Navigating the U.S. Corporate Transparency Act: An overview of Beneficial Ownership Reporting for businesses

‍The team at MinterEllisonRuddWatts specialise in gaining a deep understanding of their clients business and industry to help deliver value. I'd like to share a big thanks with the team Igor Drinkovic and Jeremy Muir at MinterEllisonRuddWatts who raised this in late 2023 and reviewed this article.

As of 1 January 2024, the United States (U.S.) has implemented the Corporate Transparency Act (CTA), marking a significant shift towards greater corporate transparency and accountability. This legislation aims to combat illicit financial activities by requiring certain companies to disclose key ownership information. If you are a small business or start-up doing business in the U.S., there’s a high chance you will need to comply with the new Beneficial Ownership Information (BOI) Reporting rules. It is important to stay informed and seek your own independent legal advice to be prepared to avoid potential penalties.

This article will cover what you need to know at a high level, including:

• What is it?
• Who does it apply to?
• When does it kick in and what are the penalties for not complying? 
• What are the reporting requirements?
• Where & how to report it?

As this article is only a summary, see FinCEN’s website for more information about these reporting requirements, including details on the timing of reporting and the exemptions. To the extent of any inconsistency, the legal requirements referred to by FinCen prevail.

What is the U.S. Corporate Transparency Act and Beneficial Ownership Information Reporting requirements?

The CTA is a legislative initiative to enhance corporate ownership transparency to curb money laundering, terrorism financing, and other illicit financial activities. It mandates certain companies to disclose BOI to the Financial Crimes Enforcement Network (FinCEN).

The BOI Reporting rule requires reporting companies (see below) to submit an initial filing regarding the company’s beneficial ownership and report updates as the company’s ownership and governance structures evolve.

Who does it specifically apply to? 

Companies that must report are called "reporting companies". There are two types:

1. Domestic reporting companies: These are corporations, limited liability companies, or other entities created via a U.S. secretary of state or similar office.

2. Foreign reporting companies: These are entities formed under foreign laws but registered to do business in the U.S. by filing documents with a U.S. secretary of state or similar office.

If you fit one of the above, you may still be an “exempt entity”:

• There are 23 exempt entities, including publicly listed companies (via the SEC), registered investment companies, registered VCs, public accounting firms and many not-for-profits. 
• Of note is the “large operating company” exemption, including criteria of employing more than 20 people in the U.S., having over $5 million of U.S.-based revenue and a physical office in the U.S. 

Below is a simplified eligibility diagram (see Small Entity Compliance Guide):

As you can see, the reporting requirements impact upon those companies lacking an established regulatory reporting framework, particularly startups and small businesses. Inversely, large publicly-owned companies are exempt from these requirements due to their existing regulation and mandatory government filings. 

When does it kick in, and what are the penalties for non-compliance?

‍The initial filing obligations under the CTA must be fulfilled when an entity is formed or registered, and existing entities have a grace period to comply:

• Did you form or register your company after December 31, 2023? You have 90 days from receiving actual or public notice that the company’s creation or registration is effective to file the initial BOI reports. Note: For reporting companies created or registered on or after January 2, 2025, this is reduced to 30 days from actual or public notice that the company’s creation or registration is effective to file their initial BOI reports.‍
• Companies formed or registered before January 1, 2024: have until January 1, 2025.

After the initial filing, there is no annual reporting requirement. However, reporting companies must update or correct BOI reports no later than 30 days after the date on which the change has occurred. This would include any changes to  required information in relation to the reporting company, changes to its beneficial owners including any change in an owner’s legal name, address, or other required details. 

Penalties: The wilful failure to comply may result in severe consequences, including criminal charges, fines up to $500 a day, imprisonment and/or a fine of fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure.

What gets reported?

A “reporting company” must identify, document and report on itself, its beneficial owners and its company applicant (if applicable). A beneficial owner under the CTA is defined as any individual who:

• Directly or indirectly exercises substantial control over the reporting company; or
• Directly or indirectly owns or controls at least 25% ownership interest of the reporting company.

A domestic reporting company created or a foreign company registered to do business in the United States on or after 1 January, 2024, need to report their company applicants. Up to two individuals could qualify as company applicants (a company or legal entity cannot be a company applicant):

• The individual who directly files the document that creates or registers the company; and
• If more than one person is involved in the filing, it refers to the individual primarily responsible for directing or controlling the filing process.

Information required for “reporting company”:

• Full legal name
• Any trade name or “doing business as” name
• Jurisdiction
• For foreign reporting company, jurisdiction of first registration
• Internal Revenue Service Taxpayer Identification Number (including an Employer Identification
• Number).

Information required for all “beneficial owners” and “company applicant” (if applicable): 

• Full legal name
• Birthdate
• Address
• Identification documents (eg. passport or driver’s licence)

Where does it get filed/reported?

BOI reports must be filed online using FinCEN’s secure filing portal. To do this, gather the necessary information, including some basic company information, the beneficial owner's details (discussed above) and company applicants (if applicable). 

Orchestra is considering providing a solution for customers. If you want to follow progress, please request access to our product update newsletter here. 

Conclusion:

If you are a small business or start-up doing business in the U.S., there’s a high chance you will need to comply with the new Beneficial Ownership Reporting rules. It is important to stay informed, and seek your own independent legal advice to be prepared to avoid potential penalties.

Using equity management software such as Orchestra can help make reporting requirements easier. If you would like to see a demo, contact our team. 

Disclaimer: This article is a brief overview of the key points, but not to be taken as legal advice. We encourage you to familiarise yourself further with the CTA reporting requirements and to discuss specific questions with your legal advisor. 

Where can I find additional information about BOI reporting?

• Additional information about the Reporting Rule and guidance materials are available at www.fincen.gov/boi 
• FinCEN has issued and will continue to issue frequently asked questions to address specific questions on the topic. They can be found here: www.fincen.gov/boi-faqs