In 2021, the federal government passed the Corporate Transparency Act (CTA), scheduled to take effect on January 1, 2024.
The CTA requires many small businesses to file Beneficial Ownership Information (BOI).
Although filing BOI does not involve extensive information, determining who and what to file is complicated.
If you are a small business owner in Texas, contact Massingill to learn more about the CTA. We can guide you through what this law means for your business.
We believe in making the complex simple, which we will do in this Corporate Transparency Act update by explaining the act as the implementation date looms closer.
What Is the Corporate Transparency Act?
The CTA requires most business owners to report who owns or controls their business.
The CTA is intended to help identify and prevent money laundering, tax fraud, and similar financial crimes.
The Financial Crimes Enforcement Network (FinCEN), part of the US Treasury Department, oversees the CTA’s implementation.
Under the act, “reporting companies” must report “beneficial ownership information” to the government.
Businesses registering after the CTA’s January 1, 2024, effective date must also provide information about “company applicants.” We break down these terms in turn.
What Is a Reporting Company?
The definition of a reporting company is broad, including both foreign and domestic entities.
A foreign entity is formed under the laws of a foreign country, while a domestic entity is formed under the laws of a state or tribal government.
A domestic company is a reporting company if you had to file documents with a state or tribal government to create it.
A foreign company is a reporting company if you have registered it with a US state or tribal government. The entity’s business structure generally determines whether it is a reporting company.
Reporting Business Structures
In Texas, that means your business is likely required to report if it is a:
- Corporation,
- Limited Liability Company (LLC),
- Limited Partnership (LP), or
- Limited Liability Partnership (LLP).
General partnerships and sole proprietorships can be formed without state registration, so they may not need to file.
Exceptions to Reporting
There are 23 exceptions exempting businesses regardless of their formal business structure.
Those exceptions cover financial institutions, financial service providers, investment companies and advisers, government or public utility entities, tax-exempt organizations, large operating companies, and inactive entities.
You will likely know if your entity is any of those categories except one—a large operating company. These types of companies are defined as:
- Having more than 20 full-time employees;
- Who work in the US;
- Have an operating presence at a physical office in the US;
- Filed a federal income tax return showing more than $5,000,000 in gross income;
- Reported its gross income as receipts or sales; and
- At least $5,000,000 was earned in the US.
A company must meet all six requirements to qualify.
What Is Beneficial Ownership Information?
Beneficial ownership information includes:
- The business entity,
- Its beneficial owners, and
- Company applicants.
We explore the definitions of each and what you need to provide below.
Business Entity
The information you must provide about the entity includes:
- Full legal name,
- All trade names or doing business as (DBA) names,
- Current US address,
- Jurisdiction where it was formed, and
- Taxpayer Identification Number (TIN).
The jurisdiction is a state, tribal government, or foreign country. Foreign corporations must include the country and the US state or tribe where the entity was first registered.
Beneficial Owners
Beneficial owners are people who directly or indirectly exercise “substantial control” over a company or own or control at least 25% of the company’s “ownership interests.” There is no maximum number of beneficial owners under these definitions.
Substantial control
Individuals who exercise substantial control over your business typically include:
- Senior officers,
- People with appointment or removal authority over senior officers, and
- Important decision-maker.
Substantial control is broad and can include someone not fitting into these categories. Generally, someone who can affect the company’s operations might have substantial control over it.
Ownership interests
Ownership interests include:
- Equity, stock, or voting rights;
- Capital or profit interests;
- Instruments that can be converted into either of the above; and
- Options or privileges to buy or sell any of the above.
Again, the definition should be read broadly to include any other interests that substantially comprise the entity’s interests.
Exceptions
Individuals are not beneficial owners if they are:
- Minors;
- Nominees, intermediaries, custodians, or agents of the entity;
- Employees of the entity;
- Inheritors with only a future interest in the entity; or
- Creditors of the entity.
Although minors are exempt, you should report information about the parents or legal guardians of any minors who would qualify as beneficial owners.
An employee is someone the entity can control and direct the activities of. This definition includes what should be done and how the employee should do it.
Company Applicants
Only entities formed after the CTA’s effective date need to report company applicants. Company applicants must be individuals, not legal entities. The definition includes direct entity filers and people who direct or control entity filing.
A direct filer is the person who files the paperwork to create or register the company. Every entity will have a direct filer.
A person who directs or controls the filing is the individual primarily responsible for creating the company. Not every entity will have one of these individuals.
Information Needed About Individuals
Once you have identified company applicants and individuals with ownership interests, you have to report information about them, including the individual’s:
- Full legal name,
- Date of birth, and
- Current address.
You must also include an image of a government-issued identity document belonging to the individual. You can submit:
- A US passport;
- A driver’s license; or
- Any other identification issued by a state, tribal, or local government.
You can submit a picture of a foreign passport if you do not have any of these documents.
When Should You Report?
You cannot report your BOI until January 1, 2024. If your entity was formed before January 1, 2024, you have until January 1, 2025 to file.
If your entity is formed on or after January 1, 2024, you should file within 30 of your business becoming active.
How Do You Report?
You report BOI through FinCEN’s online system, where you will create an account and request a FinCEN identifier. The online system does not begin operating until January 1, 2024.
Business Lawyers to Guide You
Our experienced business lawyers can guide you through the filing process established by the Corporate Transparency Act. Small business owners are particularly affected by the act, including law firms like ours.
Contact Massingill today if you have reviewed this article and conclude that your business is likely subject to the CTA.
Where You Can Find Our Austin, TX Office
Joshua Massingill
Joshua Massingill is an attorney practicing in Austin, Texas. He serves on the Texas State Bar’s Law Practice Management Committee, the Leander Educational Excellence Foundation (LEEF) Board of Directors, and the Success-Werx Board of Advisors. He mentors young entrepreneurs in Leander ISD’s INCubatorEDU program and is active in his church.
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