December 20, 2023
By Barrie Charapp Beaty
Mahdavi Bacon Halfhill & Young, PLLC
Starting January 1, 2024, the Corporate Transparency Act (CTA) will go into effect.
What is this law? The CTA is a federal law that requires various types of businesses to provide certain information to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). The law creates a federal process and database for reporting, disclosing and tracking of “beneficial ownership” of “reporting companies” in an effort to enhance national security, intelligence and law enforcement efforts to counter money laundering, financing of terrorism, and other illicit activity.
Dealers may find that they are exempt from this law, but exemption status can change and so dealers should be ready to comply.
Are Dealers impacted?
Under the CTA, businesses – such as corporations, limited liability companies, and limited partnerships operating in the United States – are considered “reporting companies” if they don’t qualify for specific exemptions identified by FinCEN. There are 23 listed exemptions under the CTA, which can be found at https://www.fincen.gov/boi-faqs.
However, for dealers and related dealer organizations (i.e. management companies and dealer real estate holding companies), there is an exemption for entities that 1) employ more than 20 full-time employees, 2) operate at a physical office in the United States, and 3) file federal tax returns demonstrating more than $5 million in gross receipts or sales. For those dealer groups that do not meet those three requirements, you are not exempt from the law.
Nonetheless, dealer entities that are exempt should remain vigilant because exemption is not permanent. If at any time an exempted entity falls below the thresholds as identified above, a report must be filed within 30 days. Likewise, an updated report must be filed if the entity becomes exempt again. While the number of employees of a dealer is not likely to fluctuate below 20 full-time employees, gross receipts of sales falling just below or exceeding $5 million can easily change a dealer’s exemption status. This means dealership controllers will have to keep a mindful eye on this threshold requirement.
What must you do?
Reporting companies must obtain a federal identification number from FinCEN and submit a confidential online report known as the Beneficial Ownership Information Report (BOIR).
This BOIR includes essential identification details about the business and all individuals (e.g., name, address, a driver’s license or passport number and an image of the document) who have substantial ownership or control over it, referred to as “beneficial owners.” A “beneficial owner” is an individual who either has direct or indirect ownership or control of 25% or more of a reporting company’s equity interests or exercises substantial control over the business. Ownership can be indirect, involving intermediary entities. “Exercising substantial control” over the business is determined if the individual 1) serves as a senior officer, 2) has authority over the appointment or removal of a senior officer or a majority of the board of directors, or 3) directs, determines, or has substantial influence over important business decisions. Senior officers are considered beneficial owners, even if they do not own any equity in the reporting company. There is no limit to the number of individuals that can be reported as beneficial owners and exemptions exist for certain categories of individuals, such as minors, individuals acting as agents, and employees with substantial control derived solely from employment status.
The reporting deadlines are determined by the business’s formation date. If your company is in existence on December 31, 2023, you are required to submit the initial BOIRs no later than January 1, 2025, but not earlier than January 1, 2024. If your company is created after December 31, 2023, you must file your initial BOIR within 90 days following their formation date. Companies formed after December 31, 2024 are subject to a reporting deadline of 30 days after their date of organization.
Each BOIR must include mandated identification information about the reporting company; its beneficial owners; and, for U.S. reporting companies formed after December 31, 2023, or those foreign reporting companies first registering to do business in the U.S. during 2024, details about one or two applicants. Beneficial owners and individual applicants may obtain a unique “FinCEN identifier” number for reporting purposes after January 1, 2024 and provide that information to a reporting company in lieu of the specified personal identification information, but they are also obligated to update their information within 30 days if it becomes inaccurate.
For reporting companies, the following information will have to be reported:
- full legal name and trade names for entity;
- current address;
- the state the entity was formed in, or in which a foreign company first registers; and
- taxpayer identification number and employer identification number provided by the Internal Revenue Service
For beneficial owners and company applicants (individuals who directly file the formation documents for the reporting companies) of reporting companies, the following information will have to be reported:
- full legal name;
- date of birth;
- business or residential address; and
- a unique identifying number from an acceptable identification document (i.e. passport, driver’s license, etc.), or FinCEN identifier
What does it all mean?
Information contained in the BOIRs are maintained in a confidential, secure, and non-public database that is not publicly accessible and is not subject Freedom of Information Act requests. Even so, the CTA permits disclosure to large hosts of recipients and for a broad range:
- federal agencies engaged in national security, intelligence, or law enforcement;
- state, local, or tribal law enforcement for purposes of criminal or civil investigations;
- federal agency requests for assistance to foreign investigations or prosecutions;
- financial institutions requesting this information, with the consent of the reporting company, to facilitate compliance with customer due diligence regulations; and
- federal functional regulators or other appropriate regulatory agencies.
Failure to comply with the reporting requirements of the CTA can lead to civil and criminal penalties, including maximum civil penalty of $500 per day, up to $10,000, and imprisonment for up to 2 years. A false, fraudulent or incomplete BOIR constitutes a reporting violation only if it is a willful act.
In order to properly comply with the CTA, companies should not delay to plan accordingly. Companies should gather reportable information so that they are in compliance with reporting deadlines as determined by entity formation dates. Companies should consider a compliance policy that binds shareholders, members, and managers to provide such reportable information and update the necessary information as it changes. Companies may even consider amending their governing documents to expressly provide for such compliance duties.