Beneficial Ownership Reporting: New federal reporting requirements under the Corporate Transparency Act.

The Corporate Transparency Act (the "CTA"), codified at 31 U.S.C. $ 5336 et seq., is a federal act that was passed to enhance transparency in entity structures and ownership and to combat and prevent illegal activities such as money laundering, tax fraud, and terrorist financing. The CTA and regulations promulgated by the United States Department of Treasury’s Financial Crimes Enforcement Center (“FinCEN”), took effect on January 1, 2024.  Under the CTA and implementing regulations, as of January 1, 2024, all reporting companies must report information about the entity and their beneficial owners—the individuals who, directly or indirectly, ultimately own, control or influence the company—by filing a Beneficial Ownership Information (“BOI”) report with the United States Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). This will aide FinCEN in identifying criminals and terrorists who try to hide their illicit activates and identities behind anonymous shell companies. Unlike many government requirements, BOI reporting targets small businesses and is estimated to impact more than 30 million businesses once it takes effect. Accordingly, if you are a small business owner, there is a likelihood that your business is subject to BOI reporting. Failure to comply with reporting requirements will result in fines and potentially criminal charges.

Common Questions:

Who is a Reporting Company?

Under the CTA, any “Reporting Company” is required to report company information, beneficial ownership information, and for companies created or registered on or after January 1, 2024, its Company Applicants.

A Reporting Company is broadly defined under the CTA to include any corporation, limited liability company (LLC), or similar entity or business trust that is created or registered to do business in the United States by filing a document with a secretary of state or a similar office of a U.S. state or tribal government. Accordingly, a sole proprietorship is not a Reporting Company unless it was created, or registered to do business, by filing a document with a secretary of state or similar office.

There are, however, 23 exemptions to reporting companies. See below for a brief discussion of exemptions from reporting companies.

Who is a Beneficial Owner?

A Beneficial Owner is an individual who either, directly or indirectly: (1) exercises “substantial control” over the Reporting Company, or (2) owns or controls at least 25% of the Reporting Company’s ownership interests. Accordingly, a person who exercises substantial control must be reported as a Beneficial Owner even if they have no ownership interest in the Reporting Company.

Substantial control is broadly defined and includes individuals who directly or indirectly control or influence the company, such as:

  • Senior officers, such as the Reporting Company’s president, chief executive officer, chief financial officer, chief operating officer, general counsel, or other high-level officer.
  • An individual with the authority to appoint or remove senior officers or a majority of the board of directors or similar body.
  • An important decision-maker, such as a person who controls, directs, determines, or has substantial influence over important decisions regarding the Reporting Company’s business, finances, or structure, including but not limited to:
    • Nature/scope of business;
    • Selection or termination of business lines or ventures, or geographic focus;
    • The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;
    • The sale, lease, mortgage, or other transfer of any principal assets;
    • Major expenditures or investments;
    • Issuing any equity;
    • The incurrence of any significant debt;
    • The approval of the operating budget;
    • Compensation and incentives for senior officers
    • Reorganization, dissolution, or merger;
    • Amendments of any substantial governance documents of the Reporting Company (e.g., formation documents, bylaws and operating agreements); or
    • Drafting or amending significant policies or procedures.
  • A person who exercises any other form of substantial control.

*If multiple individuals can exercise a power together, each has an equal vote, or all participate in the vote, then the power is attributed to all of the individuals.

Likewise, Ownership Interest is also broadly defined such that it can arise directly or indirectly from any contract, arrangement, understanding, relationship or mechanism used to establish ownership, such as:

  • Equity, stock or similar interest (regardless of whether such interest bestows voting rights), or voting rights;
  • Membership interests;
  • Capital or profit interest;
  • Any instrument (e.g., warrants, options or future rights) convertible into an ownership interest
  • Option or privileges created with the knowledge or involvement of the Reporting Company
  • Owners of a business that owns another business that is a considered a Reporting Company under the CTA. 

*Only a natural person (an individual) can be a Beneficial Owner of a Reporting Company. If any of the above applies to an entity, one must inquire and review records of the entity to identify the human being(s) who are Beneficial Owners.

**Indirect ownership of a Reporting Company through one or more intermediary entities depends on the proportionate interest in each entity that owns the Ownership Interest in each entity down the chain. To determine which individual owner of the intermediary entities qualifies as a Beneficial Owner, one must trace that through each entity.

Exceptions to the definition of “Beneficial Owner”:

The following are not considered Beneficial Owners: (i) minor children, as dictated by the relevant state’s age of majority (provided a parent or legal guardian is reported as a Beneficial Owner); (ii) nominees, intermediaries, custodians, or agents (provided the individual on behalf of whom the nominee is acting is reported); (iii) employees (excluding senior officers or those performing functions similar to a senior officer and employees with an ownership interest); (iv) future inheritors; and (v) creditors (unless the creditor may be considered a “Beneficial Owner” via substantial control or ownership interests).

