Highlights

A final rule has been issued by FinCEN clarifying many elements of the Corporate Transparency Act and the related new Beneficial Ownership Reports.

Will my company need to file a Beneficial Ownership Report with FinCEN in 2024?

Most likely, yes. Starting in January 2024, the Corporate Transparency Act will make it mandatory for most small U.S. LLCs or corporations to file Beneficial Ownership Reports with FinCEN (Financial Crimes Enforcement Network). Statistics indicate that about 30,000,000 small businesses in the U.S. will be required to file initial reports in 2024. This new law does not apply to larger companies, defined as those with over 20 full-time workers and revenues in excess of $5,000,000. Additionally, some smaller companies are excluded if they do business in a regulated industry that already shares similar ownership information with regulators. Unless your company qualifies for an exemption, it will be defined as a “reporting company” under the new law and required to file a BOI report.

What information must companies disclose to FinCEN on their Beneficial Ownership Reports?

Business owners will be required to submit both general information about their company and specific information about all individuals who own 25% (or more) of the company’s ownership or make important decisions in the company. Owners and decision makers are defined as “beneficial owners” of the company under the new law and must be included in the Beneficial Ownership Reports.

General company details required on filings will include:

• Current business address
• Tax identification number
• Company name
• DBAs or the business’ trade names

Beneficial owner details will contain information about individuals such as:

• their legal names
• current residential addresses (current),
• Date of Birth
• identifying number from a legally acceptable document such as passport or driver’s license.
• Image of the I.D. card, driver’s license, or passport.

Companies in existence prior to the 1st of January, 2024 will have one year from that date to file their initial report. New companies and companies updating information will have thirty days to file. Owners will be also be required to file updated reports within 30 days whenever there is a change in any of the required information listed above.

What is the penalty for failing to file a beneficial ownership report under the corporate transparency act?

Not filing BOA reports by the deadline or filing false information can lead to jail time or substantial fines under the law. Owners found guilty of not complying with the reporting requirements of the CTA will be fined up to $10,000 or even serve up to two years in prison.

The Corporate Transparency Act came into existence in January of 2021 as a part of NDAA (National Defense Authorization Act) . It was enacted by congress as part of 2020 AMLA (Anti-Money Laundering Act). The objective was to prevent or deter criminals from infusing illegal funds into the country’s financial system through U.S. shell companies. Beneficial Ownership Information Reports will power FinCEN’s mission to identify owners of all U.S. companies to hold malicious parties accountable and prevent misuse of U.S. companies and the domestic financial system.

Full list of exemptions for Corporate Transparency Act report filing

According to Cooperate Transparency Act (CTA), potential reporting companies could are defined as any limited liability company (LLC), corporation, or entity that was created by having a document filed with a U.S. secretary of state or tribal government. Reporting companies can also be those corporations formed under a foreign country’s laws and registered in the U.S. to carry out business activities in our country. If an organizational or formation document was filed with a state secretary or in an office under state law, it would most likely be considered a reporting company.

Exemption of Large Companies

Companies considered “large operating companies” are exempt from filing a report. To be considered a large operating company, ALL of the following must be true:

• The company must employ over 20 workers on a full-time basis in the U.S.
• The company must have previously filed income tax returns showing gross earnings of over $5,000,000.
• The company must carry out operations primarily from a physical location within the U.S. The corporation must lease or own such office space. Also, the space shouldn’t be an individual residence. Finally, the space must not be shared with anyone apart from affiliated entities or partners

Some Other Exceptions based on regulation by other U.S. organizations

There are 23 other exceptions as outlined by FinCEN. These are rare and based on the industry-required filings that certain types of companies already complete. The following types of companies do not need to file reports:

• Domestic credit unions
• Banking institutions
• Security dealers and brokers
• Companies that are into money transmitting
• Depository institution-holding companies
• Security issuers
• Governmental authorities (domestic)
• Registered investment companies
• Other Securities Exchange Act (involving entities of 1934)
• Security exchanges & clearing agencies
• Inactive businesses
• Subsidiaries of some exempted companies
• Large operating entities
• Tax exempted entities
• Pooled investment vehicles
• Accounting companies
• Financial market utilities
• Public Utilities
• Commodity Exchange Act entities that are registered
• Insurance producers (state-licensed)
• Insurance entities
• Venture capital fund advisers
• Investment companies (registered) & advisers

(List provided by TurboCTA.com)

Entities that fall into these categories are regulated by federal and state agencies which hold details about their beneficial ownership, making filing a corporate transparency act report redundant.

What information must be included on a FinCEN beneficial owner report?

Beneficial ownership reports will contain two sections of information. The first will include general details about the company itself, and the second section will include information about individuals considered beneficial owners, decision-makers, and company applicants. For those that wish to offload this compliance process to a third-party, solutions exist to simplify these filings, such as those found on TurboCTA.com

Required Company Information to Report

Reporting companies must report distinguishing information about the LLC or the corporation itself. The following information will be included in all filings to identify each reporting company:

• Legal name of the business
• Primary business operations address of the business
• Unique tax identification number for the business (EIN)
• DBAs or trade names, including registered and non-registered names.

