As we head into the second half of the year, and with the first set of Corporate Transparency Act (the "CTA") filing deadlines behind us, below are some suggested action items to help prepare for the upcoming deadline to bring existing entities (those formed or registered prior to 2024) into compliance with the CTA.
As discussed in our prior Client Alert (which can be accessed through this link), as of January 1, 2024, the CTA requires any corporation, limited liability company or other similar entity that is created by the filing of a document with, or which is formed under the law of a foreign jurisdiction and registered to do business in the U.S. with, a secretary of state or similar office of a State or Indian Tribe ("Reporting Companies") to file reports disclosing their beneficial ownership information ("BOI") with the Financial Crimes Enforcement Network ("FinCEN") of the United States Department of the Treasury, unless the entity is exempt from such reporting requirements under the CTA.
The filing deadline under the CTA depends on when the Reporting Company was formed. BOI reports for entities formed in 2024 must be filed with FinCEN within 90 days of formation of the entity. For entities that will be formed in 2025, BOI reports must be filed within 30 days of formation. Importantly, any pre-existing entities that were formed prior to January 1, 2024, are required to file their initial BOI reports no later than January 1, 2025. After filing an initial report, each Reporting Company is also required to file an updated report with FinCEN within 30 days following the occurrence of any change in previously reported information.
Maintaining compliance with the CTA by timely filing BOI reports for all pre-existing entities is critical to avoid costly fines and penalties. In light of the upcoming deadline, and although not intended to be all-inclusive, below are some suggested action items to consider:
- Get Organized. The first step is to identify each Reporting Company which you directly or indirectly manage or own a substantial interest in and locate its organizational documents. Doing so will allow you to get a sense of how many entities need to be analyzed and the reports that may need to be filed.
- Evaluate Exemptions. For each entity identified above, an analysis should be performed to determine whether such entity qualifies for one of the exemptions specified in the CTA. For example, certain subsidiaries that are 100% owned or controlled by an exempt entity are also exempt under the CTA and are not Reporting Companies.
- Identify Beneficial Owners. If an entity is a Reporting Company, all "beneficial owners" (as that term is defined in the CTA) must be identified. Beneficial owners include individuals that directly or indirectly own 25% or more of the Reporting Company's ownership interests and individuals with "substantial control" over the Reporting Company. Unfortunately, the regulations and guidance from FinCEN lack clarity on the criteria for determining ownership or substantial control. As a result, identifying a Reporting Company's beneficial owners may be a challenging and fact-specific task. Therefore, it is important to allocate sufficient time and resources to consult with legal counsel and/or other advisors to comply with the CTA.
- Obtain FinCEN IDs. Reporting Companies and beneficial owners may want to obtain a FinCEN Identifier (FinCEN ID) to streamline future reporting and to provide a mechanism by which the information filed under a FinCEN ID can be conveyed to other Reporting Companies seeking to comply with the CTA without disclosing the sensitive information filed under such FinCEN Identifier (e., by disclosing the FinCEN ID, but not the underlying information).
- File BOI Reports and Maintain Compliance. For Reporting Companies that were formed or registered to do business in the U.S. prior to January 1, 2024, all BOI reports must be filed no later than January 1, 2025. In addition, specific processes and procedures should be implemented to monitor future changes in beneficial ownership and other reportable changes to existing beneficial owners to timely comply with the CTA.
Reporting Companies that have until the end of the year to file their initial BOI reports may not feel a sense of urgency to file now. However, because this will be the first time such Reporting Companies are going through the reporting process, the amount of effort needed to complete the analysis for an entity with even a moderately complex structure may be more time-consuming than expected.
Accordingly, Reporting Companies are strongly advised to prepare well in advance of the January 1, 2025, deadline, so that they have enough time to analyze beneficial ownership, coordinate with beneficial owners, and prepare the required filings, particularly with respect to companies with complex structures and/or large numbers of beneficial owners. It is not a process to put off until the final month of 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.