In 2024, millions of businesses in the United States will be faced with a new and unprecedented obligation to report information regarding their beneficial owners to the federal government under the Corporate Transparency Act. Read on for more information about the Corporate Transparency Act, how it will impact clean energy project developers and startup companies, and key considerations for what to do next.
CORPORATE TRANSPARENCY ACT: THE BASICS
The Corporate Transparency Act, or CTA, was enacted in 2021 with the goal of fighting money laundering, terrorism and financial crimes by requiring companies to disclose detailed information about the individuals who own or control them. Beginning in 2024, most private companies formed or registered to do business in the United States will be required to report information regarding their beneficial owners – that is, any individual who exercises substantial control over the business or has an ownership interest greater than 25%. This information will be reported to FinCEN, a bureau of the U.S. Department of the Treasury, but will also be accessible to certain U.S. and foreign government officials. Financial institutions may also be able to access this information with a company’s consent. (This article will use “formed” to refer to formation and registration.)
Who has to report beneficial ownership information?
Any “reporting company” that does not qualify for an exemption will be required to report its beneficial ownership information, or BOI, to FinCEN. A domestic reporting company is any corporation, LLC, or other entity created by filing a document with a secretary of state or similar office in the United States, and a foreign reporting company is a non-U.S. company that has registered to do business in the United States.
The CTA includes 23 specific exemptions from the obligations of a “reporting company.” FinCEN’s Small Entity Compliance Guide includes a checklist detailing the requirements for each exemption, which companies should review carefully to determine whether they qualify. The majority of exemptions cover companies that are already subject to significant reporting requirements, such as publicly-traded companies, banks, investment advisors, utilities, and venture capital funds. Other notable exemptions include:
- Large operating companies are exempt from CTA reporting obligations if, among other things, they employ more than 20 full-time employees in the United States, have a physical office within the United States, and had more than $5 million in gross receipts or sales from U.S. sources in the previous year.
- Certain charitable and/or tax-exempt entities under Section 501 of the Internal Revenue Code, including charities, schools, and churches, are exempt from CTA reporting requirements. Exemptions are also available for certain political organizations, charitable trusts and organizations that operate exclusively to assist a tax-exempt entity.
- Subsidiaries of most exempt entities are themselves exempt from CTA reporting requirements. Note, however, that subsidiaries of certain exempt entities, such as money transmitting businesses, pooled investment vehicles, entities assisting a tax-exempt entity, and inactive entities are not exempt.
What information needs to be reported?
Companies must report information about the company as well as personal information about the company’s individual “beneficial owners,” which means any individual who directly or indirectly exercises substantial control over the reporting company, or owns or controls at least 25% of the ownership interests of the reporting company. “Substantial control” and “ownership interests” are both broadly defined. Companies should carefully review FinCEN’s Small Entity Compliance Guide for more information on how to determine beneficial ownership as well as certain exemptions.
Entities formed in the United States on or after January 1, 2024 will also need to report information regarding at least one “company applicant,” which means the person who directly files the document creating or registering the company, and, if more than one person was involved in the filing, the individual who was primarily responsible for directing or controlling the filing.
Individuals who don’t want to provide their personal information to a reporting company may provide a FinCEN identifier instead. A FinCEN identifier is a unique ID number that an individual will be able to obtain from FinCEN by providing the same personal information that would be required in a BOI report.
Filing Deadlines and Penalties
Companies looking to get a head start on their filings will need to wait until the new year. FinCEN is developing an online BOI filing system that it says will be accessible by January 1, 2024, but it will not accept filings prior to that date.
The deadline for a company’s first BOI report depends on when the company first formed in the United States. Companies formed prior to January 1, 2024 will have until January 1, 2025 – a full year – to complete their first filing. However, companies formed in 2024 will need to file within 90 days after forming, and companies formed on or after January 1, 2025 will have only 30 days after forming to file. After a company files its initial BOI report, it has on ongoing obligation to file an updated report within 30 days any time the information in the report changes – for example, if the company gets a new beneficial owner, or if one of its existing beneficial owners has a new address.
If an inaccuracy is identified in a previously filed report, the company has 30 days to file an updated report to correct the error. As long as any errors or omissions are corrected within 90 days of the deadline for the initial report, there will be no penalty. Willful violations of the CTA may lead to criminal or civil penalties, including fines of up to $10,000 and/or imprisonment for up to two years.
