How To File For The Corporate Transparency Act

The first step is to determine whether your company is a "reporting company".

Under the Final Rule, a "reporting company" is either a "domestic reporting company" or a "foreign reporting company."

An entity is a domestic reporting company if it is either a corporation, a limited liability company, or another legal entity "created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe." You may need to consult an attorney if your company does not clearly fall into one of these three categories.

An entity is a foreign reporting company if it is a corporation, limited liability company, or other entity that is both (1) formed under the law of a foreign country, and (2) registered to do business in any U.S. State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.

If your entity is either a domestic reporting company or a foreign reporting company, then you need to proceed to Step 2. If not, your entity is not subject to the Corporate Transparency Act and you do not need to file.

There are twenty-three (23) exemption categories under the Corporate Transparency Act. If your entity is a reporting company that is exempt under any of these 23 categories, then you do not need to file a beneficial ownership report.

Some exemption categories are pretty clear, like "banks" and "credit unions". They are exempt. Others are more complex and may require you to consult an attorney.

If your reporting company is exempt, you will not need to file a beneficial ownership report. If your reporting company is not exempt, then you need to proceed to Step 3.

If your entity is a reporting company and it is not exempt, your next step is to determine who are its beneficial owners.

A "beneficial owner" is an individual who either (a) directly or indirectly owns or controls at least 25 percent of the ownership interests of the reporting company, or (b) directly or indirectly exercises substantial control over the reporting company.

You will need to identify all the individual beneficial owners under each of these two tests.

The Ownership Rule describes those beneficial owners who directly or indirectly own or control at least 25 percent of the ownership interests of the reporting company. For some companies that have few owners and a simple ownership structure, determining whether an individual owns 25 percent or more might be easy. For more complex ownership structures, however, the answer may be hard to determine.

The Final Rule provides guidance in several ways.

First, the Final Rule defines "ownership interests" broadly so that it encompasses every type of ownership interest in a corporation, a limited liability company or other entity.

Second, the Final Rule provides guidance on how to determine whether an individual has indirect control over an ownership interest. For example, if an ownership interest in a reporting company is owned by a trust, the indirect ownership interest might be attributed to the trust's settlor, trustee, beneficiaries (or all three), depending on the trust instrument. Complex arrangements like those should be reviewed by an attorney who can apply the requirements in the Final Rule.

Third, the Final Rule provides specific instructions on how to calculate the total ownership interests of a reporting company. Those instructions contain four requirements:

1. Calculate the ownership interests of an individual at the present time as if any options or similar interests of the individual had been exercised.

2. For reporting companies that issue capital or profit interests (including entities treated as partnerships for federal income tax purposes), the individual's ownership interests are the individual's capital and profit interests in the entity, calculated as a percentage of the total outstanding capital and profit interests of the entity.

3. For corporations, an individual's percentage interest is the greater of (a) the total combined voting power of all classes of ownership interests of the individual as a percentage of the total outstanding voting power of all classes of ownership interests entitled to vote, or (b) the total combined value of the ownership interests of the individual as a percentage of the total outstanding value of all classes of ownership interest.

4. If the facts and circumstances do not permit calculations described above "to be performed with reasonable certainty" then any individual who owns or controls 25 percent or more of any class or type of ownership interest of the reporting company is deemed to own or control 25 percent or more of the ownership interests of the reporting company.

If your company has a complex ownership structure (such as a corporation with both common and preferred stock, or a limited liability company with a "distribution waterfall") then you should consult an attorney for legal advice on how to apply the Ownership Rule to your company.

After you have determined all the individual beneficial owners under the Ownership Rule, you should proceed to Step 4.

Because the definition of "beneficial owner" has two prongs, after you determine who are the beneficial owners under the Ownership Rule, you must also determine who else might be a beneficial owner under the Substantial Control Test.

The Final Rule provides that an individual has substantial control over a reporting company if that individual:

(A) Serves as a senior officer of the reporting company;

(B) Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);

(C) Directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding:

(1) The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;

(2) The reorganization, dissolution, or merger of the reporting company;

(3) Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;

(4) The selection or termination of business lines or ventures, or geographic focus, of the reporting company;

(5) Compensation schemes and incentive programs for senior officers;

(6) The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;

(7) Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; or

(D) Has any other form of substantial control over the reporting company.

Determining whether an individual has substantial control can be a challenging task. If your company has more than two potential beneficial owners, you should consult an attorney to determine who might have substantial control for purposes of determining the beneficial owners of your company.

After you have determined all of the beneficial owners of your company, you should proceed to Step 5.

After you have determined all the beneficial owners of your reporting company, applying the Ownership Rule and the Substantial Control Rule, the next step is to collect the required five pieces of information you will need to report for each beneficial owner.

Under FiNCEN's regulations, a reporting company must include in its beneficial ownership report the following five pieces of information for each beneficial owner:

1. Full legal name,

2. Date of birth,

3. Current residential street address,

4. A unique identifying number (such as an unexpired passport or drivers license), and

5. An image of the document from which the unique identifying number was obtained

Because these five types of information are personal, and are ordinarily kept confidential, you may have difficulty requiring your beneficial owners to provide this information.

The FinCEN Report Company's CTA Compliance Hub may help. Through the CTA Compliance Hub, each individual can create their own secure data locker that will contain their personal data in encrypted format. The CTA Compliance Hub allows the administrator of the company account to secure permission from each beneficial owner to include their data in the company's beneficial ownership report., If the previously-reported data from any beneficial owner changes, the CTA Compliance Hub will alert the administrator of the company account to file an amendment with FinCEN to report that change, as the CTA requires.

After the reporting company identifies all its beneficial owners, the company applicant can file its beneficial ownership report with FinCEN.

Reporting companies that utilize the CTA Compliance Hub will be able to file electronically with the push of a button. The CTA Compliance Hub will record the filing and save the FinCEN filing receipt for future reference.

Reporting companies that do not utilize the CTA Compliance Hub will need to find electronic filing instructions on the FinCEN website and preserve evidence of filing manually. Manual filers will also need to find a way of remaining aware of their beneficial owners' personal data. If any item of previously report data should change, the reporting company will have only 30 calendar days to file an amendment that reports the change.

Failure to file an amendment on time can result in a civil penalty of $500 per day. A willful failure to file (or willfully filing inaccurate information) can be a felony, punishable by imprisonment of up to two years.

Because of the importance of filing the initial beneficial ownership report on time, and filing any necessary amendment within 30 calendar days, we believe that many company administrators and business owners will benefit from the secure electronic filing service made possible by the CTA Compliance Hub.