Navigating the Complexities of CTA Compliance: What You Need to Know

Client Alert

September 2024

By: Kyle R. Leingang

On September 30, 2022, the Financial Crimes Enforcement Network (“FinCEN”) published its final rule to implement beneficial ownership reporting requirements set forth in the Corporate Transparency Act (the “CTA”).   The CTA and related rules went into effect in 2023 and, as a result thereof, filings of Beneficial Owner Information (“BOI”) are required by many companies with FinCEN, a department of the U.S. Department of the Treasury.  For entities formed prior to January 1, 2024, that are subject to the CTA’s reporting requirements, please note the forthcoming filing deadline of January 1, 2025.

Applicable filing deadlines associated with required BOI reports are different depending upon when the applicable entity was originally formed:

  • For entities formed prior to January 1, 2024, BOI reports with FinCEN are required to be made by January 1, 2025.  
  • For entities formed during calendar year 2024, BOI reports are required within 90 days of formation.
  • For entities formed on or after January 1, 2025, the filing of such BOI reports with FinCEN must be made within 30 days of formation.

Failure to make a required BOI report to FinCEN within the specified timeframes may result in civil or criminal penalties, including civil penalties of up to $500 for each day, 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 also be held accountable for the failure.       

Aside from the deadlines and penalties set forth above, three questions are generally raised when it comes to the CTA:  

  • Do CTA filing obligations apply to my business?
  • What information needs to be filed with FinCEN?
  • How do I make these filings?

Below is information generally addressing each of these questions.  In addition, please note that FinCEN has made available certain reference materials and other information related to the CTA and frequent related compliance inquiries on its website at https://www.fincen.gov/boi, which can be consulted as a resource as well. 

Do CTA filing obligations apply to my business?

U.S. corporations, limited liability companies, and similar entities created by a filing with a state secretary of state, together with foreign entities registered to do business in the U.S., are each a “reporting company” under the CTA and are required to file BOI reports with FinCEN unless they satisfy one of 23 designated exceptions. While the breadth of this definition covers nearly every business entity, note the definition does not extend to sole proprietorships or general partnerships, as these businesses are not formed pursuant to such state filings, and a business does not become a reporting company simply by virtue of making a filing with the IRS to obtain an employer identification number, making a fictitious business name filing, or applying for a professional license for a state regulator or professional association.

The 23 listed exceptions to being a reporting company are as follows: 

  • Securities reporting issuer
  • Governmental authority
  • 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
  • Investment company or investment adviser
  • Venture capital fund adviser
  • Insurance company
  • State-licensed insurance producer
  • Commodity Exchange Act registered entity
  • Accounting firm
  • Public utility
  • Financial market utility
  • Pooled investment vehicle
  • Tax-exempt entity
  • Entity assisting a tax-exempt entity
  • Large operating company
  • Subsidiary of certain exempt entities
  • Inactive entity

While consideration of these exceptions may require detailed legal and factual analysis in some cases, the exceptions summarized below are likely to be particularly important for many companies.

  • Securities Reporting Issuers. Exception #1 for Securities Reporting Issuers applies to entities that issue securities registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) or are required to file supplementary and periodic reports under Section 15(d) of the Exchange Act.
  • Broker or Dealer. Exception #7 for brokers and dealers applies if an entity is a “broker” or “dealer” as those terms are defined in section 3 of the Exchange Act and is registered under Section 15 of the Exchange Act.
  • Investment company or investment advisor. Exception #10 for investment companies and advisors applies if both (a) the entity is an investment company under Section 3 of the Investment Company Act of 1940 (the “Investment Company Act”) or an investment adviser under Section 202 of the Investment Advisers Act of 1940 (the “Investment Advisers Act”) and (b) the entity is registered with the Securities and Exchange Commission under either the Investment Company Act or Investment Advisors Act.
  • Venture Capital fund adviser. Exception #11 for venture capital funds advisors applies if the entity is an investment adviser under Section 203(l) of the Investment Advisers Act and the entity has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the Securities and Exchange Commission.
  • Pooled investment vehicle. Exception #18 for pooled investment vehicles applies if the entity (a) is (i) an investment company, as defined in Section 3(a) of the Investment Company Act, or (ii) 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 the Investment Company Act and is identified by its legal name by the applicable investment adviser in its Form ADV (or will be so identified in the next such Form ADV) and (b) the entity is advised by an entity exempt form reporting under exceptions 3, 4, 7, 10, or 11 above.
  • Large Operating Company. Exception 21 applies when all the following criteria are met: (1) the entity has more than 20 full time employees (calculated by those employed at least 30 hours per week) employed in the U.S., (2) the entity has a physical presence in the U.S., and (3) the entity (or group of entities, if filing a consolidated return) filed a federal income tax return for the previous year reporting more than $5,000,000 in gross receipts or sales from business in the U.S.  This exemption will not apply to companies which have not yet filed a US federal income tax return, regardless of meeting the other two criteria.
  • Subsidiary of Exempt Entities. The entity is either wholly owned (directly or indirectly) or its equity interest are wholly controlled by entities exempt under one or more applicable exemptions. Note that this exemption is not based on greater than 51% ownership, but rather 100% ownership or “control” of all the ownership interests.  If an exempt entity controls some but not all of the ownership interests of the subsidiary, the subsidiary does not qualify for this exception.  
  • Inactive Entity. The inactive entity exception only applies to the extent that the entity was in existence before January 1, 2020, has no active business, has no foreign ownership, has not undergone any ownership changes in the prior 12 months, has no funds over $1,000, and has no assets. The prior existence requirement will mean that any new entities formed as shell entities, such as in preparation for an acquisition transaction, will not be exempt under this exception and thus will be required to make relevant CTA filings unless qualified under a different exception. Importantly, the “no assets” requirements of this exemption means that holding companies that have no business interests or assets other than holding ownership interests in other entities do not qualify for the inactive entity exception.

