New and existing corporations should start familiarizing themselves with a new law that will require beneficial ownership information (BOI) to be reported. Effective January 1, 2024, corporations, limited liability companies (LLCs) and other entities formed under state law (domestic reporting companies) or similar entities formed under foreign law and registered to do business in the U.S. (foreign reporting companies), are required to report their beneficial ownership to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCen). Failure to comply will result in penalties.
What is the Purpose of Filing Beneficial Ownership Information?
The BOI reporting provisions are included in the Corporate Transparency Act (CTA) which is part of the Anti-Money Laundering Act of 2020 (AML Act). This rule was created to strengthen the ability of FinCen and other agencies to protect U.S. national security along with preventing and combatting money laundering, terrorist financing, tax fraud and other illicit activity. Under the CTA, access to BOI will be granted to federal agencies engaged in national security, intelligence or law enforcement activities. The Department of the Treasury in connection with its official duties, as well as state and local law enforcement agencies in connection with criminal or civil investigations, will also have access.
Who is Required to File Under the Corporate Transparency Act?
Reports must be filed by domestic and foreign reporting companies. A domestic reporting company is defined as a corporation, LLC or any entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe. A foreign reporting company is a corporation, LLC or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office.
Who Is Considered to Be a Beneficial Owner and Company Applicant?
The rule requires that reporting companies file reports with FinCen that identify individuals who are beneficial owners and company applicants of the entity. In most cases, the company applicant will also be a beneficial owner of the company. Under the rule, a beneficial owner includes any individual who directly or indirectly exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company. The company applicant can be defined as an individual who directly files the document that creates the entity, or in the case of a foreign reporting company, the document that first registers the entity to do business in the U.S., as well as the individual who is primarily responsible for directing or controlling the filing of the relevant document by another.
Nonetheless, the rule exempts five types of individuals from the definition of beneficial owner. The following are not considered beneficial owners of a reporting company:
- A minor child, provided that the reporting company reports the required information of the minor child’s parent or legal guardian
- An individual acting as a nominee, intermediary, custodian or agent on behalf of another individual
- An individual acting solely as an employee of a reporting company in specified circumstances
- An individual whose only interest in a reporting company is a future interest through a right inheritance
- A creditor of the reporting company
Are There Exemptions from Beneficial Ownership Information Reporting?
An exemption applies to entities that employ more than 20 full-time employees in the U.S., have an operating presence at a physical office in the U.S. and demonstrate more than $5 million in gross receipts or sales on their federal income tax return. In the future, entities that fall below the exemption threshold, will have 30 days to file a report. An updated report is required if a reporting company later becomes eligible for the exemption. Besides this exemption, the proposed regulations include 23 statutory exemptions from the definition of a reporting company. Below are some noteworthy exemptions of the rule:
- Securities and Exchange Commission (SEC) reporting companies
- Regulated financial service companies including banks, credit unions, depository institution holding companies, registered securities broker-dealers, registered investment companies and investment advisers, venture capital fund advisors and pooled investment vehicles
- Entities registered pursuant to the Commodity Exchange Act
- Tax-exempt entities
- Subsidiaries of certain exempt entities
- Large operating companies
- Accounting firms
- Inactive businesses
The full list of exemptions from beneficial ownership information reporting can be found in the final rule by the Financial Crime Enforcement Network in the National Archives of the Federal Register.
What Information is Required in the Report and How Do I File?
The report will include information about the reporting company and information about individual beneficial owners and company applicants. The reporting company will need to include their full legal name, any trade name or “doing business as” name, current address, jurisdiction of formation and federal taxpayer ID number. They must also provide FinCen with the full legal name, birthdate, address and an acceptable identification document along with the image of the document for each beneficial owner and company applicant. All reports filed will not be available to the public and are not subject to requests under the Freedom of Information Act.
In the event that there are any changes or inaccuracies to information previously reported, the reporting company is required to file an update within 30 calendar days after the date on which the change occurs. Reporting companies created or registered before January 1, 2024, will have one year (January 1, 2025) to file their initial reports, while reporting companies created or registered after the effective date will have 30 days after receiving notice of their creation or registration to file their initial reports. FinCen is currently developing a new IT system called the Beneficial Ownership Secure System (BOSS), which will be used to collect, store and maintain BOI reports.
As of right now, FinCen has released a final rule along with fact sheets for reporting companies to read over before the rule goes into effect. New guidelines will be released as we approach the new year. If you are a reporting company who has any questions on how this may affect you, please contact a BSSF advisor.
About the Author
Ken Wolfe, CPA, CGMA, President and Managing Principal at Brown Schultz Sheridan & Fritz (BSSF). He leads the Firm in its mission to help people achieve extraordinary outcomes. Ken is responsible for directing the Firm’s culture, vision and growth strategy, as well as managing the Firm’s professional services and internal operations.