In prior alerts from December and January, we discussed the history and intent of the Corporate Transparency Act (“CTA”), how two federal judges in the Eastern District of Texas issued nationwide injunctions against its enforcement, and how one of those injunctions was stayed by the U.S. Supreme Court. On Monday, February 17, 2025, the district judge who issued the second of those injunctions stayed his own injunction in light of the Supreme Court’s stay of the first one. This means that the CTA is back in effect! On Wednesday, February 19, the Financial Crimes Enforcement Network (“FinCEN”) confirmed this, announcing a new filing deadline of March 21, 2025, for reporting companies currently in existence that have yet to come into compliance with the CTA – four days before the U.S. Court of Appeals for the Fifth Circuit is scheduled to consider the constitutionality of the CTA.
Although FinCEN has indicated that it will take the next 30 days to “assess its options to further modify deadlines,” companies that are obligated to report beneficial ownership information (“BOI”) to FinCEN under the CTA but have yet to do so should take action to come into compliance now.
What is the CTA?
The CTA was enacted by Congress on January 1, 2021 and aims to enhance transparency in business ownership by establishing a federally maintained, restricted-access database of entities’ BOI. By requiring the disclosure of ownership details, the CTA seeks to combat illicit activities such as money laundering and tax evasion, and thus ensures greater accountability for entities operating in or engaging with the U.S. market.
Who Must Comply with the CTA?
All legal entities meeting the definition of a “reporting company” need to file both initial reports and update reports as ownership or personal information changes. In addition, legal entities formed on or after January 1, 2024 need to report information concerning their “company applicant” as further described below.
Reporting companies include any domestic or foreign entities that do not fall within one of 23 specified exemptions. Domestic reporting companies encompass corporations, limited liability companies, or “other entities” created through the filing of a document with a secretary of state or a similar office under the laws of a U.S. state, an Indian tribe, or a U.S. territory or possession. Entities such as limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships typically fall within the “other entities” category of reporting companies, as they are generally created through such filings. However, sole proprietorships, certain types of trusts, and general partnerships that are not formed through the filing of a document with a secretary of state or similar office generally do not meet the definition of a reporting company.
Foreign reporting companies include corporations, limited liability companies, or other entities formed under the laws of a foreign country and registered to do business in any U.S. state or tribal jurisdiction through the filing of a document with a secretary of state or a similar office under the laws of a U.S. state or an Indian tribe.
Legal entities that otherwise meet the definition of a “reporting company” may be exempt from reporting if they fall within one or more of the 23 exemptions expressly set forth in the CTA. These exemptions generally apply to large entities or entities that are already subject to significant regulation. One such exemption is the “large operating company” exemption, which requires the entity to (1) employ more than 20 full-time employees in the United States; (2) maintain an operating presence at a physical office within the United States; and (3) demonstrate, through U.S. federal income tax or information returns in the United States, more than $5,000,000 in U.S. gross receipts or sales for the prior fiscal year. For purposes of this exemption, a full-time employee is generally someone employed by the exempt entity (not an affiliate) for at least 30 hours per week or 130 hours per month (with specific rules applicable to non-hourly employees). On the other hand, the $5,000,000 threshold can be met through affiliated entities in certain circumstances.
A separate exemption applies to inactive entities, but it is narrowly defined and subject to strict conditions. To qualify, an entity must (1) have been in existence on or before January 1, 2020, (2) not be engaged in active business, (3) have no direct or indirect foreign ownership, even in minimal amounts, (4) have had no change in ownership in the past 12 months, (5) have neither sent nor received funds exceeding $1,000—whether directly or through any affiliated financial account—within the past 12 months, and (6) hold no assets of any kind, including ownership interests in other entities.
Other exempt entities include public companies, investment companies or investment advisers, venture capital fund advisers, pooled investment vehicles, insurance companies and insurance producers, certain other highly regulated entities such as banks and credit unions, public accounting firms, tax-exempt entities, entities assisting tax-exempt entities, governmental authorities, and subsidiaries of certain exempt entities.
Reporting companies that were dissolved in 2024 are not exempt and must still file their BOI reports with FinCEN, even if they ceased to exist before the deadline, as the reporting obligation is not contingent on the company's ongoing existence.
What Must a Company Do to Comply with the CTA?
If an entity is in fact a reporting company, the entity needs to file a BOI report with FinCEN identifying its beneficial owners and, if formed after January 1, 2024, its company applicant(s).
What is a Beneficial Owner?
A beneficial owner is any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25% of its ownership interest.
Under the CTA, an individual is considered to exercise substantial control if such individual serves as a senior officer, such as the president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function, regardless of title. Substantial control also includes having the authority to appoint or remove senior officers or a majority of the reporting company’s board of directors or a similar governing body. Additionally, an individual exercises substantial control if such individual directs, determines, or exerts significant influence over important company decisions, such as the sale of major assets, major expenditures, equity issuances, the incurrence of significant debt, or budget approvals. Finally, any other form of substantial control over the company also qualifies under this definition.
