The Corporate Transparency Act (CTA), enacted on January 1, 2021, was passed to enhance transparency in entity structures and ownership, to combat money laundering, tax fraud, and other illicit activities. It is designed to capture more information about the ownership of specific entities operating in or accessing the U.S. market.

A key development in the CTA is the new Beneficial Ownership Information (BOI) reporting requirement. This requirement was established by the Financial Crimes Enforcement Network (FinCEN) under the CTA, as part of the National Defense Authorization Act. This represents the most significant reformation of the Bank Secrecy Act and related anti–money laundering rules since the U.S. Patriot Act.

This new requirement requires most U.S. entities (primarily small and medium size businesses) to report “beneficial owner” information to the Financial Crimes Enforcement Network.

When do you need to file a report?

Initially, there are three categories for company reporting, depending on when the Reporting Company was formed:

• Reporting Companies that existed on December 31, 2023 will be required to file a report electronically with FinCEN beginning January 1, 2024; it is due before January 1, 2025.
• Reporting companies that were created or registered on or after January 1, 2024 and before January 1, 2025 have 90 calendar days from their formation date to file their initial BOI reports.
• Reporting companies that were created or registered on or after January 1, 2025 will have 30 calendar days after their formation date to file their initial BOI reports.

The reports are required to be submitted electronically, and many filers will use the FinCEN website: https://www.fincen.gov/boi

There is no annual reporting requirement – only an initial BOI report and updated or corrected BOI reports as needed. If there is any change to the required information report that a company filed, the company must file an updated report no later than 30 days after the date of the change.

What is a reporting company?

A reporting company is a domestic reporting company or a foreign reporting company unless it qualifies for an exemption.

• Domestic reporting companies – These are corporations, limited liability companies (LLCs) and other entities created by a filing with a secretary of state or similar office under the law of a state or Indian tribe.
• Foreign reporting companies – These are corporations, LLCs and other entities formed under the law of a foreign country that are registered to do business in any U.S. state or Tribal jurisdiction.

The beneficial ownership rule applies to most businesses in the U.S. other than domestic sole proprietorships. Certain exemptions to beneficial ownership reporting requirements have been provided, including certain types of banks, credit unions, investment companies, insurance companies, accounting firms and regulated public utilities. Certain tax-exempt entities and inactive entities are also specifically exempt from filing a beneficial ownership report.

Another notable exception is for “large operating companies” defined as companies that meet all of the following requirements:

• Employ at least 20 full-time employees in the U.S.
• Gross revenue (or sales) from US sources over $5 million reported on the prior year’s tax return.
• An operating presence at a physical office in the U.S.

Whose information needs to be reported?

The report must provide information about the company (name, address, state of formation and taxpayer ID number), and personal information about the individuals considered “Beneficial Owners” of the company (name, address, date of birth and image of an identification document).

A Beneficial Owner is any individual who, directly or indirectly:

• Exercises substantial control over a reporting company; or
• Owns or controls at least 25 percent of the ownership interests of a reporting company.

A Reporting Company formed on or after January 1, 2024 will also be required to file personal information for up to two “Company Applicants.” No Company Applicant information is required to be filed for Reporting Companies existing on or before December 31, 2023.

Company Applicants are defined as:

• The individual who directly filed the document that created a domestic reporting company, or the individual who directly filed the document that first registered a foreign reporting company. This individual would have actually physically or electronically filed the document with the secretary of state or similar office, or
• The other possible company applicant is the individual who was primarily responsible for directing or controlling the filing of the creation or first registration document.

What happens if a report is not filed as required?

The rules regarding compliance with this requirement are complex as drafted at this time, and the penalties for not complying are high. Willful failure to report complete or updated beneficial ownership information to FinCEN, or providing false or fraudulent beneficial ownership information, may result in civil or criminal penalties. These could include civil penalties of up to $500 for each day that the violation continues and/or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may also be held accountable for that failure.

Take immediate action now!

As the CTA is not a part of the tax code, the assessment and application of many of the requirements set forth in the regulations, including but not limited to the determination of beneficial ownership interest, necessitate the need for legal guidance and direction. Contact your legal counsel with expertise in this area to assist your organization with the steps you need to take to ensure compliance with the CTA.

For additional details:
https://www.fincen.gov/boi/small-business-resources
https://www.fincen.gov/boi-faqs