Your business may soon have to comply with new reporting requirements that take effect on January 1, 2024. Under the Corporate Transparency Act (CTA), enacted in 2021, certain companies will be required to provide information related to their “beneficial owners” — the individuals who ultimately own or control the company — to the Financial Crimes Enforcement Network (FinCEN). Failure to do so may result in civil or criminal penalties, or both.
On November 29, 2023, FinCEN announced it was amending the beneficial ownership information (BOI) reporting rules.
Understanding the CTA
The CTA is intended to reduce exposure to serious crimes, including terrorist financing, money laundering 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. A business that’s characterized as a “reporting company” has either 30 days or one year to comply with the new rules.
The CTA’s rules generally apply to both domestic and foreign privately held reporting companies. For these purposes, a reporting company includes any corporation, limited liability company or other legal entity created through documents filed with the appropriate state authorities. A foreign entity includes any private entity formed in a foreign country that’s properly registered to do business in the United States.
The complete list of entities that are exempt from the reporting rules is too lengthy to include here — ranging from government units to not-for-profit organizations to insurance companies and more. 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. However, many of these companies already must meet other reporting requirements providing comparable information.
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 might not currently qualify can update its status with FinCEN if it later does and obtain an exemption.
Determining Who Is and Isn’t a Beneficial Owner
Under the CTA, a nonexempt entity must provide identifying information about its beneficial owners. A beneficial owner is defined as someone who, directly or indirectly, exercises substantial control over a reporting company, or owns or controls at least 25% of its ownership interests. An individual has substantial control of a reporting company if he or she:
- Is a senior officer of the company,
- Has authority over the senior officers or a majority of the company’s board,
- Has substantial influence over the company’s important decisions, or
- Has any other type of substantial control over the 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 information 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.
FinCEN announced on November 29 that it was amending the 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, reporting companies will have 30 days, 90 days or one year from the January 1, 2024, effective date to comply with the reporting requirements.
The deadline to comply depends on the entity’s date of formation. Reporting companies created or registered prior to January 1, 2024, have one year to comply by filing initial reports. Those created or registered on or after January 1, 2024, but before January 1, 2025, will have 90 days upon receipt of their creation or registration documents to file their initial reports. Those created or registered on or after January 1, 2025, will have 30 days upon receipt of their creation or registration documents to file their initial 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. Consult with your legal and professional advisors for additional guidance.