Effective as of January 1, 2024, Congress implemented the Corporate Transparency Act (CTA) for the purpose of providing for the collection of beneficial ownership information (BOI) for corporations, limited liability companies, and other similar entities formed under the laws of the United States. The primary objective of the CTA is to establish a database of BOI that will be highly useful in combatting money laundering, tax fraud, terrorist financing, and other abuse of shell and front companies by criminals, corrupt officials, and other bad actors.
I. What is required of the CTA?
Under the CTA, businesses must report information about their beneficial owners to the Financial Crimes Enforcement Network of the Department of the Treasury (FinCEN) pursuant to Section 6403 of the CTA. FinCEN promulgated regulations which reflect FinCEN’s understanding of the critical need for the highest standard of security and confidentiality protocols to maintain confidence in the U.S. Government’s ability to protect sensitive information while achieving the objective of the CTA (See 31 CFR 1010.380).
You can find FinCEN’s BOI reporting page here:
https://www.fincen.gov/boi.
You can find FinCEN’s final regulations implementing the CTA’s reporting requirements here:
https://www.ecfr.gov/current/title-31/subtitle-B/chapter-X/part-1010/subpart-C/section-1010.380.
II. Does my company have to report its beneficial owners?
The CTA requires a company file BOI reports with the FinCEN if the company does not qualify for exemption and is either a domestic reporting company or a foreign reporting company. Absent exemption, a company is required to file a BOI report if the company is a corporation, limited liability company, or other company created or registered to do business in any U.S. State or Tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.
An entity is exempt from the reporting requirement if the company qualifies for one of the following 23 exemptions set forth in the CTA and the final regulations implementing the reporting requirements, all of which are more specifically detailed in 31 CFR 1010.380(c)(2):
- Securities reporting issuer
- Governmental authority
- Bank
- Credit union
- Depository institution holding company
- Money services business
- Broker or dealer in securities
- Securities exchange or clearing agency
- Other Exchange Act registered entity
- Investment company or investment adviser
- Venture capital fund advisor
- Insurance company
- State-licensed insurance producer
- Commodity Exchange Act registered entity
- Accounting Firm
- Public utility
- Financial market utility
- Pooled investment vehicle (see special rule at 31 CFR 1010.380(b)(2)(iii))
- Tax-exempt entity
- Entity assisting a tax-exempt entity
- Large operating company
Must:
(i) employ more than 20 full-time employees (generally working 30 service hours per week);
(ii) maintain an operating presence at a physical office within the U.S. that is not shared other than with the reporting company’s affiliates; and
(iii) have filed a prior year federal income tax return reporting over $5 million in gross receipts or sales. For entities filing consolidated returns, the entities must use the amount reported on the consolidated return for the group. - Subsidiary of certain exempt entities (see special rule at 31 CFR 1010.380(b)(2)(i))
- Inactive entity
Must:
(i) Be in existence on or before January 1, 2020;
(ii) Not be engage in active business;
(iii) Not be owned by a foreign person, whether directly or indirectly, wholly or partially. “Foreign person” means a person who is not a United States person. A United States person is defined in section 7701(a)(30) of the Internal Revenue Code of 1986 as a citizen or resident of the United States, domestic partnership and corporation, and other estates and trusts.
(iv) Not have experienced any change in ownership in the preceding twelve-month period;
(v) Not have sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding twelve-month period; and
(vi) Not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.
*Even if a reporting company is dissolved on or after January 1, 2024, it is required to file a BOI report with the FinCEN as it became subject to the CTA’s reporting requirements during its existence.
III. Who is a beneficial owner of my company?
If the company is a reporting company and does not qualify for an exemption, the company is required to file a BOI report identifying its beneficial owners and the company’s applicant. A “beneficial owner” is any individual who, directly or indirectly, (i) exercises substantial control over a reporting company, or (ii) owns or controls at least 25% of the ownership interests of the reporting company.
With respect to the exercises substantial control test, there is no limit to the number of individuals who can be reported. An individual exercises substantial control over a reporting company if the individual meets any of the following criteria:
- The individual is a senior officer (e.g., president, Chief Executive Officer, Chief Financial Officer, General Counsel, or the like);
- The individual has authority to appoint or remove certain officers or a majority of directors of the reporting company;
- The individual is an important decision-maker (e.g., directs, determines, or substantially influences the reporting company’s business, finances, or structure); or
- The individual has any other form of substantial control over the reporting company.
With respect to the ownership interest test, any of the following can be an ownership interest: equity, stock, or voting rights; a capital or profits interest; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership (see 31 CFR 1010.380(d)(2)(a)(i)). An individual may directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding, relationship, or otherwise, including (i) joint ownership, (ii) through another individual, (iii) a trustee or other individual with the authority to dispose of trust assets, and (iv) certain trust beneficiaries.
There are, however, exceptions to who constitutes a “beneficial owner” for reporting purposes. That is, a/an (i) minor child, provided the required information about the minor child’s parent or legal guardian is provided, (ii) individual acting as a nominee, intermediary, custodian, or agent on behalf of such individual, (iii) employee of the reporting company (who is not a senior officer), (iv) individual whose only interest is a future interest through a right of inheritance, or (v) creditor of the reporting company.