Companies must share their primary business address. This must be the address where they carry out most of their daily operations – and not simply a registration or mailing address. This address can be an office address or even a residential address if the small business is operated from home. According to FinCEN, registered agent addresses or P.O. boxes are unacceptable. Companies carrying out their operations from overseas are required to specify their best U.S. address, as overseas addresses will not be acceptable.

Domestic companies are expected to identify themselves by submitting their Federal EIN (Federal Employer Identification Number or “FEIN”). U.S. Companies that don’t have EINs should acquire EINs before the deadline. Foreign companies may use a non-U.S. tax number ONLY if their business does not subject them to U.S. tax.

Reporting companies are expected to include any trade names or DBAs they use on their beneficial ownership reports. DBAs or trade names registered with any state government must be included, and any names used but not registered.

Required Beneficial Owner Information to Report

Every reporting company must file specific details about each beneficial owner, including decision-makers and company applicants. Beneficial Ownership Reports must disclose the following details about each Beneficial Owner:

• Legal name
• Date of birth
• Current Residential address
• Identification number from an official document such as passport, driver’s license, and state I.D.
• A digital copy of the document uploaded during the reporting process.

The current residential address of each beneficial owner must be shared. Filings will not allow business addresses or P.O. boxes due to the limited investigative value these addresses provide.

It should be noted that company applicants (defined in the next section) are required by FinCEN to provide business addresses instead of their personal addresses. This is due to how company applicants function as agents that file applications while carrying out their business activities and do so, typically, from a business address.

What makes an individual a “Beneficial Owners” on my beneficial ownership reports?

According to FinCEN, beneficial owners are individuals who fall into EITHER of the following categories:

• Indirectly or directly own at least 25% ownership of an reporting entity.
• Exercise great control and power over the reporting entity.

25% Ownership

Someone can qualify as a beneficial owner when he/she controls or owns a minimum of 25% of an entity’s ownership through any variety of ownership mechanisms such as:

• Shares or management units
• Sole ownership of the entity or partnership greater than 25%
• Rights or warrants
• Convertible instruments
• Profit or capital interest
• The reporting company’s equity
• Other options for acquiring capital, and equity

This category has been left broad by FinCEN. It is to ensure that wrongdoers cannot conceal the ownership of their companies via complicated ownership. Reporting entities are expected to consider all elements of ownership while determining who should be specified as their beneficiary owners.

Substantial Control

This term is very broad. FinCEN has specified three control indicators to determine whether a person holds substantial control. ANY of the following would require an individual to be included in the beneficial ownership report:

• Serving as a senior officer or equivalent role of the reporting company.
• Wielding the authority or power to remove/appoint senior officers in a company.
• Having a significant influence over crucial matters in a reporting company

Despite all of these indicators, it is still possible for criminals to find weaknesses and exploit them. FinCEN has stated that companies must include individuals who can exercise substantial control but don’t want to reveal themselves to prevent exploits. Those directing the affairs or activities of the company in secret should always be included in the BOI reports.

Company Applicants

These are third-party services providers or companies that play a part in the formation of LLCs or corporations but no longer play any role in managing the business after its formation. However, FinCEN needs to know who helped new companies form and needs these individuals included in the BOI reports in a separate section. Company applicants must only be inclued for reporting companies formed after January 1st, 2024.

According to FinCEN, company applicants are defined as:

• A domestic reporting entity or individual that files documents for the creation of other domestic reporting companies.
• In the case of foreign companies, it is any individual who files the documents to have such foreign reporting company registered in the U.S.

Keep in mind that documents are sometimes filed by paralegal or lawyers. In many cases, such a process may involve two or more lawyers. This means multiple individuals must be included as “applicants” instead of “an applicant,” and all parties that worked to complete the filing must be shared in the BOI report.

Expectations and Penalties For Not Filing Beneficial Ownership Reports

Failure to comply with this new law is an illegal act similar to not filing a tax return or filing a false tax return. Companies or individuals that fail to comply with the law will be punished. Non-compliance is a criminal act under the law with listed penalties of a $10,000 fine and/or up to a 2-year prison term.

Companies are expected to file these reports and are responsible for collecting all needed information from their beneficial owners. Company applicants and beneficial owners are not expected to file individual reports because they are part of the company report. The burden is placed on reporting companies to ensure individuals submit valid and accurate information. Furthermore, some language of the final rule indicated that if a company unintentionally files a false report due to incorrect information provided to the company by an individual owner, the liability will pass through to the individual who provided incorrect information. A safe harbor does exist for correcting incorrect information. When false detail of reports are corrected within a period of 90 days after submission, this will fall within the “safe harbor” rule where regulatory liabilities will be eliminated.

Fortunately, complying with the Corporate Transparency Act and its related regulation can be very simple, thanks to service providers already starting up over a year ahead of the filing deadlines. Service providers such as TurboCTA are already tracking the launch of beneficial ownership reporting and building enterprise solutions for small businesses and law firms or accounting firms that provide compliance services for their customers. More information about simplified compliance solutions can be found on TurboCTA.com.