The Corporate Transparency Act (CTA), which came into effect on January 1, 2024, has significant implications for government contractors, tribal entities, and commercial businesses. If you formed an entity before January 1, 2024, and are not subject to one of the exemptions, you must file your initial Beneficial Ownership Information Report (BOIR) no later than January 1, 2025. If you formed an entity on or after January 1, 2024, and are not subject to one of the exemptions, you must file your initial BOIR within ninety (90) days from the effective date of creation or registration of the entity. If you form an entity on or after January 1, 2025, and are not subject to one of the exemptions, you must file your initial BOIR within thirty (30) days from the effective date of creation or registration of the entity.
To help businesses comply with and avoid harsh enforcement penalties, this client alert summarizes recent developments in the CTA—including filing requirements after losing exempt status under the CTA, physical office and tax return requirements for the large operating company exemption, reporting requirements for dissolved entities, the CTA’s applicability to tribal entities, and outside access to the BOIR.
Background
As reported by PilieroMazza, the CTA is legislation enacted by Congress in 2021 that requires privately held U.S. businesses to report certain identifying information for all “beneficial owners” of such businesses to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN); the result of reporting will be a central registry of beneficial owners that can be searched by various governmental entities.
Importantly, FinCEN has a powerful enforcement mechanism: the willful failure to report, complete, or update beneficial ownership information to FinCEN—or the willful provision of or attempt to provide false or fraudulent beneficial ownership information—may result in civil or criminal penalties. Civil penalties include up to $591 (adjusted annually for inflation) for each day the violation continues OR criminal penalties, including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of any entity failing to file a required BOIR may be held accountable for that failure.
Losing Exempt Status
Generally, an entity that loses its exempt status under the CTA on or after January 1, 2025, must file a BOIR within thirty (30) calendar days after the date it no longer meets the criteria for a CTA exemption. However, if an entity created prior to January 1, 2024, loses its exempt status under the CTA in the next few months, prior to January 1, 2025, FinCEN determined such entities will receive the benefit of whichever reporting timeframe is longer: (1) the remaining days left in the one-year filing period for existing companies or (2) the 30-calendar-day period for companies that lose their exempt status.
For example, if an existing reporting company created prior to January 1, 2024, ceases to be exempt on November 1, 2024, the company will have until January 1, 2025, to file its initial BOIR. But if the company ceases to be exempt on December 15, 2024, the company will have until January 14, 2025, to file its initial BOIR.
Physical Office and Tax Return Requirements
As previously stated by PilieroMazza, an entity must meet the following criteria to qualify for the “large operating company” exemption under the CTA:
- have more than 20 full-time employees in the U.S.;
- filed a federal income tax or information return in the U.S. in the previous year demonstrating more than $5 Million in gross U.S. receipts or sales; AND
- have an operating presence at a physical office in the U.S.
One of the requirements causing headaches for many businesses is the “operating presence at a physical office in the United States”—many companies abandoned their physical office space during COVID. A number of clients have inquired whether a home office in a personal residence qualifies as a “physical office” under the exemption. For a personal residence to qualify as the “physical office,” the entity that qualifies for the exemption must itself lease or own the physical location, regularly conduct business at that location, and the location must be physically distinct from the place of business of any other unaffiliated entity. Thus, a company must actually rent or own the space in the personal residence that it uses to qualify for the large operating company exemption.
Similarly, there’s confusion regarding which tax return to use when determining whether an entity meets the “$5,000,000 in gross U.S. receipts or sales” requirement. First, the federal income tax return must demonstrate more than $5 Million in gross receipts or sales, excluding gross receipts or sales from sources outside the U.S. Additionally, to the extent a tax return for the previous year was not filed in the previous year (e.g., because an entity did not file its return for the previous year by the time the BOIR is due or because the return filed in the previous year was for a prior year), a company should use the return filed in the previous year for purposes of determining its qualification for the exemption. If a company relying on this exemption subsequently files a tax return demonstrating less than $5 Million in gross U.S. sales or receipts, and it no longer qualifies for the large operating company exemption or any other exemption, it has thirty (30) days from the date of the tax return to file an initial BOIR.