There are many instances in which it can be difficult to determine an individual’s ownership interest in a reporting company based on the guidelines promulgated in the final regulations, and so it may be wise to seek appropriate guidance to avoid potential penalty assessments for submitting inaccurate information. If it is unclear whether an individual has or exercises substantial control, we should err on the side of caution and report those individuals who may be a beneficial owner.
IV. Who is my company applicant?
A company’s applicant is the individual who directly files or is primarily responsible for the filing of the document that creates or registers the company. However, not all reporting companies are required to report their company applicants to FinCEN.
If the reporting company (foreign or domestic) was created before January 1, 2024, the reporting company is not required to list its company applicant(s). If the reporting company was created on or after January 1, 2024, the reporting company is required to list its company applicant(s). The company applicant must be an individual who either filed the document organizing the reporting company or who directed or controlled the filing action, but in no event more than 2 company applicants shall be reported.
V. What specific information does my company need to report?
The following information about the reporting company and its beneficial owners is required to be collected and reflected in the reporting company’s BOI report:
- Reporting Company:
(i) Full legal name
(ii) Any trade name or “doing business as” name
(iii) Current U.S. principal place of business
(iv) Jurisdiction of formation (i.e., the jurisdiction in which the reporting company was organized)
(v) Taxpayer identification number (including an Employer Identification Number (EIN) - Each Beneficial Owner and Company Applicant:
(i) Full legal name
(ii) Date of birth
(iii) Current residential address (business address for company applicants who form or register a company in the course of their business)
(iv) Unique identifying number (e.g., driver’s license number), issuing jurisdiction, and image of, one of the following: (i) U.S. passport, (ii) State driver’s license, (iii) identification document issued by a state, local government, or tribe, or (iv) if an individual does not have any of the foregoing, a foreign passport.
An individual may obtain a FinCEN identifier number by creating an account using the following link: https://fincenid.fincen.gov/landing. An individual who has obtained a FinCEN identifier may provide the same to the reporting company and the reporting company may include such FinCEN identifier in its BOI report instead of the information required about the individual. A company may request a FinCEN identifier when it submits a BOI report by checking a box on the reporting form.
VI. When and how should my company file its initial BOI report?
If the reporting company was organized prior to January 1, 2024, the company has until January 1, 2025, to file its initial BOI report. To allow business owners to adjust to the CTA reporting requirements, a reporting company that was organized between January 1, 2024 and January 1, 2025, being the first full year of the CTA going into effect, a reporting company has 90 days after the company’s formation (the date in which the company’s organization becomes effective) to file its initial BOI report. If a company is organized on or after January 1, 2025, the reporting company has 30 days after the company’s formation to file the BOI report.
- Reporting company created or registered to do business in the United States before January 1, 2024 – Reports are due by January 1, 2025
- Created or registered to do business in the United States on or after January 1, 2024, but before January 1, 2025 – Reports are due 90 calendar days after the organization becomes effective (i.e., after receiving actual or public notice that the company’s organization is effective).
- Created or registered to do business in the United States on or after January 1, 2025 – Reports are due 30 calendar days after the organization becomes effective (i.e., after receiving actual or public notice that the company’s organization is effective).
VII. What if there are inaccuracies in my BOI report?
An inaccurate BOI report may be updated and corrected within 90 days of when it was filed without penalty. If an inaccuracy in the BOI report is identified and remains inaccurate after the initial 90 days, the company must correct the BOI report within 30 days after the date on which the company becomes aware or has reason to know of the inaccuracy. The same 30-day timeline applies to inaccuracies in information submitted by an individual in order to obtain a FinCEN identifies.
This includes (i) any change in the reporting company’s name, trade name(s), address, or taxpayer identification number, (ii) any change in beneficial owners, such as the appointment or removal of a senior officer, a sale that changes who meets the ownership interest threshold of 25%, or the death of a beneficial owner, or (iii) any change in a beneficial owner’s name, address, or unique identifying number (including where a beneficial owner obtains a new driver’s license or other identifying document). Also note that the special rule for minor’s requires the BOI report be updated within the 30-day period when the child reaches the age of majority.
In the event the reporting company qualifies for exemption after filing a BOI report, the company should file an updated BOI report to indicate that is it newly exempt from the reporting requirements.
VIII. What is the penalty for failing to file or timely update a BOI report?
The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Additionally, a person may be subject to civil and/or criminal penalties for willfully causing a company not to file a required BOI report or to report incomplete or false beneficial ownership information to FinCEN.
A penalty for a willful violation can be assessed to any individual, reporting company, or other entity who commits the violation. However, the director of the FinCEN has publicly stated that the agency is not pursuing “gotcha” enforcement when it comes to companies complying with new rules for reporting their beneficial ownership information, rather, FinCEN will look for entities that are willfully evading the requirements of the new rules. The director stated further that FinCEN “wants to promote education and compliance, especially to communities that have never heard of FinCEN, and we don’t anticipate using enforcement as a way to educate them.” This is assuring as there will undoubtedly be individuals and companies who may not become aware of the reporting requirements until after the applicable deadlines have passed. One may assume that the Internal Revenue Service and financial institutions will start, if they haven’t already, implementing procedures requiring companies to submit a FinCEN transcript with certain filings or to establish accounts in an effort to spread awareness of the CTA.