LEGAL CORNER: The New Federal Corporate Transparency Act: Key Features, Compliance Requirements and Impact on Real Estate Industry

The Corporate Transparency Act [see https://bit.ly/4hfQlRC], enacted as part of the Anti-Money Laundering Act of 2020, went into effect on Jan. 1, 2024, and it introduced significant new disclosure requirements for corporations, limited liability companies and other covered entities operating in the United States. The CTA is primarily designed to combat illicit activities such as money laundering, tax evasion and terrorist financing by increasing the transparency of business ownership.

The CTA mandates that certain businesses report specific details about their beneficial owners (i.e., Beneficial Ownership Information or BOI) to the Financial Crimes Enforcement Network [see https://fincen.gov/boi]. FinCEN provides important information for companies and individuals [see FAQs https://bit.ly/3UEVxFl] relating to the new filing requirements. For many small businesses, particularly in the real estate industry, the disclosures required under the CTA represent a major regulatory shift away from important privacy considerations.

The CTA: Who Must File; Are There Exemptions Available?

The reporting obligations under the CTA apply to all “reporting companies” as defined under the CTA. “Reporting companies” include most corporations, LLCs, and similar entities that are: (1) created by filing a document with a secretary of state or similar office in the U.S.; or (2) formed under foreign laws and registered to do business in the United States.

The CTA does provide for limited exemptions designed to ease the burden on certain small businesses. Entities that have: (1) more than 20 full-time employees; (2) more than $5 million in gross receipts or sales; and (3) a physical presence in the U.S. are not required to report BOI to FinCEN. Additionally, there are also 23 specific types of entities that also are exempt from the CTA reporting requirements.

The following is a list of some of the specific types of exempt entities: banks, credit unions, brokers or dealers in securities, security exchanges or clearing agencies, insurance companies, public utilities, tax-exempt and nonprofit entities, and large operating and publicly traded companies. Many of these entities are exempt because they are already subject to substantial federal and state regulation, and other required reporting requirements.

Unfortunately, many small businesses, including most real estate brokerage firms, and real estate investment and holding companies, will not meet these criteria and will therefore be required to comply fully with the CTA’s filing requirements. However, if an individual operates as a “sole proprietorship” (i.e., not formed through a state agency), that individual would not be subject to the CTA filing requirements since the individual (and the business the individual operates) is not a separate and distinct legal entity.

Beneficial Ownership Information Reporting Requirements

The CTA requires “reporting companies” to disclose the Beneficial Ownership Information of all beneficial owners. “Beneficial owners” are defined as individuals who, directly or indirectly, own or control 25% or more of an entity, or who exercise substantial control over the entity. An individual could be a “beneficial owner” as a result of the “substantial control” element, by ownership interests, or a combination of both.

The information to be reported includes a beneficial owner’s: (1) full legal name; (2) date of birth; (3) current residential or business address; and (4) the identifying number and issuer from either a non-expired U.S. driver’s license, a non-expired U.S. passport, or a non-expired identification document issued by a state (including a U.S. territory or possession), local government, or Indian tribe. If none of those documents exist, a non-expired foreign passport may be utilized. An image of the document must also be submitted when filing the beneficial ownership information with FinCEN.

What Constitutes Substantial Control?

It is important to note that all individuals who exercise “substantial control” in a “reporting company” are also deemed to be beneficial owners for purposes of the CTA. Under the CTA there is no limit to the number of individuals who may be required to be included in the filing. FinCEN explains as follows:

“[a]n 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.”

FinCEN also provides important guidance and “indicators” to determine which individuals exercise substantial control. Specific examples provided by FinCEN include the following:

• Senior Officers (e.g., such as the President, Chief Financial Officer, General Counsel, Chief Executive Officer, Chief Operating Officer or any other individual (irrespective of title) who performs similar functions);
• Any individual who has the authority to appoint or remove an officer or the majority of directors of a corporate board or a similar body; and
• Any individual who directs or has substantial influence over important decisions of the company (e.g., relating to business operations, mergers, acquisitions, finances, ownership structure, etc.).

The CTA also includes a “catchall” which broadens the above descriptions, and requires that the BOI of a beneficial owner be filed if that individual exercises “substantial control” in any “new and unique” way. Additionally, it is important to note that the BOI of trustees of trusts that own an interest in a “reporting company” or that may have “substantial control” as defined above would be required to be submitted with the filing as well.