SPECIAL CONSIDERATIONS FOR CLEAN ENERGY COMPANIES
Clean Energy Project Developers
Clean energy project developers often have a tangled corporate family tree, with each separate solar, wind, battery or other project assigned to its own separate project company, and potentially additional layers of entities in between. Unfortunately, the CTA does not permit a parent company to submit a single aggregate filing covering all of its subsidiaries. Each entity will require its own beneficial ownership analysis and its own separate filing. Clean energy developers, and indeed any company with a complex organizational structure, should begin this analysis as soon as possible. Additionally, developers that expect to form a project company in the near term should consider doing so prior to December 31, 2023 so these new subsidiaries enjoy a more generous January 1, 2025 compliance deadline.
Of course, if the parent company qualifies for a reporting exemption itself, perhaps by meeting the requirements of a “large operating company,” then its subsidiaries would also likely be exempt. The parent company is permitted to aggregate gross receipts or sales across entities to meet the $5 million minimum for the large operating company exemption but cannot aggregate employees across entities for purposes of meeting the 20-employee minimum.
Startup Companies
Startups founders often have enough on their plates without also having to navigate an unfamiliar disclosure regime. Unfortunately, however, most new startup companies will be unable to qualify for an exemption prior to the post-formation reporting deadline. For example, even if an early-stage startup grew rapidly enough to qualify for the large operating company exemption by virtue of its employee headcount and gross sales – which is a tall order – the exemption would not be available until the company has filed at least one annual tax return. Startups should prepare for their initial BOI filing as part of the incorporation process.
Young companies should also be mindful of their obligation to update their BOI report over time as their business evolves. The company’s beneficial owners are likely to change over time as new senior officers are hired, new directors are added to the board, and new investors are added to the cap table. Any change to previously reported information about the company or its beneficial owners will trigger the need to file an updated BOI report within 30 days of the change. This is something to pay particular attention to when fundraising, as FinCEN’s expansive definition of “ownership interest” includes options and convertible securities in addition to stock. This means that popular early-stage financing vehicles like SAFEs or convertible notes will need to be factored into the beneficial ownership calculation, even though they may never ultimately convert into stock (and if they do, the number of shares they will convert into is typically unknown at the time of the financing). Companies can look to FinCEN’s Small Entity Compliance Guide for detailed guidance on calculating beneficial ownership.
KEY NEXT STEPS
- Be mindful of reporting timelines. If you have near-term plans to form or register a business, consider doing so before December 31, 2023 if possible to give the company more time to comply with CTA requirements.
- Familiarize yourself with Corporate Transparency Act requirements and how they will affect your business. Determine with respect to each entity in your ownership structure whether it is a reporting company and whether an exemption applies. Any reporting company that does not qualify for an exemption will need to determine who its beneficial owners are and reach out to begin gathering the requisite information. Keep in mind that “beneficial owners” includes persons who don’t own any equity in the company but have substantial control, such as a CEO, CFO or COO and certain board members, even if they don't own any equity in the company.
- Develop internal compliance policies and best practices. Companies should ensure they have secure systems for obtaining and storing sensitive personal information, and develop internal controls to identify in a timely fashion when updates to the company’s prior BOI reports are required. Reporting companies, beneficial owners and repeat company applicants may want to apply for FinCEN identifiers to ease their ongoing reporting obligations.
- Watch out for fraud! FinCEN has reported recent fraudulent email attempts to solicit information from individuals and entities who may be subject to CTA reporting requirements. FinCEN does not send unsolicited requests and emails. If you receive a potentially fraudulent email, do not respond, and do not click on any links or scan any QR codes. FinCEN has not launched its BOI reporting system yet, and no reports can be submitted prior to January 1, 2024.
- Keep an eye out for more updates. Corporate Transparency Act regulations are continuing to evolve, and some rulemakings have yet to be finalized. You can find more information about the Corporate Transparency Act and sign up for updates on the FinCEN website.
- Seek guidance as appropriate. Should you have questions or need support in complying with the CTA reporting requirements, don’t hesitate to reach out to counsel or other appropriate advisors. In addition to laws firms, many resident agent service platforms and equity management platforms are rolling out CTA compliance services.
FURTHER INFORMATION
For further information about these matters, please contact Sam Rothberg at srothberg@klavenslawgroup.com, Frans Wethly at fwethly@klavenslawgroup.com or Jonathan Klavens at jklavens@klavenslawgroup.com.
DISCLAIMER
This document, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Klavens Law Group, P.C. or its attorneys. Please seek the services of a competent professional if you need legal or other professional assistance.
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