The Corporate Transparency Act (CTA) was passed into law, effective January 1, 2021, as part of the larger Defense Authorization Act for Fiscal Year 2021. CTA requires most business entities registered to conduct business in the U.S. to report information about the entity’s beneficial owners to the Department of the Treasury. Specifically, Beneficial Owner Information (BOI) is reported to the Financial Crimes Enforcement Network (FinCEN) division of Treasury.
The goals of CTA are to limit the use of shell companies in the U.S. to hide the actual individuals owning or controlling activities that may evade tax or may be criminal. BOI information may be shared with government agencies, law enforcement, financial institutions, and regulators. The information is not intended to be shared with the general public.
For closely held businesses and foreign entities operating in the U.S., BOI reporting may generate a new compliance burden to collect, protect, and report personal information on individual owners and key management personnel.
Join Michael Cornett, a leader in the Firm’s International Tax group, with Sarah McGregor and Brooks Nelson to have your burning questions answered about the CTA.
Chapter Markers
- 2:20 – Overview of BOI reporting
- 7:04 – What is a Reporting Company
- 12:24 – Who is Beneficial Owner
- 16:37 – When is information reported
- 18:22 – What information must be reported
- 23:06 – Action Steps
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BROOKS NELSON: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters.
BROOKS NELSON: Welcome to this edition of the Cherry Bekaert Tax Beat podcast. Today's episode is an overview of the proposed rules for beneficial owner information reporting. We'll refer to that as BOI reporting. This appears to be a new compliance burden, particularly for closely held businesses. The regulations and reporting mechanisms are not yet effective, but advanced planning can make the new law and its requirements less daunting.
BROOKS NELSON: Joining today's conversation is Michael Cornett, a director with the firm's international tax services team. Hello, Michael.
MICHAEL CORNETT: Hi, Brooks. Hello, everyone. Glad to be here. I'm in the mountains of southern West Virginia today, near the Virginia border, in the Roanoke area.
BROOKS NELSON: And as always, joining us is Sarah McGregor.
SARAH MCGREGOR: Hello. I'm calling in from Greenville, South Carolina.
BROOKS NELSON: I'm Brooks Nelson, a partner out of Richmond, and today I'm sitting in our Washington, D.C. office. Sarah, how's life treating you right now?
SARAH MCGREGOR: Life is good. The firm is transitioning after its big transaction. There are a lot of good things happening this summer, including some vacation time coming up.
BROOKS NELSON: Important to get that vacation time in. All right, a little background. This all stems from the Corporate Transparency Act, or CTA, which was passed into law effective January 1, 2021. CTA was part of the National Defense Authorization Act for fiscal year 2021. It requires most business entities registered to conduct business in the U.S. to report information about the entity's beneficial owners.
BROOKS NELSON: Specifically, CTA requires certain domestic and foreign-held business entities to identify and provide personal information about owners or key management personnel to the Financial Crimes Enforcement Network, FINCEN, a bureau of the Department of the Treasury. The goal of CTA is to limit the use of shell companies to hide individuals who may be evading tax or engaging in criminal activity. Information collected by FINCEN may be shared with other government agencies, law enforcement, financial institutions, and regulators.
BROOKS NELSON: Sarah, this law was passed over a year ago. Why are we talking about it now?
SARAH MCGREGOR: The law anticipated initial reporting beginning in January 2023, but CTA required regulations to implement it. Treasury issued proposed regulations in late 2021 and there has been a comment period. The law's reporting requirements don't become effective until the regulations are finalized, and because this is complicated, people should prepare now.
BROOKS NELSON: Mike, is the U.S. playing catch-up on BOI reporting compared with the rest of the world?
MICHAEL CORNETT: Yes. The U.S. is catching up. The Foreign Account Tax Compliance Act in 2010 began identifying U.S. persons hiding behind foreign entities, but many foreign countries moved further, implementing know-your-customer and beneficial ownership rules. The U.S. did not pursue widespread beneficial owner reporting until CTA. Treasury found that many entities have been used for money laundering, terrorist financing, and other illegal activities. CTA is an effort to address that.
BROOKS NELSON: Sarah, who has to file this new report? What is a reporting company?
SARAH MCGREGOR: The law is broad. A reporting company is any domestic entity or foreign reporting company that is registered to do business with a state or is formed by filing with a state. That includes limited partnerships, LLCs, corporations, and S corporations.
SARAH MCGREGOR: There are 23 categories of exemptions, mainly for entities already subject to regulatory scrutiny. Exemptions include insurance companies, banks, credit unions, savings associations, REITs, mutual funds, SEC-reporting companies, and registered public accounting firms. Law firms, however, are not exempt.
SARAH MCGREGOR: A significant exemption is the large business exemption. To qualify, an entity must meet three criteria: more than 20 employees, at least $5 million in gross receipts reported on a prior-year tax return, and a physical office in the United States. Missing any one of those three means the entity must report.