Dissolved Entities
If an entity was completely and irrevocably dissolved and wound up prior to January 1, 2024, it is not required to file a BOIR with FinCEN. Requirements for dissolution and winding up vary by jurisdiction but generally involve filing dissolution paperwork with the entity’s jurisdiction of creation or registration, receiving written confirmation of dissolution, paying related taxes or fees, ceasing to conduct any business, and winding up its affairs (e.g., fully liquidating itself and closing all bank accounts). However, if a non-exempt entity continues to exist as a legal entity for any amount of time on or after January 1, 2024 (i.e., did not entirely complete the process of formally and irrevocably dissolving before January 1, 2024), it is required to file a BOIR, even if the company wound up its affairs and ceased conducting business before January 1, 2024.
Further, if a reporting company was created on or after January 1, 2024, and was subsequently dissolved and wound up its affairs, the entity still must file a BOIR even if it ceased to exist before its BOIR was due. Reporting companies created or registered in 2025 or later, no matter how quickly they cease to exist thereafter, must also file a BOIR within thirty (30) days of receiving actual or public notice of creation or registration.
Tribal Entities
While Indian Tribes have varying entity formation practices, some allow individuals to form legal entities under Tribal law by filing a formation document (such as Articles of Incorporation) with a Tribal office or agency. Tribal offices or agencies that perform this function may not be referred to as a “secretary of state,” but FinCEN determined that they are performing a function similar to that of a typical secretary of state’s office. As a result, a legal entity created by such a filing is a reporting company and is required to file a BOIR, unless it qualifies for an exemption.
There are three main caveats to the reporting requirement for Tribal entities:
- Tribal corporations formed under federal law (i.e., section 17 of the Indian Reorganization Act of 1934) are not reporting companies required to report beneficial ownership information to FinCEN.
- “Governmental authorities” are also not required to report beneficial ownership information to FinCEN. For this purpose, a “governmental authority” is an entity that: (a) is established under the laws of the U.S., an Indian Tribe, a state, or a political subdivision of a state or under an interstate compact between two or more states and (b) exercises governmental authority on behalf of the U.S. or any such Indian Tribe, state, or political subdivision. As such, a Tribal entity that is a “governmental authority” is not required to file a BOIR. This category includes tribally chartered corporations and state-chartered Tribal entities, if those corporations or entities exercise governmental authority on a Tribe’s behalf.
- Certain subsidiaries of governmental authorities are also exempt from the CTA’s reporting requirement. An entity qualifies for this exemption if its ownership interests are controlled (in their entirety) or wholly owned, directly or indirectly, by a governmental authority.
Outside Access to Beneficial Ownership Information
A significant concern within the business community is the release of information contained in an entity’s BOIR. First, all beneficial ownership information reported to FinCEN through a BOIR is exempt from disclosure under the Freedom of Information Act.
Further, FinCEN said it will provide access to beneficial ownership information over five phases:
- Phase 1: A pilot program for some federal agency users.
- Phase 2: Access extended to Treasury offices and other federal agencies engaged in law enforcement and national security activities that already have memoranda of understanding for access to Bank Secrecy Act information.
- Phase 3: Access extended to additional federal agencies engaged in law enforcement, national security, and intelligence activities, as well as to state, local, and Tribal law enforcement partners.
- Phase 4: Access extended to intermediary federal agencies in connection with foreign government requests.
- Phase 5: Access extended to financial institutions subject to customer due diligence requirements under applicable law and their supervisors.
Despite FinCEN’s initial timeline for these phases, FinCEN noted that, as of April 18, 2024, it is not currently accepting requests for access to beneficial ownership information and has not yet provided an update on when it will begin accepting requests for information.
PilieroMazza attorneys are here to assist you. If you need guidance concerning compliance with the CTA, please contact Meghan Leemon, Abby Baker, Cole Fox, or another member of the Firm’s Government Contracts or Business & Transactions practice groups.
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Looking for practical insights on gaining a competitive advantage through a deeper understanding of the government’s compliance requirements? Check out PilieroMazza’s podcasts “GovCon Live!” and “Clocking in with PilieroMazza.”
