Beginning on January 1, 2024, many companies in the United States will have to report information about their beneficial owners, i.e., the individuals who ultimately own or control the company. Make sure you’re ready.
In 2021, Congress enacted the Corporate Transparency Act that, beginning January 1, 2024, will require almost all privately held U.S. business entities to make disclosures to the Financial Crimes Enforcement Network (FinCEN), a US Department of Treasury agency. There are myriad resources detailing the legislative history of this new Act if you’re interested in the background (here, here, and here). In sum, the CTA was enacted to combat financial crimes Congress determined have been historically perpetrated by privately-held companies, such as money laundering, terrorism financing, tax evasion, human and drug trafficking, counterfeiting, and securities fraud.
The Act now requires FinCEN to collect business owner personal information so that authorized governmental authorities may access such information during financial crimes investigations. More important, though less explicit in the Act itself, is the effect of the CTA on corporate governance gatekeeper entities and individuals, like business lawyers and business formation specialists. Under the CTA, corporate service providers that create new entities will be associated in a federal database in perpetuity with the entities they create (and potentially with any future misdeeds of those entities)—these providers should take a close look at their vetting procedures and be vigilant about red flags as they gather ownership information for their clients during business formation activities.
Here’s what business owners need to know about the CTA:
Who Has to Report?
Under the CTA, every business entity that meets the definition of a reporting company will be required to file. Your company may be a reporting company and need to report information about its beneficial owners if your company is:
- A corporation, a limited liability company (LLC), or was otherwise created in the United States by filing a document with a secretary of state or any similar office under the law of a state or Indian tribe; or
- A foreign company and was registered to do business in any U.S. state or Indian tribe by such a filing.
What Gets Reported?
Every reporting company will be required to file a beneficial ownership information (BOI) report. A beneficial owner is defined as any individual who, either directly or indirectly, (1) exercises substantial control over a reporting company or (2) owns or controls at least 25% of the reporting company’s ownership interests. Beneficial owners are not solely equity owners. There are four ways in which an individual can exercise substantial control over a reporting company:
- The individual is a senior officer (the company’s president, CFO, CEO, COO, general counsel, or any other officer who performs a similar function).
- The individual has authority to appoint or remove certain officers or a majority of directors (or similar body) of the reporting company.
- The individual is an important decision-maker for the reporting company.
- The individual has any other form of substantial control over the reporting company.
Reporting companies will have to submit detailed information about each of their beneficial owners. This information includes:
- Full Name
- Date of Birth
- Complete current residential street address
- ID Number (such as US passport number; state, local, or Indian tribal ID number; or driver’s license number)
- An image of the document from which the ID Number was obtained
In addition, the BOI report requires the following information about the entity:
- Full legal name of entity
- Any trade names or d/b/a names
- Compete current address of principal place of business
- EIN or ITIN
How Do I Report?
Reporting companies will have to report beneficial ownership information electronically through FinCEN’s website: www.FinCEN.gov/boi. The system will provide the filer with a confirmation of receipt once a completed report is filed with FinCEN. Anyone whom the reporting company authorizes to act on its behalf—such as an employee, attorney, or third-party service provider—may file a BOI report on the reporting company’s behalf. When submitting the BOI report, individual filers should be prepared to provide basic contact information about themselves, including their name and email address or phone number.
When Do I Report?
Reports will be accepted starting on January 1, 2024 (and not earlier). If your company was created or registered prior to January 1, 2024, you will have one year—until January 1, 2025, to report BOI. If your company was created or registered on or after January 1, 2024, and before January 1, 2025, you must report BOI within 90 calendar days after receiving actual or public notice that your company’s creation or registration is effective, whichever is earlier. Companies created after January 1, 2025, must report within 30 calendar days.
When a company’s BOI information changes in any way, updates must be submitted to FinCEN within 30 days.
Who Does Not Have to Report?
Twenty-three types of entities are exempt from the beneficial ownership information reporting requirements. These entities include publicly traded companies, nonprofits, and certain large operating companies. FinCEN’s Small Entity Compliance Guide includes, among other things, checklists for each of the 23 exemptions that may help determine whether your company qualifies for an exemption.
In general, the exemptions do not apply to closely-held corporations and LLCs. The exemptions are geared toward entities that are already subject to government regulation, such as credit unions and securities brokers, which already file reports with other governmental agencies.
However, there is an exception for large LLCs, meaning those that employ more than 20 full-time employees in the United States, have an operating presence at a physical office in the United States, and filed a federal income tax or information return for the previous year showing more than $5 million in gross receipts or sales.
What If I Don’t Report?
If you have a reporting requirement under the CTA, we can’t recommend avoiding it. The CTA includes steep penalties for non-compliance, including daily accumulation of civil fines ($500/day) and criminal sentences of up to two years’ imprisonment.
Do I Need to Update my Corporate Governance Documents?
Though not mandatory, it’s good corporate practice and recommended that business owners revise their operating agreement or bylaws to include CTA reporting provisions, especially so that all owners and officers remain aware of the reporting requirements. And if you’re adding a CTA provision to your operating paperwork, it’s also a good time to do any other corporate governance housekeeping you’ve been pushing off.
Now’s the time to plan for the January 1, 2024, reporting implementation. If you need help determining whether your business is a reporting company—or for any other corporate governance and regulatory compliance needs—contact The Chapman Firm for personalized analysis and professional guidance.