Key Dates for Initial Filings

Although the CTA went into effect on Jan. 1, 2024, there are two different categories of filings that need to be noted. The first category includes “reporting companies” that were formed prior to Jan. 1, 2024. These entities will have until Jan. 1, 2025, to file their initial reports. The second category is for new companies that are formed on or after January 1, 2024. These reporting companies must file their initial report within 90 days after their formation.

Are There Ongoing Filing Requirements?

There is no ongoing annual filing requirement for reporting companies beyond the initial filing. However, all covered entities are required to update the Beneficial Ownership Information of any new beneficial owners within 30 days of any change in ownership or substantial control. Therefore, it is important for covered entities and their shareholders or members to keep track of when additional owners, or any individuals exercising substantial control, join the company.

It is also important to note that it is common for owners of smaller businesses to transfer ownership interests and/or “substantial control” (in whatever form) in their companies to family members and/or trusts established in connection with their estate and/or other succession planning. Any such transfer would require an update to the initial filing to be submitted to FinCEN within 30 days of such transfer or change.

Penalties for Non-Compliance

The CTA imposes significant penalties for willful non-compliance. Failing to report or to file required updates, submitting inaccurate information, or intentionally evading the requirements of the CTA can lead to: (1) civil penalties of up to $591 per day for each day the violation continues; and (2) criminal penalties including fines up to $10,000 and up to two years of imprisonment for willful violations.

Impact on the Real Estate Industry and Small Businesses

Real estate brokers and brokerage firms that operate as LLCs, corporations and other covered entities, and real estate investors and developers who use LLCs to purchase real estate and/or use corporations, LLCs or other covered entities to operate their businesses, will now have to disclose the BOI of all individuals who hold significant control and/or ownership interests (i.e., 25% or more) in these entities.

While the CTA aims to bring greater transparency, making it harder for illicit actors to launder money through real estate purchases. At the same time, it places an additional burden on those individuals who, and small businesses that, operate within the bounds of the law. For small businesses with straightforward ownership structures, compliance with the CTA may not be overly burdensome. However, businesses with more complex ownership arrangements or those unaccustomed to regulatory filings may find the requirements onerous. Small companies will also face challenges in tracking and reporting changes in ownership within the above-mentioned 30-day period.

Procedures for Compliance under the CTA

FinCEN has provided small businesses with resources and information necessary to make filing as quick and easy as possible. FinCEN has prepared a “Small Entity Compliance Guide” [see https://bit.ly/3C2W9hd] in plain language and has also prepared various informational videos and webinars, FAQs, and other important information which can all be found on its website [see www.fincen.gov/boi].

Entities subject to the CTA will need to establish procedures and put systems in place in order to identify and report beneficial owners. First, businesses will need to review their ownership structures to determine who qualifies as a beneficial owner under the CTA. This may require careful analysis, especially in companies with complex or layered ownership models, and/or major decision makers who are not owners.

Once the “beneficial ownership” status of individuals is established, reports must then be filed electronically with FinCEN, providing the required identifying information for each beneficial owner. FinCEN is expected to issue further guidance on the specific reporting forms and processes as needed.

Lastly, businesses will then need to develop internal processes to monitor changes in ownership and control, and to ensure that timely updates are filed with FinCEN. This includes tracking changes in stock ownership, management positions, and other factors that could affect beneficial ownership status.

Where Do We Go From Here?

The CTA represents a significant shift in how business entities are regulated in the U.S., particularly with respect to beneficial ownership transparency. The real estate industry, in particular, will be affected by the increased disclosure requirements, as will small businesses that now face these new compliance burdens. To avoid fines and penalties, businesses must prepare to comply with the new reporting requirements, ensuring that they meet key deadlines and file accurate information with FinCEN.

It is important for businesses to seek legal guidance to ensure they understand their obligations under the CTA and establish processes to remain compliant going forward. The real estate and small business sectors, in particular, will need to adapt quickly to these new regulations to avoid costly penalties and ensure that accurate and complete information is provided in a timely and complete fashion.

Legal Column author John Dolgetta, Esq. is the principal of the law firm of Dolgetta Law, PLLC. For information about Dolgetta Law, PLLC and John Dolgetta, Esq., please visit http://www.dolgettalaw.com. The foregoing article is for informational purposes only and does not confer an attorney-client relationship and shall not be considered legal advice. The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the views or positions of HGAR, its affiliates, or any other entity.