Filing Deadline Approaches: The Corporate Transparency Act
The Corporate Transparency Act (CTA) requires entities to report beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury.
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While the CTA has been in effect since the beginning of this year, a major filing deadline is quickly approaching for all entities that qualify as “Reporting Companies” under the CTA. Further, FinCEN has released various updates throughout this year which may clarify whether such reporting deadline applies to your entity.
Filing Deadline
Reporting Companies created or registered to do business prior to January 1, 2024, have until the end of this year (until January 1, 2025) to file an initial CTA report with FinCEN. This deadline applies to each and every active entity that has ever been created by filing with a secretary of state in the United States (including corporations, limited liability companies, limited partnerships and more), unless the entity falls under one of 23 narrow exemptions. There are millions of entities in the United States impacted by this deadline, and failure to file with FinCEN could result in substantial penalties for you personally as well as for your business.
While the January 1, 2025, deadline applies to existing entities, for any new entities that are created or registered to do business beginning in 2024, you will have 90 calendar days after receiving notice of formation to file an initial CTA report. Finally, starting next year, the deadline to file becomes even shorter, requiring entities that are created or registered to do business on or after January 1, 2025, to file a CTA report within 30 calendar days after receiving notice of formation.
Frequently Asked Questions
Before filing under the CTA, there are certain rules which may impact your Reporting Company’s filing status, including 23 exemptions. Below are a few frequently asked questions which cover certain updates FinCEN released this year.
- Subsidiary Exemption
Under the CTA, FinCEN exempts 23 categories of entities from filing requirements. Based on FinCEN’s recent clarification of the Subsidiary Exemption (Exemption #22), there is an emerging viewpoint and interpretation which provides that the Subsidiary Exemption may be applied if a subsidiary’s ownership interests are (1) wholly owned or (2) wholly controlled by certain exempt entities. In either case, this exemption requires a Reporting Company’s ownership interests to be “fully, 100 percent” owned or controlled, directly or indirectly, by an exempt entity. As an example, this emerging viewpoint could allow for a Reporting Company, which is owned by a non-exempt parent company, to rely on an exempt general partner or exempt management company (as long as such exempt company “wholly controls” the Reporting Company) to qualify the Reporting Company as exempt under the Subsidiary Exemption. Note that FinCEN’s published guidance does not directly address this analysis, and future policies could further clarify what constitutes “control” under this exemption. For instance, if the governing documents of the Reporting Company or its parent company (if the Reporting Company is a subsidiary) provide for decision rights for investors other than the exempt general partner, the general partner’s “fully, 100 percent” control would be called into question. As a result, a detailed analysis of the Reporting Company and its governing documents should be performed before relying on this exemption.
- Dissolved Entities
FinCEN also recently clarified certain requirements a Reporting Company must satisfy in order to qualify as “dissolved” under the CTA, therefore, exempting the Reporting Company from filing. If a Reporting Company ceased to exist as a legal entity prior to January 1, 2024, then it is exempt from CTA reporting requirements as a dissolved entity. To qualify, the entity must have “wound up their affairs, ceased conducting business, and entirely completed the process of formally and irrevocably dissolving” prior to January 1, 2024. However, if the entity legally exists for any period of time in 2024 (or thereafter), then the entity is not considered dissolved for this exemption and a CTA report must be filed. To determine if an entity is formally dissolved, FinCEN will follow the law of the jurisdiction where the Reporting Company was created or registered to do business.
If a Reporting Company ceases to exist and formally dissolves prior to the expiration of its CTA reporting deadline (i.e., before the 30- or 90-day reporting deadline), then a CTA report is still required to be filed, and arrangements should be made for such filing prior to the entity’s dissolution. The CTA report should include BOI “accurate as of the moment prior” to the Reporting Company’s dissolution.
- Disregarded Entities
An entity that is considered “disregarded” for U.S. tax purposes must still submit its own report under the CTA. FinCEN requires a taxpayer identification number to be provided in each CTA report. For disregarded entities, different types of taxpayer identification numbers may be reported, consistent with the rules of the Internal Revenue Service (IRS).
- If a disregarded entity has an EIN, it should report that EIN on the CTA report. If a disregarded entity does not have an EIN, it is not required to obtain one—so long as it can provide another type of taxpayer identification number instead.
- If a disregarded entity is a single-member limited liability company (or has only one individual owner), then the disregarded entity may provide the individual owner’s SSN or ITIN.
- If a disregarded entity is owned by another U.S. entity that has its own EIN (i.e., a parent company), then the disregarded entity may report the parent company’s EIN.
- If a disregarded entity is owned by another disregarded entity (or is owned by a chain of disregarded entities), then the disregarded entity may report the EIN of the first owner up the chain of disregarded entities that has an EIN.
As discussed, analysis of whether an entity must report requires a review of the entity’s governing documents and ownership and control structure. While sponsors of these entities can wait until later in the year to actually file the BOI reports, it is advisable to start the analysis of whether the entity must report now to provide sufficient time for the review.
For additional information or assistance regarding the CTA, its filing process, or legal analysis, contact Jon Katona, Patrick Murphy or Samantha Blank.
For additional information on the CTA, please see our previous publications (1, 2, 3). Or you can visit FinCEN’s BOI webpage.
Co-authors Jon Katona and Patrick Murphy are partners and Samantha Blank is an associate in the Corporate and Securities Department at Klehr Harrison.