New Beneficial Ownership Reporting Requirements for U.S. Businesses in Effect as of January 2024
On January 1, 2021, Congress passed the Corporate Transparency Act (the “Act”). The Act requires certain entities, called “reporting companies” to disclose certain personal information about their owners, senior officers, company applicants, and other individuals who exercise substantial control of the entity to the Financial Crimes Enforcement Network (“FinCEN”) managed by the United States Department of the Treasury.
This information is called Beneficial Ownership Information (“BOI”) and must now be reported to FinCEN upon the formation of the entity and promptly updated upon any changes. As of January 1, 2024, the first of the key compliance requirements of the Act has gone into effect, requiring BOI reports to be uploaded to FinCEN. BOI reports may be submitted and updated electronically via FinCEN’s Website. Many small businesses in the United States organized as corporations, limited liability companies, or limited partnerships will qualify as reporting companies.
The Act is part of the federal government’s efforts to make it harder for foreign governments and bad actors to hide their identities through shell companies and opaque ownership structures. FinCEN and the Department of the Treasury state that the Act will assist law enforcement in identifying and preventing money laundering, terrorism, and clandestine activities by foreign governments. The Act has been described as “pulling back the veil” on privately owned business entities by requiring that beneficial owners and company applicants identify themselves and have their information placed in a non-public database that will be created and maintained by FinCEN.
To be clear, the Act does not strip a business owner of the personal liability protections they obtain by owning and operating a business. Business owners should not be afraid that the FinCEN database of beneficial ownership information creates personal liability for the officers or managers for the activities of the business unless an existing law permits such liability (i.e., failure to pay employees wages). However, the burden of compliance with the Act lies with the ownership of a business to submit their BOI to FinCEN – or direct the submission thereof – by the required date. The timeline for compliance will be discussed below but is determined by when the business entity was formed.
The ACT exempts twenty-three (23) specific types of entities from the reporting requirements. A complete list of the exempt entities is available on the Downloadable Compliance Guide on the FinCEN website. If your business is not explicitly exempt from the enumerated categories it is a reporting company that must submit its BOI to FinCEN. Most of the exemptions are businesses already heavily regulated by other federal laws or ones where owners are already required to identify themselves to the Federal Government on existing documentation, such as IRS forms.
The most anticipated exemption is for certain “Large Businesses” which must meet each of the following six (6) criteria to be exempt from the new reporting requirements:
– Employs more than 20 full-time employees, when applying the meaning of “full-time employee” provided in 26 CFR 54.4980H-1(a) and 54.4980H-3. In general, “full-time employee” means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with an employer.
– More than 20 full-time employees are employed in the “United States,” as that term is defined in 31 CFR 1010.100(hhh).
– Has an operating presence at a physical office within the United States. “Operating presence at a physical office within the United States” means that an entity regularly conducts its business at a physical location in the United States that the entity owns or leases and that is physically distinct from the place of business of any other unaffiliated entity.
– Filed a federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000.00 in gross receipts or sales. If the entity is part of an affiliated group of corporations within the meaning of 26 U.S.C. 1504, refer to the consolidated return for such group.
– Reported greater-than-$5,000,000.00 gross receipts or sales (net of returns and allowances).
– When gross receipts or sales from sources outside the United States, as determined under federal income tax principle, are excluded from the entity’s amount of gross receipts or sales, the amount remains greater than $5,000,000.00.
Other exemptions to the reporting requirements include banks, credit unions, security exchanges, insurance companies, public utility providers, certain investment companies, and certain tax-exempt entities. If you believe your entity is exempt from the Act’s reporting requirements, please consult FinCEN’s compliance guide or contact your attorney.
Beneficial Ownership Information and Who is a Beneficial Owner?
BOI is information about the individuals who exercise substantial control over the reporting company (including officers/managers) or who own or control at least 25% of the ownership interests. The definition of substantial control is broadly drafted but can include any person with the power to hire and fire senior-level employees or who can broadly set the nature, scope, and financial direction of the business. The definition includes a catch-all section for any other form of control that rises to the level of substantial control. By making the definition so broad, FinCEN has shown a clear desire that reporting companies list any person who may qualify as a Beneficial Owner on the reporting documents.
Reporting companies are required to file a Beneficial Ownership Information Report with FinCEN within the timelines detailed below. Click Here for a sample Beneficial Ownership Information Report. Please note there is no fee for submitting the BOI Report to FinCEN. Beneficial owners who expect to form multiple entities may wish to consider applying for a FinCEN ID number on the FinCEN website (as discussed below) to expedite future filings.
If your business was formed before 1/1/24
If your business qualifies as a reporting company and was created or registered to do business prior to January 1, 2024, then it will have until January 1, 2025, to report its:
– legal name;
– trade names (if any);
– principal place of business address;
– jurisdiction of formation; and
– Taxpayer Identification Number (“TIN”).
