By Fernando Landa, Partner, and Lee Kaplan, Associate
Author's Note: On March 1, 2024, a federal district court in Alabama ruled the Corporate Transparency Act is unconstitutional. However, it is a limited ruling, and companies and persons that are not plaintiffs to that case or were members of the National Small Business Association as of March 1, 2024, should continue to comply with the new reporting requirements at this time.
On January 1, 2024, a new corporate reporting law took effect which is set impact the entire real estate industry. The Federal Corporate Transparency Act, 31 U.S.C. §5336 ("CTA"), enacted by Congress in 2021, will impose major new requirements on most business entities operating in the United States –requiring most new and existing entities to report information regarding their "beneficial ownership" to the Federal Financial Crimes Enforcement Network ("FinCEN"), a bureau of the U.S. Department of the Treasury.
Starting this year, each entity that is not exempt under the CTA (referred to as a "reporting company") will need to file Beneficial Ownership Information ("BOI") reports with FinCEN. A reporting company is any domestic or foreign company (including any limited liability company) doing business in the U.S. that is not covered by one of the CTA's 23 exemptions. The list of exemptions mostly covers banks and other financial institutions. The most broadly applicable exceptions are for (i) "large operating companies" with more than twenty (20) employees and $5,000,000 in annual gross receipts and (ii) "inactive entities," which are companies in existence on or before January 1, 2020 that have not engaged in any business or received more than $1,000 in a given reporting year.
Reporting companies need to file a BOI form with FinCEN or risk penalties of up to $500 per day (up to a maximum of $10,000) and potential criminal liability. The BOI form requires each reporting company to disclose its "beneficial owners." A "beneficial owner" is any individual who either (i) exercises "substantial control" over the reporting company, or (ii) owns or controls at least a twenty-five percent (25%) ownership interest in the reporting company. According to the CTA, an individual exercises "substantial control" over a reporting company if:
- "the individual is a senior officer;
- "the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company;
- "the individual is an important decision-maker; or
- "the individual has any other form of substantial control over the reporting company" – which may include "new and unique" methods of control.
For purposes of the 25% ownership threshold, an "ownership interest" may include "equity, stock, or voting rights; a capital or profit interest; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership." Information about a beneficial owner of a reporting company whose interest is held through an exempt company does not need to be reported.
It is important to note that the beneficial owners of a company are individuals and not other entities. Therefore, reporting companies need to look through any intermediary entities that own or exercise control over them to identify the natural persons who actually exercise substantial control or hold at least 25% ownership interests. For companies that are affiliates or subsidiaries of other companies, with entities serving as owners, officers, or directors, determining the specific individuals who qualify as "beneficial owners" may be a complex task. It is best to work with a qualified attorney or accountant to determine the beneficial owners of multi-level organizations.
In addition to beneficial ownership information, the CTA requires new domestic companies formed on or after January 1, 2024, or foreign companies registered to do business in the U.S. on or after the same date, to submit information regarding "company applicants" – meaning the people who file, or direct and control the filing of, the documents creating or registering the new company.
The BOI report for a reporting company needs to include the following information about the company:
- Full legal name
- Any DBA
- Complete address
- Jurisdiction of formation
- IRS TIN
The BOI report for a reporting company must also include the following information for each beneficial owner (and company applicant, if applicable):
- Full legal name
- Date of birth
- Complete current residential address (or business address for company applicants)
- Number, issuing jurisdiction, and image of a passport, driver's license, or other government-issued identification
FinCEN began accepting BOI reports through an online portal on January 1, 2024, but companies already in existence as of that date will not need to file a report until January 1, 2025. Companies created or registered after January 1, 2024 will have 90 days after creation or registration to file a BOI report. For companies created or registered on or after January 1, 2025, the reporting deadline will be 30 days from registration or creation.
A reporting company is not required to file a new BOI report each year – but if there are updates (such as new beneficial owners) or corrections to the information originally filed, an updated report will need to be submitted within 30 days after the triggering change or of the company becoming aware of an inaccuracy. There is no fee for filing a BOI report or an update/correction.
The CTA imposes substantial new burdens on most business entities operating in the United States, and determining beneficial owners for certain entities may be a complex process. However, once the required information is obtained, only one filing is required, subject to any necessary updates. The BOI reported pursuant to the CTA will go into a non-public federal database which will be used to monitor and prevent financial crimes. California has introduced its own State version of the CTA (SB 738) – but that bill is still in committee and has not yet been enacted.