Author: Jeff Racho
On January 1, 2024, the Corporate Transparency Act (“CTA”) went into effect. This new law requires certain business entities, including foreign entities registered to do business in the United States, to file beneficial ownership information (“BOI”) reports with the U.S. Treasury. The purpose of the BOI reports is to provide ownership information of business entities to the U.S. Treasury, specifically the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
Under the CTA, the CTA requires all existing business entities that were organized prior to January 1, 2024 to also file BOI reports. The due date for the reports for pre-existing entities is December 31, 2024.
The BOI report must list the “beneficial owners” of a business entity. The CTA defines a beneficial owner as a person who (1) owns or controls twenty five percent (25%) of the equity in the business entity, or (2) who exercises “substantial control” over the business entity. Examples of persons who exercise “substantial control” over a business entity would include Managers of limited liability companies, individual general partners of limited partnerships, and directors and officers of corporations.
Furthermore, all new business entities organized in 2024 will be required to file the BOI report within ninety (90) days of the date of formation. This ninety-day period will be reduced to thirty (30) days on January 1, 2025.
For example, if a new limited partnership and a new limited liability company to act as the limited partnership’s general partner are organized on June 1, 2024, the two new entities – both the limited partnership and the limited liability company – will need to file BOI reports with the U.S. Treasury by August 30, 2024. Please note that the law only applies to entities that are organized by filing a certificate of formation with a state, such as with the Texas Secretary of State; general partnerships and sole proprietors have no filing requirement. The filing requirement will also apply to home ownership associations and nonprofit organizations that do not have a 501(c) exemption.
The CTA also requires disclosure of beneficial owners in parent/subsidiary structures. For example, if SubCompany, LLC is a wholly owned subsidiary of ParentCompany, LLC, then both SubCompany, LLC and ParentCompany, LLC will need to file BOI reports that identify the beneficial owners of ParentCompany, LLC because the beneficial owners of SubCompany will be deemed the same persons who are the beneficial owners of ParentCompany.
The CTA exempts certain entities from the BOI report requirement. For example, banks, publicly traded corporations, broker-dealers of securities, registered investment advisers, and insurance companies are exempt from filing. Also exempt are larger private companies that have offices in the United States, reported at least $5million in annual revenue to the IRS during its prior tax year, and have more than twenty (20) full-time employees. Wholly owned subsidiaries of exempt entities are likewise exempt from registration.
The CTA also imposes reporting requirements if the addresses of control persons change (such as if a Manager or officer moves to a new residence) and if the control person “group” changes (such as if a new limited partner is added to a limited partnership and the new partner has a 27% partnership interest).
Please contact your attorney at GDHM should you require more information on the CTA and the BOI reports.
Updates and Other Helpful Links
On March 1, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional.
https://cases.justia.com/federal/district-courts/alabama/alndce/5:2022cv01448/183445/51/0.pdf
https://www.thomsonreuters.com/en-us/posts/corporates/cta-unconstitutional-ruling/
Title 31 of the US Code that was amended by the Corporate Transparency Act