Hello, and welcome to my initial column for The Wholesaler magazine. As a matter of introduction, for more than 40 years, I have served as legal counsel to wholesalers, independent sales representatives, manufacturers, distributors and dealers, as well as various trade associations, including the Association of Independent Manufacturers’/Representatives, Inc. and the Manufacturers’ Agents National Association. 

My firm, Schoenberg Finkel Beederman Bell Glazer, is a full-service business law firm located in Chicago and handles a range of legal matters, from routine corporate and commercial issues to complex litigation and mergers and acquisitions. Regardless of the issues presented over my career, however, one thing is always true — a little bit of knowledge and prevention go a long way. 

In that spirit, in this reoccurring column, I’ll offer up my experience by suggesting practical ways to better protect your company against risk, delving into common legal pitfalls in the commercial wholesale industry, and providing timely updates about new laws potentially impacting your business. In addition, I invite you to send me questions or to suggest topics for future columns. With that said, let’s get started.

The Corporate Transparency Act: What Business Owners Need to Know

Maybe it’s me, but nothing rings in the new year quite like a new batch of compliance regulations. Either way, for those of you who didn’t have “analyze and review recent corporate entity regulations” on your 2024 to-do list, allow me to summarize one such new regulation that all business owners need to be aware of: the Corporate Transparency Act (CTA). 

As of Jan. 1, 2024, the CTA requires certain entities to report information about the individuals who own or control the company to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). For most small businesses with relatively simple ownership and operating structures, the CTA’s new reporting requirements will likely not be overly burdensome, but it does present completely new filing requirements and ongoing reporting obligations for your business. 

Additionally, noncompliance can carry stiff penalties (willful noncompliance or fraudulent reporting may result in civil fines accruing at $500 per day or criminal penalties, including imprisonment for up to two years or a fine of up to $10,000), so it is important that you understand and comply with your company’s obligations under the CTA. 

Does my company need to report its beneficial owners?

Companies meeting the definition of a “reporting company” and do not otherwise qualify for an exemption under the CTA must file a Beneficial Ownership Information (BOI) report to FinCEN. Domestic reporting companies are limited liability companies, corporations and any entity created by filing a document with the secretary of state or similar state office or Indian tribe. 

Foreign reporting companies are entities formed under the laws of a foreign country and registered to do business in the United States. Unsurprisingly, the CTA casts an intentionally wide net, and an estimated 30 million entities must submit BOI reports.

Notably, however, not all companies fall under the umbrella of the CTA. The CTA specifically identifies 23 entities that are exempt from its reporting requirements. Exempted entities generally include those already subject to regulatory oversight (e.g., banks, insurance companies, financial advisers, securities brokers and pooled investment companies). 

In addition, certain companies meeting the definition of “inactive entities” or a “large operating company” (which requires, among other criteria, that the entity employs more than 20 full-time employees and reports more than $5 million in sales from U.S. sources) may also qualify for an exemption. 

Who is considered a “beneficial owner” of my company?

If your company is a reporting company under the CTA, the next step is to identify its beneficial owners. Under the CTA, a beneficial owner is any individual who exercises “substantial control” over a reporting company or owns or controls at least 25 percent of the “ownership interest” of a reporting company. The CTA provides exemplary guidance on both tests. An individual exercises substantial control over a reporting company if the individual meets any of four general criteria:

1.    The individual is a senior officer, such as chief executive officer or president;

2.    The individual has the authority to appoint or remove certain officers or a majority of directors;

3.    The individual is an important decision-maker; 

4.    The individual has any other form of substantial control over the reporting company.

Similarly, what constitutes an ownership interest is broadly defined and can include equity, stock, voting rights, capital or profit interests, convertible instruments, options and any other instrument, contract or other mechanism used to establish ownership in a company. 

Companies can (and many will) have multiple beneficial owners. As evidenced by the regulations, however, determining who is considered a beneficial owner is a very fact-specific exercise that will vary depending on each reporting company’s specific ownership details. It will, therefore, be important to identify your company’s beneficial owners well in advance of the relevant reporting deadline. 

What specific information does my company need to report?

In addition to certain identifying information regarding the reporting company, the BOI report requires disclosure of each beneficial owner’s full name, date of birth, residential address and an identifying number, such as a passport number or driver’s license number.

If there is any change to the required information about your company or its beneficial owners, you must update the BOI report within 30 days after the change occurred. Similarly, to the extent you identify any error or inaccuracies in your initial BOI report, you must correct it within 30 days after you became aware of the inaccuracy or had reason to know of it. 

In the event a reporting company inadvertently submits an incorrect initial BOI report, the CTA does provide a limited safe harbor provision allowing corrected reports to be submitted within 90 days of the original submission.

When and how should my company file its initial report?

The deadlines to submit BOI reports differ based on the date a reporting company was formed. Those existing entities formed or registered before Jan. 1, 2024, must submit the BOI report by Jan. 1, 2025, while new entities formed on or after Jan. 1, 2024 (and before Jan. 1, 2025) must submit the report within 90 days of registering with the secretary of state or similar office. For all new entities formed on or after Jan. 1, 2025, reports must be submitted within 30 days.

Filings are made electronically through FinCEN’s secure filing system called the Beneficial Owner Secure System (BOSS), which went live on Jan. 1, 2024. FinCEN identifier numbers will be available upon request by submitting the same information that must be reported in a BOI report. Reporting companies may then use an individual’s FinCEN identifier number in lieu of the information required in the BOI report. 

BOI reports submitted to the BOSS must be verified as true, correct and complete.

What can my company do to ensure compliance with the CTA?

The extent of procedures necessary to ensure compliance under the CTA will ultimately depend on each reporting company’s individual ownership and operating structures. 

At a minimum, however, companies subject to the CTA’s reporting requirements should consider designating an individual responsible for compiling beneficial owner information and submitting BOI reports, as well as establishing systems and protocols enabling timely notification of any change in its beneficial owners’ required information. 

For additional guidance, FinCEN has several published resources, including a frequently asked questions page and a compliance guide, available via its website to help reporting companies understand the new obligations created by the CTA.