Silicon Valley Legal Bible(23)Corporate Transparency Act

Many of you have likely received notices from your lawyers or accountants about a new U.S. law—the Corporate Transparency Act (CTA)—requiring companies to disclose beneficial ownership information (BOI). Some refer to it as the FinCEN Rule, but what exactly is this law? Who must comply? What are the penalties for non-compliance? Let’s break it down.

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1. What is the Corporate Transparency Act (CTA)?

• Why CTA and FinCEN? Some people refer to the Corporate Transparency Act as CTA, which is straightforward as it's the acronym of Corporate Transparency Act. Others call it FinCEN because the act is issued by the Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury. Under the act, all US companies must disclose their Beneficial Ownership Information (BOI) to FinCEN.

  2.What is BOI?

• BOI refers to Beneficial Ownership Information, which identifies the natural persons who exercise "substantial control" over the company. In terms of company governance levels, shareholders, directors, and officers are involved:

• For shareholders, those holding 25% or more of the shares, directly or indirectly, are considered beneficiaries.

• For directors and officers, all of them are seen as having actual control over the company.

• This BOI, or the information about beneficiaries or controllers, has a wide impact.

  3.Which Companies Need to Report?

  When it comes to which companies need to report, generally all SMEs do. But let's focus on which companies are exempt. There's a list of such companies, divided into three categories.

3.1 Exemptions for Large Enterprises

The first type is the exemption for large enterprises. Let's take a look at what qualifies as a large enterprise:

• Having more than twenty full-time employees within the United States. Note that these must be full-time employees. Let's assume an average annual salary of $100,000 per employee. To employ over twenty full-time staff, a company would spend at least $2 million on salaries alone each year. For a company at this level, it would be embarrassing to claim annual revenue of less than tens of millions of dollars.

• Annual revenue exceeding $5 million. As we just mentioned, the salary requirement alone likely forces the company to have an estimated revenue of at least tens of millions. So, $5 million is not a problem.

• Having a physical address, warehouse, office, etc. within the United States and conducting actual operations on-site. Note that the office here does not include shared offices, such as WeWork.

After looking at these criteria for so-called large enterprises, I think most people, like me, would realize that they will never reach this level in their lifetime. So, they just honestly file the declaration.

3.2 Exemptions for Financial Institutions

The second type is the exemption for financial institutions. You will see many financial institutions on the list. Why can these financial institutions be exempt from reporting? Because these institutions have already disclosed information in accordance with the requirements of the Sarbanes-Oxley Act of 2002, so they do not need to disclose again.

3.3 Exemptions for Inactive Entities

What is an inactive entity? It needs to meet the following conditions:

• Established before January 1, 2020.

• Never engaged in active business.

• The entity is directly or indirectly controlled by a U.S. person (note this point: if the actual controller is not a U.S. person, then even if it is inactive, it still needs to report).

• No change in ownership in the past twelve months.

• No receipt of more than $1,000 directly or indirectly in the past twelve months (which is a very small amount, not even covering a month's rent for an office in the U.S.).

• No assets held, including ownership interests in other entities (in other words, you can't say that although there is no cash flow in the bank account, the company owns a house worth millions of dollars).

4. When is Reporting Required?

• For companies established before 2024, reporting must be completed by the end of 2024.

• For companies established within 2024, report within ninety days of registration.

• For companies established after 2025, report within thirty days of registration.

• If there are updates to the reported information, the reporting entity must update FinCEN within thirty days of the change.

5. Consequences of Not Reporting

I know you're most concerned about the consequences of not reporting and whether there are any loopholes. If you fail to report, the declarant may face administrative penalties of up to five hundred dollars per day, and criminal penalties of up to a ten thousand dollar fine or/and up to two years' imprisonment.

6. Does Reporting Mean Shareholder Information is Disclosed?

As previously mentioned in many videos, the shareholders of U.S. companies are not publicly registered. Does the Corporate Transparency Act change this? The answer is no. Why? Information reported under the Corporate Transparency Act is stored in the Financial Crimes Enforcement Network (FinCEN) National Registry. It's like filing taxes in the U.S. — once submitted, it's a dead end. It's not available for public viewing. As I mentioned before, "registration" and "disclosure" are not the same thing. Registration does not mean the information is publicly accessible.

The Silicon Valley Bible - Chapter 42, a legal encyclopedia tailored for founders. I'm Liu Xiaoxiao, an American attorney. See you next time!