Dealers may find that they are exempt from this law, but exemption status can change and so dealers should be ready to comply.
June 19, 2024
By Barrie Charapp Beaty
Charapp & Weiss, LLP
bbeaty@cwattorneys.com
This is a six-month check-in on your compliance with the Corporate Transparency Act (CTA) that went into effect on January 1, 2024.
What is CTA?
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.
How 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. Another exemption under the CTA is a wholly owned subsidiary of an exempt business. For example, if your exempt dealership company is the sole owner of your management company, then the management company would be exempt from reporting under CTA.
For those dealer groups that do not meet those exemptions as stated above, you are not exempt from the law and must report the dealership entity (or the real estate holding company or the management company) at www.fincen.gov. Dealers need to remember that the operating dealership entity may meet an exemption, BUT the real estate holding company may not have any employees and is not wholly owned by the dealership company, and thus need to report because it is not exempt.
Nonetheless, dealer entities that are exempt should remain vigilant because the 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.
What are the reporting deadlines?
The reporting deadlines are determined by the business’s formation date. If your company was in existence on December 31, 2023, you are required to submit the initial BOIRs no later than January 1, 2025 If your company was 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.
What does it all mean?
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 and report accordingly. Companies should gather reportable information so that they are in compliance with reporting deadlines. Seek legal counsel if you need assistance in filing or have questions about filing.