SARAH MCGREGOR: There are roughly 30 million existing business entities in the United States and over 40,000 foreign entities, not counting about 4 million new entities formed each year. This will be a substantial compliance challenge for existing businesses and an ongoing registration requirement for new entities.
BROOKS NELSON: Large corporate groups often consist of many entities. Some may be subject to reporting and others not. Mike, can you comment?
SARAH MCGREGOR: Yes. Entities in a group are evaluated individually under the proposed regulations. For example, a private equity structure might include a management company with four owners, a fund with many owners, and portfolio companies. One subsidiary could be a reporting company while another is exempt as a large entity. You must assess each legal entity separately.
MICHAEL CORNETT: The same structural complexity exists for foreign companies. Multiple beneficial owners across entities could require reporting. The rules are open-ended, and the interpretation can be complicated.
BROOKS NELSON: Mike, who is a beneficial owner that must be reported?
MICHAEL CORNETT: A beneficial owner is an individual. There are two tests: an individual who directly or indirectly exercises substantial control over the reporting company, or an individual who owns or controls at least 25% of the ownership interests in the reporting company. Ownership and control can be direct or indirect.
MICHAEL CORNETT: The regulations do not define "substantial control" clearly. Examples include a senior officer, a majority or dominant board member, or someone with authority under a contract or arrangement. A reporting company could have multiple beneficial owners under these tests.
BROOKS NELSON: So the requirement is broad, and a company might need to report every person who could fall under that definition.
MICHAEL CORNETT: That is correct.
BROOKS NELSON: Sarah, how do you see substantial control being interpreted?
SARAH MCGREGOR: Substantial control is a major source of complexity. For example, four individuals each owning 25 percent of a management company may not each have substantial control. But if one is the managing partner or general partner, or if a CFO or COO has authority to execute operations in a single-member LLC, they could be considered to have substantial control. Related-party and indirect ownership also matter, and the regs may adopt definitions from international tax regimes or create new ones.
BROOKS NELSON: When would the information have to be reported to FINCEN?
SARAH MCGREGOR: For existing companies, there will be a short window to report after the regulations are finalized; the proposed rule provides about one year to file initial reports. For new entities, reporting will be required shortly after formation. The proposed regulations require reporting changes to beneficial owner information within 30 days and corrections of errors within 14 days. This is not annual reporting; it requires prompt updates.
BROOKS NELSON: Mike, what information must be reported for each beneficial owner?
MICHAEL CORNETT: For each beneficial owner, a reporting company must provide the individual's full legal name, date of birth, a residential or business address, and a unique identifying number such as a passport number or driver's license number. The reporting company must also obtain and keep a copy of the document that contains the identifying number.
MICHAEL CORNETT: In addition to beneficial owners, the company applicant—the person who filed the formation documents with the state—must provide similar information.
BROOKS NELSON: Changes to any of that data must be reported within 30 days as proposed.
SARAH MCGREGOR: Yes. Companies will need processes to collect and maintain this sensitive personal information, track changes, and protect it from misuse.
BROOKS NELSON: When will this become effective?
MICHAEL CORNETT: The requirements become effective when the regulations are finalized. FINCEN has not released a draft form and has been developing its reporting system, so the timeline is uncertain. If the regs are finalized, existing companies would have one year to file initial reports. For newly formed companies, the proposed window is 14 days to file.
BROOKS NELSON: What are the penalties for noncompliance?
SARAH MCGREGOR: There are monetary penalties based on the number of days of noncompliance, and there are criminal penalties for willfully providing false information.
MICHAEL CORNETT: Civil penalties can be up to $500 per day. Criminal penalties may include fines up to $10,000 and possible imprisonment of up to two years for willful violations.
BROOKS NELSON: Final question: what can companies do now?
SARAH MCGREGOR: Companies should inventory their entities to determine which meet the reporting requirement and develop processes to collect and maintain beneficial owner information.
MICHAEL CORNETT: Companies should also consider modifying formation and investor agreements to require owners and investors to provide beneficial owner information and documentation. Build systems to control access to this information and contractually require compliance to avoid penalties as the reporting company.
BROOKS NELSON: FINCEN plans to issue a FINCEN identifier that individuals can apply for, which would allow reporting companies to reference that identifier rather than repeatedly providing passport or driver's license numbers.
BROOKS NELSON: We hope the final regulations will adopt group or consolidated exceptions to reduce burdens for corporate groups and streamline updates. The proposed 14- and 30-day update windows are challenging given the volume of data.
BROOKS NELSON: This concludes our podcast on the overview of the Corporate Transparency Act and beneficial owner information reporting. We are not providing tax advice on this podcast. Please consult with your tax advisor or Cherry Bekaert Advisory LLC regarding your specific tax issues or to discuss information from today's podcast. Check the firm's website at cbh.com for the latest guidance and materials on this and other tax and business topics.
BROOKS NELSON: Please like, share, and subscribe. Thank you, Michael. Thank you, Sarah. Thank you to our listeners.
