The Corporate Transparency Act of 2021 (CTA) is a key piece of legislation that’s all about enhancing transparency and combating illicit activities such as money laundering, terrorism financing, and tax evasion. As part of this legislation, businesses are required to report their beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. This requirement represents a significant federal effort to collect data that will directly or indirectly impact corporations, limited liability companies (LLCs), and other similar entities formed or registered under state law.
The BOI reporting program is the first of its kind, as entity formation and creation have historically been managed at the state, tribal, or foreign government level. As such, it’s critical for business owners and management teams to understand these new rules and determine if and when they need to comply.
So, let’s dive in to understand important aspects of the BOI reporting requirements:
1. So, You’re Wondering Who Has to File a Beneficial Ownership Information Report?
First, you have to figure out if your business is what the CTA calls a “reporting company.” Sounds fancy, right? But what does it really mean? Well, if your business is:
A corporation, LLC, or something similar and you’ve made it official by:
- Filing a document with any domestic secretary of state or Indian Tribe, or
- Forming it under the laws of a foreign country and registered with any domestic secretary of state or Indian Tribe to do business in the U.S., and
- is not exempt under the CTA (more on exemptions below)
….then you’re in the club.
2. So, Who May Be Exempt from Reporting Beneficial Ownership Information?
Not everyone has to jump through hoops to report BOI. Some lucky ones get to slide by without a second glance. But who are they? Well, it’s not a random selection. There are specific criteria that determine who gets the golden ticket of exemption. The CTA includes 23 categories of entities that are exempt, including:
- Securities reporting issuers
- Governmental authorities
- Banks and credit unions
- Depository institution holding companies
- Money services businesses
- Brokers or dealers in securities
- Venture capital fund advisers
- Insurance companies
- Public utilities
- Tax-exempt entities
- Large operating companies
- Subsidiaries of certain companies
- Inactive entities
It’s important to consult FinCEN guidance to determine whether your business qualifies for an exemption, as there are specific criteria for each exempt category. For example, the “large operating company” exemption requires that the company:
- Employ more than 20 full-time employees in the U.S.
- Have filed federal income tax returns in the U.S. showing more than $5 million in gross receipts or sales in the previous year
- Have a physical office in the U.S.
Additionally, even if your entity is initially exempt, a future change in activity or classification could trigger a BOI filing requirement.
3. How Do Companies Reporting Beneficial Ownership Information Get Started?
If your entity is classified as a reporting company, the next step is to identify each beneficial owner and applicant associated with the entity.
Who Qualifies as a Beneficial Owner?
A beneficial owner is defined as an individual who:
- Exercises substantial control over the entity, or
- Owns or controls at least 25% of the ownership interests in the entity
There are exceptions, such as minors (if the parent is being reported), employees acting solely in their employment capacity, and creditors who do not meet the definition of control or ownership.
Who Is an Applicant?
An applicant is any individual who, for entities created on or after January 1, 2024:
- Files an application to form a corporation, LLC, or similar entity under state or tribal laws
- Registers a foreign entity to do business in the U.S.
4. What Information Needs to Be Included on a Beneficial Ownership Information Report?
The reporting company must provide the following information:
Reporting Company:
- Full legal name
- Trade name or DBAs (if applicable)
- Current U.S. business address
- State, tribal, or foreign jurisdiction information
- IRS TIN or EIN
Beneficial Owners and Applicants:
- Full legal name
- Date of birth
- Complete current address (primary residence for beneficial owners, business address for applicants)
- Identifying number and issuing jurisdiction from, and an image of, one of the following non-expired documents:
- U.S. passport
- State driver’s license
- Identification document issued by a state, local government, or tribe
- Foreign passport (if no other documents are available)
- FinCEN identifier (obtained via application to FinCEN)
5. When Does Beneficial Ownership Information Reporting Begin?
FinCEN began accepting BOI reports on January 1, 2024. The deadlines for submission are based on the date your company was established:
- Prior to January 1, 2024: Initial BOI report due by January 1, 2025.
- On or after January 1, 2024, and before January 1, 2025: Initial BOI report due within 90 days of formation.
- 2025 or later: Initial BOI report due within 30 days of formation.
If there are changes to a report already filed (e.g., change of address, new contact information, change in control), the company must report the changes within 30 days.
6. So, What are the Penalties for Slipping Up on Beneficial Ownership Information Reporting Requirements?
If you’re thinking about playing fast and loose with the Beneficial Ownership Information Reporting requirements, you might want to think again. Noncompliance is no joke and can result in civil penalties of up to $500 per day that a violation continues. Criminal penalties include a fine of up to $10,000 and/or up to two years of imprisonment. However, if a report contains errors, companies have 30 days to correct the report without facing penalties.
7. Just How Tight Is Your Beneficial Ownership Info’s Security?
The CTA is quite serious about maintaining the confidentiality and security of the reported information. FinCEN had to create secure systems to store and protect the data, making sure it can only be accessed by authorized government agencies for legitimate reasons.
The BOI reporting requirements under the Corporate Transparency Act represent a significant step towards enhancing transparency and protecting the U.S. financial system from shady activities. Sure, compliance might mean a bit more admin work, but it also opens doors for businesses to do some deep digging on potential clients, partners, and suppliers.
It’s crucial for business owners and management teams to stay in the loop about the evolving requirements and take the lead to ensure compliance. Need a hand understanding these new rules, managing their impact on your organization, and making sure all required filings are done right and on schedule? Don’t hesitate to reach out and we can help you navigate these choppy compliance waters.
