Beginning January 1, 2024, most businesses will be required to report new information on the individuals who directly or indirectly control the company, including its owners, officers and controlling persons. The Corporate Transparency Act, enacted by Congress in 2021, aims to help the U.S. government prevent money laundering through shell companies or obscured business structures. All companies created in or registered to do business in the United States will be subject to these new reporting requirements by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
FinCEN announced on November 29, 2023, that it was amending the beneficial ownership information (BOI) reporting rules. Initially, reporting companies had either 30 days or one year from the effective date (January 1, 2024) to comply with the reporting requirements. Now, a business that’s characterized as a “reporting company” has either 30 days, 90 days, or one year from the January 1, 2024, effective date to comply with the new rules depending on when the entity was formed.
Understanding the CTA
The CTA is intended to reduce exposure to serious crimes, including terrorist financing and other nefarious activities. But it could also open the door to the inspection of family offices, investment angels and other private individuals who’ve generally been shielded from scrutiny in the past.
Reporting companies fall into one of two categories:
- Domestic reporting companies are corporations, LLCs, or any other company created by filing documents with a secretary of state or similar office in the U.S.
- Foreign reporting companies are corporations, LLCs or any other company created in a different country but registered to do business in the U.S. by filing documents with a secretary of state or similar office.
Several types of companies, including banks, credit unions, insurance companies, accounting firms and public utilities, among others, are exempt from the BOI reporting requirements due to the strict regulations required by their industries. If you think you may be exempt from reporting your company’s BOI, you should carefully review FinCEN’s reporting company exemptions, as the penalties for not adhering to these new reporting requirements are significant.
Notably, an exemption was created for a “large operating company” that employs more than 20 employees on a full-time basis, has more than $5 million in gross receipts or sales (not including receipts and sales from foreign sources), and physically operates in the United States.
If an entity initially qualifies for the large operating company exemption but subsequently falls short, it must then file a BOI report. On the other hand, an entity that is not currently exempt can update its status with FinCEN if it later qualifies and obtains an exemption.
Determining Who Is and Isn’t a Beneficial Owner
Domestic and foreign reporting companies will need to report their beneficial owners to FinCEN. A beneficial owner includes someone who directly or indirectly exercises substantial control over the company or owns at least 25% of the company’s interests, including equity, stocks, voting rights, capital, profit interest, etc. Those with substantial control include the following individuals:
- Senior officers;
- Those who have the authority to appoint or remove officers or directors;
- Important business, financial or structural decision-makers;
- Those who hold any other new or unique form of substantial control over the reporting company.
This generally includes individuals who are directly related to ownership interests in the company, but indirect control may also result in classification as a beneficial owner.
Individuals who aren’t treated as beneficial owners of a reporting company under the CTA include:
- Someone acting as a nominee, intermediary, custodian or agent on behalf of a beneficial owner,
- An employee of the reporting company who has substantial control over the entity’s economic benefits because of his or her employment status (but only if the individual isn’t a senior officer of the entity),
- An individual whose only interest in a reporting company is a future interest through a right of inheritance,
- Any creditor of the reporting company (unless the creditor exercises substantial control or has a 25% ownership interest in the reporting company), or
- A minor child.
However, for minor children, the reporting company must report information about each child’s parent or legal guardian.
Defining Company Applicants
The CTA also requires reporting companies to provide identifying information about their company applicants. A company applicant is someone who’s:
- Responsible for filing the documents that created the entity (for a foreign entity, this is the person who directly files the document that first registers the foreign reporting company to conduct business in a state), or
- Primarily responsible for directing or controlling filing of the relevant formation or registration document by another individual.
This rule often encompasses legal personnel acting in a business capacity.
Addressing Other CTA Reporting Requirements
The CTA’s reporting requirements are extensive. Specifically, the report to FinCEN must include the following information:
- The legal name of the entity (or any trade or doing-business-as name),
- The address of the entity,
- The jurisdiction where the entity was formed,
- The entity’s Taxpayer Identification Number, and
- The name, address, date of birth, unique identifying number of each beneficial owner (such as a U.S. passport or state driver’s license number), and an image of the document that contains the identifying number.
The deadline for filing your initial BOI reports depends on the date of your company’s creation or registration:
- Companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial BOI reports.
- Companies created or registered in 2024 will have 90 days to report their initial BOI to FinCEN after receiving official notice or public notice from the secretary of state that their creation or registration is effective.
- Companies created or registered after January 1, 2025, will have 30 days to file their initial BOI reports.
Beneficial ownership information won’t be accepted by FinCEN until the effective date.
After the initial filing, reporting companies have 30 days to file an updated report noting any change to information previously reported. In addition, reporting companies must correct inaccurate information in previously filed reports within 30 days after the date they become aware of the error.
Note that reports filed with FinCEN aren’t available to the general public. However, certain government agencies will have access to the information, including those involved in national security, intelligence and law enforcement, as well as the IRS and U.S. Treasury Department.
What are the penalties for failing to comply with the new reporting rules? An omission or fraudulent report could result in civil fines of $500 a day for as long as the report is missing or remains inaccurate. Failure to comply may also trigger a criminal penalty of a $10,000 fine or even a two-year jail term.
Taking the Next Steps
What should your company do now to ensure compliance? Evaluate your current situation. If you determine that your business must meet these obligations, collect the required information, update and refine internal policies for accurately reporting the data, and establish a system for monitoring the reporting processes. If you have questions about your company’s reporting requirements or need any assistance with BOI filing, we recommend you contact your attorney or legal advisor for help.