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TRANSCRIPT
Greg Corombos: I'm Greg Corombos. Our guest in this edition of Expert Insights is George May, Vice President, Small Business, for CT Corporation, a Wolters Kluwer company. This is one in a series of podcasts focusing on the Corporate Transparency Act. CT Corporation has received hundreds of questions from customers on the Corporate Transparency Act's implications. And during today's podcast, George will focus on what startups need to consider as it relates to the Corporate Transparency Act and what challenges they may face. And George, thank you so much for being here. I'm looking forward to giving our startup business leaders some really good advice today.
George May: Thanks very much, Greg, I'm very pleased that I could have the chance to join you. And you're correct. As of January 1 of this year, millions of startups and small businesses are faced with the obligation to file a beneficial ownership information report. BOI is the shortcut that most people refer to it as. And this is in conjunction with the United States Department Treasury's Financial Crimes Enforcement Network. FinCEN for short. So there will be some acronyms to master as a part of this topic. The Corporate Transparency Act, which is the CTA in the current lingo, is meant to gather additional information about the ownership of entities engaging or operating in the US market. And this allows the FinCEN organization to try to combat illicit activities such as money laundering, tax evasion, and other federal crimes. So that's the purpose of it. The legislation was enacted in 2021 and is just now effective here as of January 1 of this year.
Greg Corombos: George, does the CTA apply to all entities?
George May: No, actually not at all. There's a lengthy list of exemptions that apply to the CTA that don't have to file. Those fall very broadly into a couple of different categories. So, for example, banks and venture capital advisors, brokers or dealers and securities, money services businesses. These are generally very highly regulated organizations already. So even if they're smaller, and even if they fit under sort of the ceiling of reporting for BOI, they tend to be already exempt because they're already heavily regulated and their owners are known. Likewise, things like accounting firms, public utilities, they're also exempted. So are nonprofits of various kinds. So there's a lengthy list of exceptions that do apply.
When we're talking about those that do have to file, generally speaking, the rule of thumb you want to use is if you have created an entity — an LLC, a corporation, an S corp, whatever the corporate formation is that you've used with a Secretary of State in one of the states of the United States — then you would definitely be among those that would have to consider filing. There are other exceptions. If the organization is larger than $5 million dollars and so forth, or employs more than a certain number of people, there are also exemptions for that. But generally speaking, a lot of these smaller businesses are going to have to comply. So that's, that's kind of the lay of the land out there.
Greg Corombos: All right, then let's talk about some of the challenges that startups in particular should address when complying with BOI reporting requirements. Where do you start there?
George May: Well, there's a lot to think about there. So we'll kind of take it in categories. The first thing that the BOI requirement would make people aware of is that it's not just a question of ownership. Ownership does count as something towards your filing. So if you own 25%, or more of the interest in the entity, then you do have to be one of the beneficial owners whose personal information has to be captured and filed with the government. But startups have a significant challenge with regard to that, because ownership structures and startups tend to be significantly different than they are in similar kinds of organizations. So if you owned a bike shop or a hairdressing shop in one particular jurisdiction, and you're the sole owner, that's not a very complex sort of filing, and that sort of thing could be taken care of pretty readily. Startups have other challenges, though. And so they come into both the ownership and the sort of direction-related topics. On ownership, they have to be vigilant with changes of ownership. So as startups raise more money, as they take on additional financing, the ownership structure likely changes. You take a look at the cap table, and you'll certainly notice that there will be different percentages of ownership. And as new funding is brought on board, that percentage is certainly going to change. And we'll talk more about that, I'm sure, as the conversation unfolds. But those changes in ownership can trigger initial filings for certain owners or amended filings for existing owners depending on what it is that's happening.
The other thing that they need to be aware of is the fact that it isn't just percentage of ownership that matters as to whether or not your information has to be supplied. If you are also involved in directing the activities of the entity, even if you don't have an ownership position at all, you would also have to file. So if you're a company president or your CEO, or a CFO, someone who directs daily operations of the organization and can steer, those are the kinds of things that would also require a filing on that person's part. So that's one very broad set of considerations.
The other also has to do with data-protection-related considerations. Startups should definitely be considering how they'll protect the personal information of the people they have to collect and report from. Commercial providers like ourselves try to make that a good deal simpler by providing the person who's organizing the filing [with] the ability to reach out through our application, to gather the information, and have that uploaded by the person whose information it actually is, versus having highly sensitive personal information flying around in emails or anything like that, which a lot of folks aren't going to want to see happen. So how you gather the information — and doing it securely, making sure it's not sitting in some place that's easily accessible — is something I think that startup owners, and participants definitely need to be aware of. Some of the information that CT requires is deeply personal information, like the beneficial owner's name, the date of birth, home address, a passport or driver's license number, copies and images of those documents. So when we say that the information is sensitive, it's that kind of sensitive, sensitive information that we're actually talking about.
Greg Corombos: Stuff you don't want the general public to have access to. So you have to be vigilant in how you protect it. And George, you gave so much good information there. But I want to follow up on a couple of really critical points that you just mentioned in your last response. So as I understand it, from what you just said, and from what I've learned from your colleagues earlier in this series, a beneficial owner of a reporting company — as any entity required to file a BOI report is called — is defined as any individual who directly or indirectly either exercises substantial control over a reporting company or owns or controls at least 25% of the reporting company's ownership interests. Can you share any more information about that?
