The Corporate Transparency Act (CTA) became effective on January 1, 2024, and will undoubtedly cause difficulties for many startup companies.
The upshot is almost all new companies formed will have to file beneficial ownership reports with FinCEN (the Financial Crimes Enforcement Network, which is a bureau of the US Treasury Department).
There are exemptions, such as (a) entities registered with the SEC, (b) large operating companies with (i) more than $5M in top line revenue, (ii) more than 20 full-time employees, and (iii) a US office, (c) tax exempt entities, (d) certain participants in the investment funds industry, (e) subsidiaries of certain exempt entities, and (f) inactive companies, among others. See a list of 23 exemptions here: https://www.fincen.gov/boi-faqs#C_2. Unfortunately, these exemptions likely will not apply to new tech startup companies.
So, what do you have to do?
If you formed your company before 2024, you must file your first beneficial ownership report with FinCEN by January 1, 2025.
What do you have to file with the FinCEN database? Some basic information about the company and, for each “beneficial owner,” the following information:
- full legal name,
- residential address,
- date of birth,
- number from an unexpired passport, state ID or driver’s license, and
- a photocopy of the above instrument.
A “beneficial owner” is any individual who exercises substantial control over the company (e.g., a director, a senior officer), or who owns or controls 25% or more of the company’s ownership interest (including such owner’s spouse if they live in a community property state).
For companies formed during 2024, there is a 90-day window from the formation date to file the initial report. For companies formed on or after January 1, 2025, the window reduces to 30 days. In addition to the basic information about the company and each “beneficial owner,” the initial report for such a new company must include the FinCEN number or FinCEN information for the filing agent and the individual who signed the charter document (e.g., Certificate of Incorporation). Such individual may be referred to as the “incorporator” or “organizer” on such charter document.
What are your ongoing obligations?
After filing the initial report, companies will have to update the FinCEN database within 30 days of any information becoming outdated.
So, for example, you will have to update the database if any of the following events occur:
- the company issues shares to someone who, as a result of such issuance, owns 25% or more of the company’s ownership interest,
- the company appoints a director or senior officer, or
- a director or senior officer resigns.
Companies need to adopt technology tools or practices that confirm the continued accuracy of the information on FinCEN database every 30 days as well as ensure continued compliance with the CTA.
A practical note: If your company was formed before 2024, consider delaying the initial report until later in the year (e.g., Q4) to avoid an early start to the 30-day update cycle. There is no reason to start that sooner rather than later as doing so will require you to adopt a reminder system to ensure continued compliance.
Looking for more information?
Here are some helpful resources for your reference:
Regulations: 31 CFR 1010.380 (excerpt from Beneficial Ownership information Reporting Requirements Final Rule)
BOI Small Entity Compliance Guide: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf
FinCEN BOI E-Filing System: https://www.fincen.gov/boi
Everything An Angel Investor Should Know About The Corporate Transparency Act: https://www.angelcapitalassociation.org/blog/corporate-transparency-act/
Do not hesitate to contact us if you have any questions.