The Corporate Transparency Act (signed into law on 1/1/21) expanded anti-money laundering laws and created new reporting requirements for certain companies doing business in the U.S. Beginning in 2024, many small businesses will be required to report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN) in an effort to create a national database for use by national security and law enforcement agencies to prevent the use of shell companies for criminal activity.
Who Must File. Both domestic and foreign reporting companies are required to file reports. A company is considered a reporting company if a document was filed with the secretary of state (SOS) or similar office to create or register the entity. Corporations (including S corporations), LLCs (including single-member LLCs), and other entities formed through the SOS are subject to the reporting requirements. But, because sole proprietorships, trusts, and general partnerships do not require the filing of a formal document with the SOS, they generally are not considered a reporting company and will not have a filing requirement. Foreign companies are required to file reports if they are registered with the SOS or similar office under state law.
Some companies are exempt from reporting (see attached list), but many of the exempted companies are already required to report ownership information to a governmental authority. Of particular interest to you may be the exemption for large operating companies. A large operating company is any entity with (a) more than 20 full-time U.S. employees, (b) an operating presence at a physical office within the U.S., and (c) more than $5,000,000 of U.S.-sourced gross receipts reported on its prior year federal income tax return. If you meet these qualifications, you are not subject to the new reporting requirements.
What Information Must Be Provided. Beneficial ownership information (BOI) must be reported for the reporting company's beneficial owners and (for entities formed or registered after 2023) company applicants. BOI includes an individual's full legal name, date of birth, street address and a unique ID number. The unique ID number can be from a nonexpired U.S. passport, state driver's license, or other government-issued ID card. If the individual does not have any of those documents, then a nonexpired foreign passport can be used. An image of the document showing the unique ID number must also be included with the report.
Beneficial Owners. Two groups of individuals are considered beneficial owners of a reporting company: (1) any individual who exercises substantial control over the reporting company; or (2) any individual who directly or indirectly owns or controls at least 25% of the ownership interests of the reporting company.
Individuals with substantial control are those with substantial influence over important decisions made by the reporting company. Senior officers (president, CFO, general counsel, CEO, COO, and any other officer who performs a similar function) are automatically deemed to have substantial control, as are individuals with the authority to appoint or remove senior officers and board members. There is no requirement that these individuals have actual ownership in the company to be considered a beneficial owner for reporting purposes.
Company Applicants. The company applicant is the person who actually files the document that creates or registers the reporting company (e.g., an attorney). Company applicants must provide the same information that is required of beneficial owners, but only if the reporting company is formed or registered after 2023. Because of the difficulty in tracking down information about company applicants for reporting companies that have been in existence for a number of years, reporting companies formed or registered before 2024 do not have to supply BOI for their company applicants.
Important Filing Dates. For existing reporting companies created or registered before 2024, the initial report is due by 1/1/25. For reporting companies created or registered after 2023, the initial report is due 90 days after the entity's creation or registration. FinCEN has created a secure electronic filing system via their website and began accepting reports on 1/1/24.
If there is a change to previously reported information about the reporting company or its beneficial owners, an updated report must be filed within 30 days of the change.
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. As such, since we are not attorneys, our firm is not able to provide you with any legal determination as to whether an exemption applies to the nature of your entity or whether legal relationships constitute beneficial ownership.
We strongly encourage you to reach out as soon as possible to legal counsel with expertise in this area to assist your organization with the steps you need to take to ensure compliance with the CTA, if applicable. Note that penalties for willfully violating the CTA’s reporting requirements include (1) civil penalties of up to $500 per day that a violation is not remedied, (2) a criminal fine of up to $10,000, and/or (3) imprisonment of up to two years.
For additional information regarding the beneficial ownership reporting requirements under the CTA, refer to FinCEN’s Frequently Asked Questions document at https://www.fincen.gov/boi-faqs.
Ready to file follow this link: https://boiefiling.fincen.gov/fileboir
Loucks & Glassley, pllp