Submitted by UCS on November 7, 2023

Businesses Beware: Penalties for Failure to Comply with Reporting Requirements of the Corporate Transparency Act

Our guest blog post features an article written by Norris McLaughlin, P.A. Associate Rocco Beltrami and co-authored by Member, John Lushis, Jr.   Mr. Beltrami and Mr. Lushis Jr. offer an overview of the Corporate Transparency from perspective of two corporate attorneys.

Businesses, especially small and privately-owned businesses, should be aware of federal reporting requirements becoming effective Jan. 1, 2024. Congress enacted the Corporate Transparency Act (“CTA”) in 2021 to combat money laundering, terrorism financing, securities fraud, and other illicit financial activities by requiring businesses to be transparent about their ownership. With significant exceptions, the CTA generally requires businesses to report certain information—known as Beneficial Ownership Information (“BOI”)—to the federal government. BOI must be reported to the Financial Crimes Enforcement Network (“FinCEN”)—a Bureau of the U.S. Department of Treasury—where the information will be stored in a secured database. Last year, FinCEN published final regulations implementing the CTA’s reporting requirements. These regulations become effective Jan. 1, 2024.

Businesses should begin preparing for compliance with the CTA, as initial reports for existing businesses must be submitted prior to Jan. 1, 2025, and the penalties for non-compliance are severe.

What is BOI?

The CTA generally requires most domestic and foreign business entities doing business in the United States to report BOI concerning:

– Persons who directly or indirectly hold a 25% or greater interest in the business;

– Persons who directly or indirectly “exercise substantial control over” the business; and

– For businesses formed after Jan. 1, 2024, persons who assisted in the preparation of the business’s organic documents.

To Whom and When Must BOI be Reported?

– For existing businesses, BOI must be reported prior to January 01, 2025.

– Businesses formed after Jan. 1, 2024, will have 30 days from confirmation of their formation, incorporation, or registration to report BOI.

– If a business’s beneficial ownership changes following the submission of a BOI report, the business must report updated BOI to FinCEN within 30 days after such change.

Penalties for Failure to Comply with the CTA

The penalties for willfully failing to comply with the CTA’s reporting requirements are quite severe. Any person who willfully fails to report BOI or reports it inaccurately may be subject to civil and criminal penalties, including fines up to a maximum of $10,000 and imprisonment up to 2 years. Business should be aware that, although they may have been required to supply information regarding the entity to the secretary of state or other similar office upon formation or registration, BOI reports concern the business’ owners or controllers and must be submitted to FinCEN in addition to any information supplied to a state during the entity’s formation or registration.

An Evolving Landscape: Interplay between State Law and the Impact of the CTA on Businesses

It is yet to be seen whether states will adopt similar or identical BOI reporting requirements. As of the date of this post, legislation is pending in New York that would require LLCs to submit BOI to the New York Department of State upon organization or registration with the state. This same legislation also requires existing LLCs to amend their organic documents to include BOI.

Pennsylvania amended its Business Corporation Law effective Jan. 1, 2023, and now requires businesses conducting business in the state to file annual reports containing information regarding the entity itself. Pennsylvania does not currently require reporting of BOI. However, it is likely that Pennsylvania and many other states will soon follow the lead of the federal government and New York in requiring businesses to report BOI on a state level.

Conclusion

The CTA’s adoption is a watershed moment in the regulation of business entities. For the first time, businesses will be required to internally track and monitor their BOI to ensure compliance with the CTA. Moreover, compliance with the CTA will require businesses to evaluate their control structures and contractual relationships. For example, while it may be simple to determine whether a person owns 25% or more of a business, the determination of whether someone “exercises substantial control over” the business may not be so straightforward.

It is strongly recommended that businesses consult an experienced and qualified attorney to determine whether they are subject to the CTA’s reporting requirements, as well as any similar requirements imposed by states in the future. If you have questions or concerns regarding BOI and the CTA, please do not hesitate to reach out to Rocco L. Beltrami, Esq. at rbeltrami@norris-law.com or John Lushis, Jr., Esq. at jlushis@norris-law.com.

This article was originally published through the Biz Law Blog of Norris McLaughlin, P.A. on October 30, 2023.

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