Weiner Berg & Jolivet P.C.

Nick Ricotta, nricotta@mullikanlaw.com

Libby Ary, lary@mullikenlaw.com