For more information on Beneficial Owners, including exceptions and the meaning of “substantial control” and “ownership interest,” we recommend reviewing FinCEN’s Frequently Asked Questions or Small Entity Compliance Guide.

Who is a Company applicant? 

Only reporting companies created or registered on or after January 1, 2024, need to report their Company Applicants. Companies formed before that date will only report Beneficial Owners.

Up to two individuals may be a Company Applicant: (1) the individual who directly files the document that creates or registers the company, and (2) if more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing. If more than one individual is involved, two must be reported.

Notably, reporting companies do not need to update its Company Applicant information.

What information must be reported under the CTA?

Reporting Companies must file reports identifying (1) the “Beneficial Owners” of the entity, and, in some instances, (2) the individuals who have applied with specified governmental authorities to form the entity or register it to do business (“Company Applicants”). The Reporting Company is responsible for acquiring the required information from all of its Beneficial Owners and, if applicable, its Company Applicant, accurately reporting information and keeping reports up to date.

The following information must be reported to FinCEN:
  • Reporting Company Information:
    • Name
    • Any trade name or DBA
    • Current street address of its principal place of business (no post office boxes)
      • If that is not in the U.S., the primary location in the U.S. where the company conducts business.
    • State, Tribal or foreign jurisdiction of formation or registration
      • For foreign reporting companies, also the state/tribal jurisdiction of first registration.
    • EIN or TIN issued by the IRS for the Reporting Company.
  • For each (i) Beneficial Owner, and (ii) for Reporting Companies Created or Registered on or after January 1, 2024, each Company Applicant (must be individuals):
    • Full legal name of individual
    • Date of Birth
    • Current Residential Street Address (for Company Applicants who form or register a company in the course of their business, use Business Address)
    • An identifying number and name of the issuing state or jurisdiction for one of the following, non-expired, acceptable identification documents: S. passport; State driver’s license; ID used by state, local government or tribe; or, if none of the foregoing exist, a foreign passport.
    • Image of the acceptable identification document.

Alternatively, Beneficial Owners and Company Applicants can use the above information and documents to apply for a FinCEN Identifier (discussed below), and provide it to the Reporting Company for use in its BOI report in lieu of supplying the above information and document.

When must BOI Reports be filed?

  • The deadline to file the initial BOI reports depends on when the Reporting Company was created or registered:
 
Creation or Registration Date of Company Initial BOI Report Filing Deadline
Before January 1, 2024 By January 1, 2025
Anytime in 2024 Within 90 calendar days of receiving actual or public notice that the entity has been formed or registered, whichever occurs first.
On or after January 1, 2025 Within 30 calendar days of receiving actual or public notice that the entity has been formed or registered, whichever occurs first.
 
  • Any Changes in Information:

If there is any change to the information reported about the company or its Beneficial Owners, an updated report must be filed within 30 days after the date of the change. Likewise, if a BOI report is inaccurate (e.g., no longer qualifying for an exemption), the company must correct it no later than 30 days after it becomes aware of the inaccuracy or has reason to know about it.

For example, some changes, updates and/or corrections which may warrant the filing of an updated report include:  change of address (of business or Beneficial Owner); registering a new business name, fictious name or trade name; a sale of a business or interest that changes who meets the 25 percent ownership interest threshold; merger; acquisition; change in ownership; change in officer/director; or death of a Beneficial Owner. Additionally, any changes to a Beneficial Owner’s required information or acceptable identification document (including an updated image) must be submitted in an updated report.

There are, however, no penalties for filing an inaccurate report so long as it is corrected within 90 calendar days.

Is this an annual reporting requirement?

No, there is no annual reporting requirement. Reporting companies must file an initial BOI report and corrected or updated BOI reports as necessary.

How will I file my BOI report?

BOI reports will be filed electronically through the secure BOI E-Filing System, which is a secure, cloud-based, private government server, accessible via FinCEN’s website, www.fincen.gov.

Are any companies exempt from the CTA’s reporting requirements?

There are 23 types of entities that are exempt from BOI reporting. More heavily regulated entities such as banks, credit unions, investment companies, insurance companies, investment advisors, and entities already required to report certain information to the federal government are exempt from the CTA's reporting requirements. Other examples of exempt entities include publicly traded companies meeting certain requirements, many nonprofits, public utilities, certain subsidiaries of an exempt entity that is wholly owned or controlled by the exempt entity, and entities that qualify as a “large operating company” or an “inactive entity”.

A “large operating company” is defined as an entity that employs more than 20 full-time employees in the U.S., has an operating presence at a physical office in the U.S., and in the previous year filed a federal income tax in the U.S. showing more than $5,000,000 in gross receipts or sales.

“Inactive  entities” are those that (i) existed on or before January 1, 2020; (ii) is not engaged in active business; (iii) is not owned in whole or in part by a foreign person, whether directly or indirectly; (iv) has not had an ownership change in the preceding 12-month period; (v) has not sent or received more than $1,000 in funds in any financial account in which the entity or any affiliate of the entity had any interest in the preceding 12-month period; and (vi) does not otherwise hold any assets, including ownership interests in another entity.