Some third party filing agents and service providers have developed assessment guides and other materials to assist with the evaluation of CTA applicability.  Many of such guides can be very useful but please note each company and responsible person remains independently obligated to determine whether an exception applies. 

What information needs to be filed with FinCEN?

Reporting Companies must report their full legal name, trade names or “doing business as” (DBA) names, current U.S. address (not a registered agent address), jurisdiction of formation, and the company’s IRS Taxpayer/Employer Identification Number. 

In addition, the most substantive information to be included in BOI reports will be to disclose all “beneficial owners” of the company.  All beneficial owners (with no limit) must be disclosed and FinCEN expects every reporting company to have one or more such individuals.

Beneficial owners include, first and foremost, any individual who directly or indirectly owns at least 25% of the ownership interests of the company.  Note that the foregoing analysis concerns natural persons who beneficially own such interests, even if indirectly through other ownership entities or vehicles.  Any person who exceeds a 25% ownership will be deemed a beneficial owner regardless of their involvement, or lack thereof, with the applicable reporting company.  Ownership for this purpose includes, in the aggregate, all forms of direct and indirect ownership, including, for example, stock, options and purchase rights, membership or profits interest units, phantom equity, convertible instruments, and other contracts or arrangements.

Second, in addition to persons with at least a 25% ownership stake, beneficial owners include any individual who exercises “substantial control” over the reporting company.  An individual constitutes a beneficial owner under this criteria without regard for whether the individual owns any ownership interests of the company.  A person will be deemed to have “substantial control” if the individual meets any of four general criteria: (1) the individual is a senior officer; (2) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company; (3) the individual is an important decision-maker; or (4) the individual has any other form of substantial control, or exerts “substantial influence” over the reporting company.

In the event there is any change to any information submitted to FinCEN in a BOI report (or an inaccuracy is discovered), filers must make a new filing to correct any such information within 30 days.  This includes information regarding the company, the list of applicable beneficial owners, or the underlying BOI associated with a applicable individual designated on a BOI report.  Attorneys at Stradling are happy to assist in the evaluation of CTA questions, but please note Stradling will not inquire about changes to facts or circumstances regarding a company or beneficial owners, regardless of when a company is established, nor will Stradling be responsible for making any BOI reports filed on behalf of a company or make corrective updates thereto that may be required from time to time.

In addition, entities formed on or after January 1, 2024 have to designate a “Company Applicant” when making the BOI report.  Such person will be the individual “primarily responsible for directing or controlling the filing”.  There are no more than two Company Applicants.  The Company Applicant reporting requirement does not apply to entities that were existing prior to January 1, 2024.

We expect in some situations evaluating the list of beneficial owners may be complex and legal advice and analysis related to such determinations, in advance of filing deadlines, may be prudent.  In addition, soliciting and receiving the information from relevant individuals necessary to file required BOI reports may practically require efforts by internal personnel and result in delays, so we encourage companies subject to the January 1, 2025, filing deadline to undertake efforts related to CTA compliance as soon as possible.  Information required of beneficial owners includes, for example, dates of birth, home addresses, and passport or driver’s license numbers and images.

How do I make these filings?

BOI reports required by FinCEN are filed in one of two ways: using FinCEN’s website directly or by filing with the assistance of an agent.   If you choose to make such filings on FinCEN’s website directly, such filings are made at https://boiefiling.fincen.gov/fileboir.    There is no fee charged by FinCEN for filing a BOI report to FinCEN using FinCEN’s website. 

It is Stradling’s expectation that the vast majority of our clients required to file BOI reports will make those filings directly, as the online submission materials on FinCEN’s website are straightforward and the filing process does not take much time.  On the other hand, to the extent an entity has complex capitalization, has been newly formed, or analysis needs to be conducted as to which persons have “substantial control” over the businesses, further assistance may be beneficial.

In addition, some third-party filing agents and other service providers have established CTA compliance programs whereby a company’s beneficial ownership information will be provided to such agent and stored in a separate database.  In some cases, such service provider will also assist with making certain CTA filings based upon the client provided information in the database.  Please contact us if you would like a list of third-party agents who provide such services. If you wish to use any of such services for filings due by January 1, 2025, we encourage you to contact such services as soon as possible.

If you have further questions about how the CTA specifically applies to your situation, please feel free to contact us.   The chair of the firm’s CTA committee is Stradling Partner Kyle Leingang (kleingang@stradlinglaw.com).