George May: We certainly can. So when you're defining the beneficial owner based on substantial control, this is the sort of non-ownership part of it. Substantial control is defined very broadly in FinCEN’s guidance. So an individual exercises substantial control if they're a senior officer of the kind that I mentioned a little bit ago, if they have the authority to appoint or remove senior officers. So if they're participating as a board member, or participating in some other mechanism of oversight, some other sort of similar governing body. If you have the ability to choose who the leaders of the entity are, well then you also have substantial control. Or some other sort of important decision maker that you can name. There are many other kinds of substantial control. Those are explained in FinCEN’s small entity compliance guide. And there are a variety of online resources that are available from our company as well that would help people to discover what that's really all about. Substantial control can be exercised directly or indirectly. So sometimes entities own other entities. And so if you're only looking at the subsequent entity, you might think that a person is not involved. And in fact, they have a leadership position or a beneficial ownership sort of position with the parent entity, in which case, that means they also have to file for the subsequent.
As far as the 25% ownership rule is concerned, that gets a good deal more complex, as I mentioned, with startup companies having to do with the way that they raise funds and the way their ownership structures can change. And so when you think about that, here are some of those complexities when you calculate the percentage of ownership interests, whether they're held directly or indirectly by individuals, that's what you have to come to, to figure out who owns at least 25%, or controls at least 25%. And if you are calculating the diluted equity of a startup, the reporting company has to take into account the total number of shares that would be outstanding if all of the derivative instruments — and by that we mean stock options, convertible debt, any of the other sort of financing needs that you see for startups — all of those would have to be exercised and then calculated to figure out if you're actually at the 25% mark at all. So you have to count all of those as part of the ownership structure, even if they haven't been exercised yet. And because those ownership interests can change, it's important to keep track of the information reported on the initial BOI filing and update it whenever there's a change in terms of who owns or who controls at least 25%. We do an awfully good job in our suite of services of holding your BOI information securely, so that if you have to have an amendment, if something is changing in your ownership structure or your financing structure, you can come to us very quickly and get an amendment filed. Amendments typically are due to FinCEN within 30 days of the change that provoked them. As far as direct or indirect ownership is concerned, it's very similar in terms of how you assess with substantial control. And the individual can have that, as I mentioned, direct or indirect ownership or control over a reporting company through various means. It could be joint ownership representation by another individual. There's a lot of research taking place right now about trusts or similar arrangements. There are trusts that people can find that do not involve the creation of a corporate entity, and therefore they would not require a filing. But many do. Many actually create entities with Secretaries of States in trust situations, and those would also require filings.
Greg Corombos: George, as you mentioned earlier, startups must consider data privacy and privacy considerations in general, when fulfilling their beneficial ownership information reporting requirements. What other details can you provide about that?
George May: You're absolutely right. The reporting companies have to provide personally identifiable information or PII, as people like to refer to it, about all of that company's beneficial owners in the BOI report. And that means that when you're submitting this information, you have to make sure that it's always stored in a place that's absolutely secure and protected. That's what we do in our suite of services. And as I mentioned before, [they] make it easy for you to return to it securely in case you have to file an amendment or change. The PII about the company applicant or applicants is all of the sensitive information I mentioned before, including things like passport and driver's license images. And then the PII about the company applicant or applicants — that is the individual who directly files the document that creates the domestic reporting company. And if there's more than one individual involved, the individual primarily responsible for directing or controlling the filing is also required for reporting companies created on or after January 1 of 2024. So those are some of the filing requirements that people are facing.
Greg Corombos: Let’s talk about compliance briefly. How important is it to remain compliant with the CTA and the BOI reporting?
George May: Well, the government is very much serious about this. There are significant penalties including jail time that would apply to noncompliance. At this point in time, there are some active court cases that we are monitoring very carefully. At least three different jurisdictions. There have been lawsuits filed trying to overturn the CTA. The government is already filing its responses to those lawsuits. There has also been some action in Congress here earlier this year. Legislation introduced to perhaps overturn the CTA. I don't think that there's much of a chance of that legislation advancing in the current political environment. And so I would expect at this point that the CTA would continue to apply to anyone who has an entity that isn't an exception. Without exception, we advise our clients to go ahead and file and take care of their obligation here. If you created an entity prior to January 1 of 2024, you have the balance of the year 2024, to complete your initial filing. If you created a new entity, January 1 or later of 2024, you have 90 days to comply with that new entity. And then, as I mentioned, 30 days for any substantive change for a filing that's already been made. So we advise our clients to meet these obligations. I don't think anyone should be relying on court cases or wranglings in the legal world to relieve them of the obligation. So we always advise our clients to file.
Greg Corombos: George, you've offered us so much helpful information today. Anything else you wanted to mention, before we close?
George May: This is a confusing area to navigate. I think a lot of people have questions, we've done some surveying of the market. And we find that a great many people who are subject to the filing obligation are, as yet, unaware of the fact that they face it. So general awareness has to rise quite a lot. And we're doing our best with our own content, webinars and so forth to inform clients and folks who are new to us about what this means and how they should approach it. Anyone who would like to make use of our online resources, and we have some very extensive ones, can go to ctcorporation.com. And you'll find that beneficial ownership as a topic is one of the main banner topics. And if you click on any of those resources, you can be directed through a whole bunch of information, helping you understand what it is that you might need to do. We even have an online quiz available where people can go through, answer the questions, and find out if they're exempt or if they're not and what their next obligation would be. So we do our very best to get clients educated about this sort of thing and make sure that they hit the mark.
Greg Corombos: Fantastic. Well, George, as you've already explained very well, leaders of startups have a lot of plates spinning at the same time. And I know they appreciate additional clarity on how they need to comply with the reporting requirements of the Corporate Transparency Act. So thank you very much for your time and your insights today.
George May: Greg, thanks very much for having me on.
Greg Corombos: George May, Vice President, Small Business for CT Corporation, a Wolters Kluwer company. I'm Greg Corombos, reporting for Expert insights. For more information on this subject, please visit ctcorporation.com.
