The CTA requires small businesses to be familiar with several new terms in order to avoid heavy fines and imprisonment. This glossary is here to help make sense of the new requirements.
Corporate Transparency Act (CTA)
Part of the Defense Authorization Act of 2019, created a federal requirement that most new and existing business entities created or registered in the United States to file Beneficial Owner Reports (BOI) with the Financial Crimes Enforcement Network (FinCEN). To get all the details from the source, or as a cure for insomnia, you can go to Corporate Transparency Act text. In the text of the law, you will learn that small entities are considered to be “shell companies,” that is, entities with no assets or economic activity that serve to conceal illicit activity. Therefore, the CTA specifically targets small entities, the ones least likely to have access to legal guidance, and least able to take the time to read the law. Even more important than the law, you will need to be familiar with the regulations that are set up to enforce the law. Known collectively as the “Reporting Rule,” these are the specific regulations that govern how to comply with the law so you are less likely to pay heavy fines or go to jail.
A business entity which is required to file Beneficial Owner Reports with FinCEN and is not exempt from filing. There are two kinds of reporting companies:
Domestic Reporting Company
A non-exempt corporation, LLC or similar entity which was created by the filing of a document with the Secretary of State or similar office of a state or Indian tribe.
Foreign Reporting Company
A business entity formed under the law of a foreign country and registered to do business in the US by the filing of a document with the secretary of state or similar office of a state or Indian tribe.
Short for “Beneficial Ownership Information Reporting Rule,” requires certain entities to file beneficial ownership information (BOI) reports to FinCEN. Reports contain information about the entity itself and two categories of individuals: 1. Beneficial owners 2. Company applicants.
Means any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, the United States Virgin Islands, and any other commonwealth, territory, or possession of the United States.
Means any Indian or Alaska Native tribe, band, nation, pueblo, village or community that the Secretary of the Interior acknowledges to exist as an Indian tribe. (See section 102 of the Federally Recognized Indian Tribe List Act of 1994
Any individual who, directly or indirectly:
• Exercises substantial control over a reporting company;
• OR •
Owns or controls at least 25 percent of the ownership interests of a reporting company. An individual might be a beneficial owner through substantial control, ownership interests, or both. Reporting companies are not required to report the reason (i.e., substantial control or ownership interests) that an individual is a beneficial owner. A reporting company can have multiple beneficial owners.
An individual exercises substantial control over a reporting company if the individual meets any of four general criteria:
(1) the individual is a senior officer;
(2) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company;
(3) the individual is an important decision-maker; or
(4) the individual has any other form of substantial control over the reporting company.
There is no limit to the number of individuals who can be reported for exercising substantial control.
Beneficial Ownership Information (BOI)
Beneficial ownership information refers to identifying information about the individuals who directly or indirectly own or control a company. Beneficial owners are always individuals, with very few exceptions. To FinCEN, corporations (and LLCs, LPs, etc) are NOT people, so the people who own or control these entities must be reported.
A “FinCEN identifier” is a unique identifying number that FinCEN will issue to an individual or reporting company upon request after the individual or reporting company provides certain information to FinCEN.
An individual who directly files or is primarily responsible for the filing of the document that creates or registers the company.
There are two categories of company applicants – the “direct filer” and the individual who “directs or controls the filing action.”
• The first category (direct filer) must be identified by all reporting companies that have a company applicant reporting requirement.
• The second category (directs or controls the filing action) may not be applicable to all reporting companies that have a company applicant reporting requirement. The second category of company applicants is only required to be reported when more than one individual is involved in the filing of the document that created or first registered the company.
• If more than one individual is involved in the filing, then two company applicants must be reported.
• No reporting company will have more than two company applicants.
A shell corporation is a company formed for various purposes, including financing, holding assets, and providing anonymity. While they have legitimate uses, they can also be employed for illicit activities like tax evasion and money laundering.
According to the text of the Corporate Transparency Act:
“It is the sense of Congress that—
(1) more than 2,000,000 corporations and limited liability
companies are being formed under the laws of the States each
(2) most or all States do not require information about
the beneficial owners of the corporations, limited liability
companies, or other similar entities formed under the laws
of the State;
(3) malign actors seek to conceal their ownership of corpora-
tions, limited liability companies, or other similar entities in
the United States to facilitate illicit activity, including money
laundering, the financing of terrorism, proliferation financing,
serious tax fraud, human and drug trafficking, counterfeiting,
piracy, securities fraud, financial fraud, and acts of foreign
corruption, harming the national security interests of the
United States and allies of the United States;
(4) money launderers and others involved in commercial
activity intentionally conduct transactions through corporate
structures in order to evade detection, and may layer such
structures, much like Russian nesting ‘‘Matryoshka’’ dolls,
across various secretive jurisdictions such that each time an
investigator obtains ownership records for a domestic or foreign
entity, the newly identified entity is yet another corporate
entity, necessitating a repeat of the same process;”
In other words, Congress has chosen to believe that there is no other way to distinguish small businesses, startups and shell companies, that all of them must file with FinCEN or face hefty fines and imprisonment.