Starting in 2024, Most corporate entities will be required to file reports on their beneficial owners. On January 1, 2021, Congress passed the Corporate Transparency Act (the “CTA”), which is a significant expansion of anti-money laundering laws intended to help prevent and combat money laundering, tax fraud and terrorist financing. On September 30, 2022, the Financial Crimes Enforcement Network (“FinCEN”) issued the final rule (the “Reporting Rule”) that laid out the requirements for Beneficial Ownership Information (“BOI”) reports mandated by the CTA. FinCEN estimates that there will be over 32 million entities required to submit BOI reports in 2024. The first report for existing entities is due January 1, 2025.
According to the legislative findings for the CTA, nearly two million corporations and limited liability companies are formed under the States’ laws each year, and very few states require information about the beneficial owners. In fact, a person forming a corporation or limited liability company within the United States typically provides less information at the time of incorporation than is needed to obtain a bank account or driver’s license and typically does not name a single beneficial owner. Criminals have exploited State formation procedures to conceal their identities. As such, the CTA aims to reduce the vulnerability of the US to wrongdoing by corporate entities with hidden owners.
Who Must Submit BOI Report?
To reduce this vulnerability, “reporting companies” will be required to file a BOI report. Reporting companies include any corporate entity, limited liability company (“LLC”), or any entity created by filing with a Secretary of State or any similar office under the law of a State or Indian tribe is required to comply with the Reporting Rule. In California, for example, this would include limited partnerships (“LP”), limited liability partnerships (“LLPs”), professional corporations (“PC”), and real estate investment trusts (“REITs”). Additionally, any corporation, LLC or other entity formed under the laws of a foreign country and doing business in the United States will also be required to file a BOI report.
The CTA provides 23 exemptions to the definition of reporting companies. These exemptions focus primarily on entities that operate in heavily regulated sectors. One of the more notable exemptions includes “large operating companies”, defined as (i) any company that employs more than 20 full-time employees in the US, (ii) filed a federal tax return in the prior year with more than five million dollars in gross receipts or sales from US sources, and (iii) has an operating presence at a physical office in the US. Other notable exemptions include: publicly traded companies, tax-exempt entities and certain related entities and wholly-owned companies of large operating companies and exempt companies.
Who is a Beneficial Owner?
As the legislative findings for the CTA state, the purpose of the legislation is to eliminate the ability of criminals to hide behind corporations and operate in the shadows. As such, the CTA requires reporting companies to report certain identifying information on both “beneficial owners” as well as the “applicant” that forms the entity. In most instances, identifying beneficial owners and the applicant is straightforward and will include the individual or individuals who operate the reporting company. If a husband and wife create an LLC to operate their small business, they are likely both the beneficial owners and the applicant.
The CTA defines a beneficial owner as “any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise exercises substantial control over the entity; or owns or controls not less than 25% of the ownership interests of the entity.” Substantial control is outlined in the Reporting Rule and consists of three specific indicators, which include: (i) being a senior officer of a reporting company; (ii) having authority over the appointment or removal of any officer or dominant majority of the board of directors of a reporting company; and (iii) having direction, determination or decision of, or substantial influence over, important matters of a reporting company. The Reporting Rule also provides a catch-call for substantial control that includes “any other form of substantial control” over the reporting company. Applicants are outlined in the Reporting Rule and includes “anyone who directs or controls the filing of the document by another.”
Excluded from the definition of beneficial owner are minor children, individuals acting as nominees, employees acting solely as employees and not as senior officers, individuals whose only interest in the reporting company is a future interest through the right of inheritance, and creditors of a reporting company.
What is in the BOI Report?
The reporting company must report for each beneficial owner the following four items in the BOI report: the beneficial owner’s (i) full legal name (ii) date of birth (iii) residential address and (iv) passport number, driver’s license or other acceptable identification, together with a copy of the ID document. It is important to note that when beneficial owners of a reporting company change, the reporting company will have 30 calendar days to file an updated BOI report. Examples of changes would include a reporting company becoming exempt from the reporting requirements, transfers of ownership interests due to the death of a beneficial owner and transfers of ownership when a minor child reaches the age of maturity. In the instance where a BOI report contains an error, the reporting company must correct the error within 30 calendar days after the error is discovered.
The BOI report will also include information about the reporting company, which will include the reporting company’s (i) full legal name, (ii) trade name or “doing business as” name, (iii) current address, (iv) entity’s jurisdiction in which it was formed and (v) federal tax ID number.
Information reported to FinCEN will not be made public and will not be subject to disclosure under the Freedom of Information Act, or FOIA. However, certain federal agencies will be able to access the database, including national security, law enforcement, tax administration and certain inquiries made by foreign governments. Banks and financial institutions can request BOI reports with the consent of the reporting company.
How Do I Prepare for the New Reporting Requirements?
Unlike most reporting requirements that impact large corporations and create exceptions for small businesses, the CTA primarily focuses on smaller businesses. For small business owners, managers, and officers, the determination of whether their business entity classifies a reporting company should be made sooner than later to avoid a last-minute scramble during the holiday season of 2024. Reporting companies should gather the required information and make sure it is current, including ensuring that beneficial owner IDs are not expired when submitted. Reporting companies can also implement an internal tracking system for reported information.
In most instances, the reporting requirements will be straightforward and will involve beneficial owners uploading the relevant information on the FinCEN website. FinCEN is currently creating a new online system where reporting companies will submit their BOI reports. Reporting companies that willfully violate the new reporting requirements will be subject to civil penalties of $500 per day if a violation is not corrected. The CTA reporting requirements also include criminal penalties.
The first BOI reports will be accepted on January 1, 2024, and reporting companies must file their first BOI reports by January 1, 2025. Taxpayers with questions should consult their tax attorney or CPA regarding their specific facts.
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