In the past, most small businesses weren’t required to disclose information about the individuals who actually own or control the business (beneficial owners). This lack of transparency allegedly allows criminals to use businesses as shell or front companies to hide their true identities while they launder their illegally obtained funds through the financial system. At least 30 countries have implemented centralized reporting of beneficial ownership to address this lack of transparency, and 100 more countries have committed to implementing systems similar to that contained in the Corporate Transparency Act (CTA) in the United States.
The U.S. Congress passed the CTA in 2021 to expand the government’s ability to prevent money laundering, terrorist financing, tax fraud, and other financial crimes. The CTA requires that beneficial ownership information (BOI) be reported to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) beginning January 1, 2024, by U.S. entities and foreign entities registered to do business in the U.S. Some large companies and financial institutions that are already required to report similar information to a governmental authority are exempt. This new BOI reporting, however, will apply to many small businesses, including limited liability companies (LLCs) that have never previously interacted with FinCEN, and is expected to require reporting by more than 30 million companies in 2024.
WHO'S REQUIRED TO REPORT?
Businesses required to report BOI include corporations, LLCs, and any similar entity created by filing a document with a secretary of state or similar office. This includes many limited partnerships and business trusts that filed formation or registration documents in addition to foreign entities that are registered to do business in the U.S. Sole proprietorships and other entities that weren’t required to file registration documents aren’t subject to these new rules.
The regulations (31 Code of Federal Regulations (CFR) §1010.380(c)(2)) list 23 categories of businesses exempt from this new BOI reporting, such as large operating companies (businesses with gross revenue exceeding $5 million on their prior year’s U.S. tax return that employ more than 20 full-time employees in the U.S. and have a physical office in the U.S.), publicly traded companies, banks, registered money transmitting businesses, insurance companies, pooled investment vehicles, brokers or dealers registered with the U.S. Securities & Exchange Commission, public accounting firms registered in accordance with the Sarbanes-Oxley Act of 2002, and certain tax-exempt entities. Businesses should review the list of exemptions and prepare a separate entity-by-entity analysis for any subsidiaries or affiliates to determine if an exemption applies.
WHAT MUST BE REPORTED?
Companies that don’t qualify for an exemption should begin preparing the required BOI and company information. Each company must report its full legal name (and any trade or doing-business-as name), street address, jurisdiction of formation (state, tribal, or foreign jurisdiction of registration), and taxpayer identification number. The company must report information for each beneficial owner, including (1) full legal name, (2) date of birth, (3) current street address, and (4) a unique identifying number from the individual’s passport, driver’s license, or other acceptable document (and include an image of that document).
A beneficial owner is any individual who owns (directly or indirectly) at least 25% of the company or exercises substantial control over the company. The regulations use an expansive definition of ownership interests including any equity interest, capital or profits interest, and options as well as more complex instruments. Individuals will be considered to exercise substantial control if they’re a senior officer or if they direct, determine, or exercise substantial influence over important decisions the company makes or have any other form of substantial control. For example, if a corporation is owned by four individuals who each own 25% of the stock and three other individuals serve as CEO, CFO, and general counsel (none of whom own any stock), there are seven beneficial owners for whom information must be reported.
Companies created after December 31, 2023, must also report information on their company applicants. An applicant is the individual who creates a domestic business by filing the document that created the entity (or registers a foreign entity to do business in the U.S.). If another individual was responsible for directing or controlling the filing of that document, that second individual is also considered an applicant. For example, if a legal professional prepares the formation documents and then has an assistant file the documents with the state, both the legal professional and the assistant are considered applicants. A company can have up to two applicants. Companies that existed before January 1, 2024, don’t have to report information on their company applicants.
Once all of the beneficial owners are identified, their BOI must be collected for reporting and maintained in a secure manner that complies with privacy laws. Reporting will be done electronically through the Beneficial Ownership Secure System that will be available through FinCEN’s website. If an individual voluntarily provides their four required pieces of information directly to FinCEN, that individual may obtain a FinCEN identifier that can then be provided on the BOI report instead of the required information for that person.
New entities created or registered after December 31, 2023, must file within 30 days of their creation. Existing entities (created before January 1, 2024) must file by January 1, 2025. Changes to previously reported information (or if errors are discovered) must be filed within 30 days of the change (or discovery of the error).
Taxpayer penalties for noncompliance of these reporting obligations include civil penalties of up to $500 per day that a violation continues. Criminal penalties include a $10,000 fine and/or imprisonment for up to two years. To avoid possible penalties, entities with a complex ownership structure may need to spend a significant amount of time and resources in establishing ownership percentages and in identifying the individuals who have authority to substantially control the company.
©2023 A.P. Curatola
July 2023
