How the CTA is Reshaping the Business Landscape in the U.S?

ARTICLE | January 12, 2024

The Corporate Transparency Act (CTA), which came into effect on January 1, 2024, has introduced new Beneficial Ownership Information (BOI) reporting obligations. These changes, aimed at combating illicit financial activity, necessitate a thorough understanding by both domestic and international entities conducting business in the U.S. This article aims to provide a comprehensive breakdown of the requirements and implications of the BOI reporting rules. 

The CTA, passed by Congress in 2021, has mandated the BOI reporting provisions under the supervision of the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury. This directive applies to entities that meet the definition of a "reporting company" and do not qualify for specified exemptions.

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A “reporting company” typically encompasses domestic entities like corporations, limited liability companies (LLCs), and entities formed through a secretary of state, such as limited liability partnerships, and business trusts. Foreign reporting companies include entities formed under the law of a foreign country registered to do business in any U.S. state.

The BOI reporting rule stipulates that entities created or registered after January 1, 2024, must disclose identities and information regarding their beneficial owners within 30 days of creation or registration. Beneficial owners are individuals who, directly or indirectly, exercise substantial control over a reporting company or own or control at least 25% of the ownership interests of a reporting company. 

However, FinCEN has proposed an extension of the initial report filing deadline from 30 to 90 days. Moreover, companies formed or registered before January 1, 2024, have until January 1, 2025, to submit their initial reports. Any changes in ownership or control must be reported within 30 days. Failure to comply with these reporting requirements could result in both civil (monetary) and criminal penalties.

Exemptions from the BOI reporting requirements are available for 23 specific types of entities, primarily those already under substantial federal reporting obligations. These include banks, insurance companies, securities brokers and dealers, registered investment companies and advisors, and public companies. A "large operating company" with over 20 full-time employees and over USD 5 million in gross receipts or sales from U.S. sources, as shown on a filed federal income tax return, also qualifies for an exemption.

Nevertheless, the application of these rules is not without its complexities. Every company in the U.S., regardless of its size or nature of operations, needs to determine if it falls under the BOI reporting requirements or qualifies for an exemption. This process may require coordination with legal counsel, given the legalities involved in determining an entity’s status under various statutes. 

For companies subject to BOI reporting, it is crucial to establish processes for identifying beneficial owners and gathering the required information for the BOI report. This may necessitate reviewing operating agreements and other similar documents to comply with the new disclosure obligations. 

The implementation of the BOI reporting requirements represents a significant shift in transparency and accountability for businesses operating in the U.S. To navigate these changes successfully, entities are encouraged to seek professional guidance through webinars, risk management resources, and consultations with their professional liability insurance provider, in addition to engaging with their legal counsel. It is crucial for businesses to understand these rules, their implications, and the steps required to ensure compliance.