Understanding the Corporate Transparency Act:
The CTA aims to crack down on illicit financial activities by improving transparency around corporate ownership. It mandates reporting companies to file Beneficial Ownership Information (BOI) reports with The Financial Crimes Enforcement Network (FinCEN), revealing the identities and certain details of individuals who directly or indirectly own or control at least 25% of the company or who exercise substantial control over it.
Several guidelines and a few exemptions apply to companies required to report BOI to FinCEN. These are known as reporting companies:
Domestic reporting companies are corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or similar office in the United States.
Foreign reporting companies are entities, including corporations and limited liability companies, formed under the law of a foreign country and registered by the filing of a document with a secretary of state (or similar office) to do business in the United States.
As of this publication, there are 23 exempted entities not required to file a BOI report. The full list can be found on the FinCEN website, but it includes nonprofits, large operating companies, banks, and insurance companies.
What to include in a Beneficial Ownership Information (BOI) report
Simply put, beneficial ownership information is any identifying information about individuals who directly or indirectly own or control a company.
A beneficial owner has substantial control over the reporting company (i.e. President, CFO, General Counsel, etc.), or owns or controls at least 25% of the reporting company’s ownership interests.
When filing a BOI report, reporting companies must include, for all qualified individuals, names and addresses, date of birth, and an ID number from an acceptable document such as a passport or U.S. driver’s license.
All filing takes place online via the BOI E-Filing System. There are a few deadlines to be aware of, but one we want to highlight is if you are a reporting company and existed before January 1, 2024, you must file your BOI report by January 1, 2025.
In our coverage of ASC 718, we acknowledged how companies adhere to guidelines, required or not, as a transparent way to stay as compliant as possible.
While failure to comply with the CTA could have legal ramifications and penalties, we understand the complexities of managing equity data and the challenges of navigating new regulations. This can be a heavy burden especially when using Excel spreadsheets or software not tailored to your specific processes.
The CTA undoubtedly introduces a new layer of complexity for private businesses. However, it also presents an opportunity to enhance transparency, governance, and accountability.
Having the right tools in place can help streamline data collection, automate reports, and track changes in real time. Implementing cap table and equity management solutions is crucial for maintaining clean data and transparent views into ownership for effective compliance and sound strategic decision-making.
If you are looking for more efficient ways to manage your cap table and improve compliance standards, Nth Round is here to help!
This blog post is for informational purposes only and should not be construed as legal advice. Please consult with your legal counsel for specific guidance on the CTA and its applicability to your company.