Corporate Transparency Act

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Contributors

The Corporate Transparency Act (“CTA”) has been a point of contention between the United States Federal Government and small businesses, evidenced by the lawsuit brought by the National Small Business Association (“NSBA”) on behalf of its members. While the Northern District of Alabama recently prohibited the Financial Crimes Enforcement Network (“FinCEN”) from enforcing the CTA against the NSBA’s members, the court’s order does not appear to apply to non-NSBA members and the US Department of Justice has signaled its intent to appeal the decision. Thus, despite these new developments on the enforcement of the CTA, it is critical that dealers comply with the requirements of the CTA.

What is it?

On January 1, 2024, a new reporting requirement went into effect requiring millions of small businesses to file a Beneficial Ownership Information Report (“BOI”) with the US Department of Treasury’s FinCEN. The purpose of the CTA is to combat money laundering, financing of terrorism, tax fraud, and other illegal acts stemming from the use of shell corporations.

Who must file; Reporting company?

Every corporation, LLC, or other entity created by the filing of a document with a secretary of state or similar office is required to file a BOI unless it qualifies for an exemption—otherwise known as a domestic reporting company. Foreign corporations, LLC, LPs or similar entities formed under the laws of the foreign county and registered to do business with any US state are considered foreign reporting companies.

Exemptions

While there are 23 categories of exemptions, the only exemption to likely apply to dealers is the Large Operating Company Exemption. A large company, as defined by statute—is one that: (1) employs more than 20 full-time employees in the United States, (2) has an operating presence at a physical office in the United States, and (3) has filed a federal income tax return in the US for the previous year demonstrating more than $5M in gross receipts or sales. For an entity that is part of an affiliated group of corporations within the statutory meaning, gross receipts can be determined on a consolidated basis. It is important to note that due to the $5M gross receipts requirement, start-ups will unlikely be able to take advantage of this exception. Furthermore, a subsidiary of an exempt entity may qualify for exemption, even if the subsidiary alone would not have exempt status.

Who is a beneficial owner and an applicant?

Assuming a company is not exempt from BOI obligations, a BOI must be filed for each beneficial owner and applicant. A beneficial owner is an individual who, directly or indirectly, either (1) exercises substantial control over the reporting company or (2) controls at least 25% of its ownership. Substantial control includes senior officers or anyone who has authority to appoint or remove officers or directors, among others. Company applicants are those who directly file the document to create or register the reporting company and the individual who is primarily responsible for directing and controlling the filing. There can only be two applicants.

When do you need to file the BOI by?

A domestic reporting company created before January 1, 2024, must file its initial BOI by January 1, 2025. A domestic reporting company created on or after January 1, 2024, but before January 1, 2025 must file a report within 90 calendar days of the date it receives notice that its creation has become effective. A domestic reporting company created on or after January 1, 2025, must file a report within 30 calendar days of the date on which it receives notice its creation has become effective.

How is the BOI filed?

The initial BOI and all updates and corrections therein are filed electronically with FinCEN through a system made available on FinCEN’s website.

Please contact Scali Rasmussen if you have reason to believe that an exemption is not applicable to your business. An entity-by-entity analysis is required to verify eligibility for exemption and onerous monetary penalties can attach. Furthermore, there can be imprisonment of up to 2 years for failure to comply.