The key takeaway is that an individual’s title, or lack thereof, does not necessarily determine whether they exercise substantial control. Instead, FinCEN focuses on whether an individual has authority or performs a function equivalent to that of a senior officer.
A 25% ownership interest is broadly defined to include any equity interest such as stock, membership interests (both capital and profits interests), warrants, certain convertible instruments (even if characterized as debt), puts, calls, and other arrangements used to establish ownership. An individual’s total ownership interests are calculated as a percentage of the total outstanding ownership interests of the reporting company at the time of filing, with any options held by the individual treated as being exercised. An individual owning indirect interests in a reporting company through a trust, another legal entity or some other type of indirect ownership, needs to follow certain look-through rules to determine if its ownership interest meets the 25% threshold. Certain persons are expressly excluded from the definition of a beneficial owner, such as (1) minors, (2) nominees, custodians and agents, and (3) certain employees holding equity who are not senior officers.
What is a Company Applicant?
A company applicant is an individual who files the document responsible for creating or registering a reporting company in the United States or who is primarily responsible for directing or controlling the filing of that document by another. This role should generally be limited to one person, or in certain circumstances, two. However, FinCEN has indicated that no reporting company should have more than two company applicants.
Entities formed on or after January 1, 2024 must report their company applicant(s). This requirement does not apply to entities that existed before the effective date of the CTA.
Individuals who have formed their own entities, known as “self-filers,” are typically the company applicant for those entities. Businesses that handle entity formations in-house must identify the person(s) responsible for such formations and designate them as the company applicants. Businesses that use law firms or other service providers to form entities should work with their advisors to determine who should be identified as the company applicant.
What Reporting Company, Beneficial Owner and Company Applicant Information Needs to Be Reported?
FinCEN requires specific information about the reporting company, its beneficial owners and the company applicants, if applicable, to be provided.
For the reporting company, the required information includes its legal name; any trade names, “doing business as” (d/b/a), or “trading as” (t/a) names; the current address of its principal place of business, if it is in the U.S., or, for reporting companies whose principal place of business is outside the U.S., the current address from which the company conducts business in the U.S.; its jurisdiction of formation and, if a foreign entity, its jurisdiction of registration within the U.S.; its Taxpayer Identification Number; and the type of filing it is making, e.g., an initial report, a correction of a prior report, or an update to a prior report.
For each of its beneficial owners, and if the company is created or registered on or after January 1, 2024, for its company applicants, the reporting company must also disclose the following information: the individual's full legal name; date of birth; current residential address (but with respect to a company applicant working at a law firm or other service provider, this can be a business address); and a unique identifying number from an official identification document that is unexpired (e.g., a passport or state-issued driver’s license), together with an image of the identification document.
Note that entities and individuals have the option to apply for a “FinCEN ID” online by providing to FinCEN the same information the reporting company would otherwise have to provide to FinCEN. The reporting company can then use the FinCEN ID in its BOI report, instead of listing the specified personal information. This option may be preferred by individuals, as it allows them to submit their personal information directly to FinCEN rather than sharing it with personnel at the reporting company. Please note that individuals or entities issued a FinCEN ID are required to report any changes to their personal information within 30 days of the change.
Updating or Correcting Reports
Reporting companies must update and correct any previous BOI reports within 30 days of any changes or inaccuracies related to the reporting company or its beneficial owners. Note that reporting companies are not required to report changes to company applicants’ information; however, if a company applicant has obtained a FinCEN ID, the company applicant is obligated to report any changes to FinCEN directly.
Additionally, if a reporting company either becomes exempt or no longer qualifies for an exemption, it must report this change or file an initial BOI report within 30 days of the change.
Note that it is particularly critical to stay on top of ownership and senior management changes. Any such change, including a transfer of equity in an acquisition, merger, restructuring or similar transaction, an ownership change resulting from the death of an owner, or the appointment of new executives, will likely require mandatory updates.
Penalties
The CTA provides for both civil and criminal penalties for non-compliance, including a fine of up to $10,000 and imprisonment of up to two years, for any person who willfully (1) fails to report complete or updated BOI to FinCEN or (2) provides false or fraudulent BOI to FinCEN. Penalties can also be imposed on reporting companies and individuals who cause a reporting company not to report or who serve as senior officers of a non-compliant reporting company. There are also civil and criminal penalties for persons who misuse a FinCEN ID. However, there remains a safe harbor for reporting companies who correct inaccurate information within certain time periods.
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We will continue to monitor developments regarding the CTA and provide updates. In the meantime, if you have questions about whether the CTA applies to you or how to comply with it, please feel free to contact Jason Navarino, Hannah Greendyk, or any member of the Riker Danzig Corporate Group.
