An estimated 32 million existing entities will need to report information about their beneficial owners – the individuals who ultimately own or control the company – to the Financial Crimes Enforcement Network (“FinCEN”) before December 31, 2024. Most small and medium-size businesses created in or registered to do business in the United States will be subject to these rules. Even single-member LLCs, that are disregarded for Federal income tax purposes, will need to report unless they meet an exemption.
The Corporate Transparency Act (CTA) mandating this new reporting was enacted in 2021 as a part of the National Defense Act and is the most significant reform to the Bank Secrecy Act in over twenty years. It is intended to enhance transparency in entity structures and ownership to combat money laundering, tax fraud, and other illicit activities.
What entities are impacted by new CTA reporting requirements?
Both entities organized inside and outside of the U.S. may be subject to CTA reporting. Corporations, limited liability companies (LLCs), or any similar entities formed under a state’s Secretary of State or foreign equivalent jurisdiction are required to comply. There are 23 exemptions to filing under the CTA, namely entities that are already regulated by federal or state governments and as such already disclose their beneficial ownership to government authorities. Most large operating entities fall under an exemption as long as they meet all of the following:
- Employ at least 20 full-time employees in the U.S.
- Report gross revenues over $5M on the prior year’s tax return, and
- Are physically present in the U.S.
What is Beneficial Ownership Information (BOI)?
Beneficial Ownership Information refers to details about individuals who either own at least 25% interest in a company or have significant control over a company. The ownership and control includes simple shares of stock as well as more complex instruments. The reportable information typically includes the name, date of birth, address, and unique identifying number from an acceptable document such as a passport or a US driver’s license along with an image of that document.
An individual has substantial control of a reporting company if he or she directs, determines or exercises substantial influence over important decisions of the reporting company. This includes any senior officers of the reporting company, regardless of formal title even if they have no ownership interest in the reporting company!
Reporting will be done electronically through a secure filing system on FinCEN’s website. The CTA has different filing deadlines on when an entity is registered or formed or if there are any changes to the beneficial owner’s information.
- All new reporting entities created/registered after December 31, 2023 must file within 30 days (90 days for 2024).
- Existing reporting entities created prior to January 1, 2024 must file by January 1, 2025.
- Reporting companies that have changes to previously reported information or discover inaccuracies to previously filed reports must file updates within 30 days.
In addition to reporting information on beneficial owners, reporting entities created/registered after December 31, 2023 need to also report information regarding the individual who files the documents that creates or registers the company, which could be the company’s attorney or other representative.
Penalties for Failure to Comply
Penalties for willfully violating the BOI reporting requirements can result in criminal and civil penalties of up to $500 per day up to a maximum of $10,000 and up to two years of jail time.
Beware of Fraudsters Attempting to Obtain Your Information
Given the widespread applicability of the new rules and the lack of awareness among many entities, unscrupulous individuals are exploiting the recent changes in the CTA to illicitly acquire information. Be cautious of any communication with the subject line “Important Compliance Notice” or any request prompting you to click on a URL or scan a QR code. FinCEN warns that such emails or letters are fraudulent. FinCEN does not initiate unsolicited requests for information. If you are required to report beneficial ownership information under the CTA, you will provide the information electronically directly to FinCEN.
Given the complexities involved, it may be beneficial to consult with legal counsel to ensure you’re fully compliant with the act. For additional information regarding BOI reporting requirements under the CTA, the FinCEN has published a list of Frequently Asked Questions on their website https://www.fincen.gov/boi-faqs