In addition, each reporting company created or registered to do business prior to January 1, 2024, will have until January 1, 2025, to report the following information about its beneficial owners:
– beneficial owners’ full legal names;
– beneficial owners’ dates of birth;
– beneficial owners’ residential addresses;
– an identifying number from an appropriate identification document belonging to each beneficial owner (passport, driver’s license, or government-issued identification); and
– an image of the identification document used to obtain the identifying number referenced immediately above.
If your business was formed after 1/1/24 but before 1/1/25
Reporting companies created or registered on or after January 1, 2024, have 90 calendar days after receiving notice of the company’s creation or registration to file its initial BOI report with FinCEN. Furthermore, reporting companies created or registered on or after January 1, 2024, must report information about their “company applicants” in addition to the information about itself and its beneficial owners listed above.
A “company applicant” refers to the individual or individuals who directly file the documents that create or register the company, and if more than one person participates in the filing, the individual primarily responsible for directing or controlling the filing. A company applicant may be your attorney or accountant depending on their role in filing the document that created or registered the reporting company. Each reporting company can have up to two company applicants, who must report as individuals. The company applicant may list their business address on the report if they formed the reporting company in their usual course of business.
Regarding company applicants, reporting companies created or registered on or after January 1, 2024, must report the following information in addition to the information about itself and its beneficial owners listed below:
– company applicant’s name;
– company applicant’s date of birth;
– company applicant’s address;
– an identifying number from an appropriate identification document belonging to each company applicant as well as the name of the issuing jurisdiction of the identification document; and
– an image of the identification document used to obtain the identifying number referenced immediately above.
If created after 1/1/25
Reporting companies created or registered on or after January 1, 2025, will have 30 calendar days after receiving notice of the company’s creation or registration to file its BOI report and identify its company applicants with FinCEN.
Updating Existing BOI Reports
Should the beneficial ownership information of a reporting company change, including the names and addresses of the beneficial owners, then the reporting company must update its BOI report with FinCEN within 30 days. Similarly, if the reporting company becomes aware of any error in the information provided in its BOI report, it must correct the error by filing an updated BOI Report within 30 days.
With a FinCEN identification number, the beneficial owner will only need to update their account information with FinCEN and any BOI report that lists their FinCEN identification number will likewise be updated. If the beneficial owner does not have a FinCEN identification number, they will need to update each BOI report where they are named as a beneficial owner.
FinCEN Identification Numbers
Beneficial owners or company applicants may request a FinCEN identification number that may be used on the BOI report in place of the required information. The use of a FinCEN ID may simplify future updating of BOI reports when the information of an existing beneficial owner changes.
Individuals who routinely form entities that would qualify as reporting companies under the Act (such as single-member LLCs for real estate transactions) or who qualify as beneficial owners of multiple reporting companies, may wish to consider applying for a FinCEN identification number.
Currently, there is no cost associated with applying for a FinCEN Identification number online.
Penalties for Non-Compliance
For a willful violation of the reporting requirement of the Act, the Civil penalty is a fine of up to $500.00 per day that the violation continues, and the Criminal penalty is imprisonment for up to two years and/or a fine of $10,000.00. A company applicant who willfully files a false or fraudulent BOI report shall be held to the same Criminal and Civil penalties as the beneficial owners of the reporting company.
Please be aware that there will likely be a large number of scam websites and individuals falsely purporting to offer services in connection with compliance with the Act’s requirements in the coming months and years.
Where will BOI information be stored and who can access it?
FinCEN will permit Federal, State, Local, and Tribal officials, as well as certain foreign officials who submit a request through a U.S. federal government agency, to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement. Financial institutions will have access to beneficial ownership information in certain circumstances, with the consent of the reporting company. Financial regulators will also have access to beneficial ownership information when they supervise financial institutions.
Beneficial ownership information reported to FinCEN will be stored in a secure, non-public database using rigorous information security methods and controls typically used in the federal government to protect non-classified yet sensitive information systems. FinCEN is expected to issue further rules in the coming years regarding access to the BOI database.
Future Compliance Changes from FinCEN
In the coming years, FinCen is expected to update its 2016 Customer Due Diligence rule that will require financial institutions to collect business BOI information before opening a business account if they do not already do so. Many banks already require businesses to identify analogous or identical information to that which would be contained in a BOI report before opening an account or applying for a loan. These updates to the Customer Due Diligence rule will make such reporting a requirement.
This blog is for informational purposes only and does not create an attorney-client relationship.
If you need any guidance on the BOI reporting process, whether or not you are a beneficial owner, whether your business qualifies as a reporting company, or any questions at all, please, do not hesitate to contact DDCRW.