More information on exemptions is available at FinCEN's Frequently Asked Questions or Small Entity Compliance Guide. Please note that these resources are updated periodically and they are not binding, but they do provide helpful context for how FinCEN will likely interpret and enforce the statute and regulations.

Is there a fee for filing a report?

No, there is not a fee for submitting the BOI report to FinCEN.

What are the penalties for non-compliance under the CTA?

Penalties for noncompliance related to willfully reporting or attempting to report false or fraudulent beneficial ownership information, or willful failure to report or make updates to the reports, may result in civil penalties to the company and its senior officers 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.

Notably, there are no penalties for filing an inaccurate BOI report provided a corrected report is voluntarily submitted within 90 calendar days of when it was filed.

What is a FinCEN identifier, and how can it be used when reporting?

A FinCEN identifier is a unique number issued by FinCEN to individuals and reporting companies. Only one FinCEN identifier can be obtained by an individual or company. While it is not a requirement to obtain one, a Reporting Company may report an individual’s FinCEN Identifier for a Beneficial Owner or Company Applicant in lieu of providing the information noted above. Individuals that are a Beneficial Owner of multiple entities or who do not want to provide personal information multiple times may want to consider a FinCEN identifier.

Some additional benefits of using FinCEN identifiers include: (i) Reporting Companies that report FinCEN Identifiers can avoid potential liability for inadvertent disclosure of beneficial owner or company applicant information; and (ii) Reporting Companies that report FinCEN Identifiers shifts the burden to the Beneficial Owner and/or Company Applicant to update and keep required information about each Beneficial Owner and/or Company Applicant current.

Individuals may apply for a FinCEN identifier by submitting an electronic form on FinCEN’s website. The electronic form requires the same information that must otherwise be set forth in the initial BOI report. A Reporting Company, however, may obtain a FinCEN identifier by checking a box on the beneficial ownership information report when it submits the report.

FinCEN identifiers are subject to the same updating requirements as BOI reporting. If there is a change or any inaccuracy in the information provided in the application for an individual’s FinCEN identifier, the individual must report the change and/or correct the information within 30 calendar days after the date the individual became aware of the inaccuracy or had reason to know about it. To update or correct the company’s FinCEN identifier, the Reporting Company must file an updated or corrected beneficial ownership information report within 30 calendar days after the date the company became aware of the inaccuracy or had reason to know about it.

For more information on FinCEN identifiers, we recommend reviewing FinCEN’s Frequently Asked Questions or Small Entity Compliance Guide. Please note that these resources are not binding and they are updated periodically, but they do provide helpful context for how FinCEN will likely interpret and enforce the statute and regulations.

Who will have access to the BOI reports filed with FinCEN?

FinCEN is authorized to share this information with Federal, state, local, and Tribe officials and certain foreign officials who submit an official request (including, if applicable, authorization from a court of competent jurisdiction), to obtain BOI for authorized activities related to national security, intelligence, and law enforcement. Financial institutions may also access BOI in certain circumstances, with the consent of the Reporting Company. BOI reported to FinCEN will be stored in a secure, non-public database.

How can a business prepare for Beneficial Ownership Reporting?

Businesses can prepare by:
  • Gathering Reporting Company information and beneficial ownership information. To do so, it may be beneficial or necessary to conduct an internal review of the company’s structure and ownership hierarchy.
  • For companies formed on or after January 1, 2024, also gather Company Applicant information.
  • Establish a secure, centralized record-keeping system.
  • Train executive officers for compliance.
  • Implement a procedure to ensure the information you must report is obtained and updated. For example, determine who will gather and maintain beneficial ownership information, including monitoring and tracking changes in reported beneficial ownership information.
  • Consider amending governing corporate documents to address Beneficial Owners’ obligations under the CTA and specifically obligate compliance with reporting obligations.
  • Consider including provisions regarding Beneficial Owners’ obligations under the CTA in agreements with shareholders, executive/senior officers, or directors.
  • For new real estate investments, gather beneficial ownership information from Beneficial Owners during the initial questionnaire and investment process, or require each investor to obtain their own FinCEN Identifier and provide it to the Company.

You are responsible for your compliance with the CTA, including its BOI reporting requirements and the collection of relevant ownership and other information. FinCEN provides information and guidance regarding your reporting requirements, along with regular updates, on their website available at https://www.fincen.gov/boi. Please note that these resources are not binding, but they do provide helpful context for how FinCEN will likely interpret and enforce the statute and regulations. Additionally, should you have questions regarding the applicability of the CTA’s reporting requirements to your company or the information you must report, you may consider consulting with legal counsel.

DISCLAIMER

This identifies key provisions of the Corporate Transparency Act and related regulations, but it is not intended as a comprehensive summary. This summary is for information purposes and is not legal advice, and does not create any attorney-client relationship. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.