BASICS OF COMPLIANCE WITH THE CORPORATE TRANSPARENCY ACT: FINCEN BENEFICIAL OWNERSHIP REPORTING
In 2021, Congress passed the Corporate Transparency Act (CTA) in an effort to thwart criminals from using entities as a way to launder money and further illicit activities. The CTA contains a reporting requirement mandating that certain entities file reports with the Financial Crimes Enforcement Network (FinCEN) containing information regarding the entities themselves and their “beneficial owners” and “company applicants,” as explained below.
WHO IS IMPACTED BY THE CTA?
While most companies formed in the United States, or registered to do business here, will be considered to be a “Reporting Company” (as defined by the CTA), there are numerous filing exemptions, including, for example:
- Many publicly traded companies
- Companies employing more than 20 people and with greater than $5M in gross sales (as reported on its federal tax return)
- Some tax-exempt entities
- The wholly-owned subsidiaries of an exempt entity
- Certain regulated industries, including financial services, licensed insurance agencies, accounting firms, public utilities and fund advisories
WHO IS A REPORTING COMPANY?
There are two categories of “Reporting Companies” for purposes of submitting a Beneficial Ownership Information Report (BOI Report): Domestic Reporting Company and Foreign Reporting Company. If your company is a corporation, limited liability company, partnership or any other formally organized entity registered with the Secretary of State of any state in the United States, then you may be considered a Domestic Reporting Company. Likewise, if your company is a foreign entity registered to do business in the United States with the Secretary of State of any state in the United States, then your company may be considered a Foreign Reporting Company. If your company does not fit either definition, then it is exempt and does not need to file. If you have questions about whether or not you are a Reporting Company, more information can be found here.
WHO IS A BENEFICIAL OWNER AND COMPANY APPLICANT?
Generally speaking, a “beneficial owner” is a person who owns or controls at least twenty-five percent (25%) of the ownership interests of the Reporting Company (which includes equity, stock, voting rights, capital or profit interest, convertible instruments, warrants and options) or who has “substantial control” over the company. In order to properly determine who has “substantial control,” it is important to identify the people within your organization who (1) hold senior officer positions; (2) have voting authority; (3) own 25% or more of the ownership interests; or (4) are considered decision-makers when the company makes important decisions. According to FinCEN guidance, “important decisions” include decisions about a Reporting Company’s business, finances, and structure.
A company may have multiple beneficial owners. For example, a single member limited liability company may report that it has two (2) beneficial owners: the sole member, as well as the president of the company who has substantial control over the company by managing the day-to-day operations and by making company decisions (even though that person may have no ownership). Likewise, a corporation may also have multiple beneficial owners. A corporation is required to elect officers as well as a board of directors. In addition to reporting the shareholders who own more than 25% as beneficial owners, a corporation may also be required to report all of the members of the board of directors along with the officers of the corporation if they exercise substantial control over the corporation’s operations and important decisions.
Companies formed or registered to do business in the United States after January 1, 2024 must include information about (at least one but not more than two) “company applicants” in their BOI Report. A “company applicant” is defined as (a) the individual that directly files or is responsible for the filing of the document that creates or registers the company, or (b) the person who directs or controls the filing of the document that creates or registers the company. Because there are two categories of company applicants under the CTA, a direct filer or a person who directs or controls the filing action, both need to be reported on the BOI Report.
WHEN DO I NEED TO FILE?
If a nonexempt Reporting Company was formed prior to January 1, 2024, then the entity has until January 1, 2025 to file the BOI Report. However, if a nonexempt Reporting Company is formed after January 1, 2024, then the entity has only ninety (90) days from the date of its formation in which to file the BOI Report with FinCEN.
WHAT INFORMATION NEEDS TO BE INCLUDED ON THE BOI REPORT?
The BOI Report of the Reporting Company and its beneficial owners will contain the following information:
- Full legal name
- Any trade names or DBAs (all must be reported)
- Complete address located within the United States
- State, Tribal or foreign jurisdiction of formation
- Foreign reporting companies will need to report their initial filing jurisdictions
- IRS Taxpayer ID (TIN) and EIN
Beneficial Owners & Company Applicants
- Full legal name
- Date of birth
- Complete current address
- Unique identifying number, issuing jurisdiction number and image of one of the following:
- U.S. Passport
- State driver’s license
- Identification documents issued by a state, local government, or tribe
- If none of the foregoing are available, a foreign passport
WHAT IF MY BENEFICIAL OWNER INFORMATION CHANGES?
If any of your beneficial ownership information changes at any time after submitting the initial BOI Report, you must file an amendment to the BOI Report within thirty (30) days of the effective date of such change. Changes in your company or entity that might trigger a BOI Report amendment include, but are not limited to: 1) a name change of a beneficial owner; 2) death of a beneficial owner; 3) address changes of the company and/or beneficial owner; 4) a sale, recapitalization, redemption or reorganization of the company’s ownership interests; 5) elections or removal of officers; 6) board resignations and elections; or 7) creation or dissolution of board of director committees. An entity and its ownership changes often. It is crucial to stay on top of the BOI Reporting requirements so that the 30-day deadline is met.
WHAT HAPPENS IF I DON’T FILE OR MAKE A MISTAKE?
The consequences for not complying with the BOI Reporting requirements are severe. Failure to file willfully, or filing false or fraudulent beneficial ownership information, may result in civil penalties of $591 per day or criminal penalties including imprisonment of up to two (2) years and a fine of $10,000. However, if a person believes that a report contains inaccurate information and voluntarily submits a corrected report within ninety (90) days of the original BOI Report deadline, the CTA may provide a safe harbor from the steep penalties that are otherwise imposed under the CTA.
HOW DO I FILE?
BOI Reports may be filed directly with FinCEN here. More information, including detailed step-by-step instructions, can be found here. If you need assistance with or have any questions about the CTA reporting requirements or BOI Reports, our attorneys and paralegals are here to help. Contact us today!
BE ON THE LOOKOUT FOR FRAUD!
As with many things, the new filing requirement brings new opportunities for scammers. Be on the lookout for emails, letters or calls advising you to complete applications or reports in order to stay in compliance with the CTA. Please be aware that FinCEN will NEVER reach out to you to make sure you are in compliance. Any correspondence you receive will more than likely be a solicitation for your business or an attempt to scam you. If you do receive any solicitations via email, delete them immediately.
FinCEN is providing updates and guidance on BOI Reports frequently. We are monitoring these updates and will revise this article as we learn more.
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