The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued a final rule establishing beneficial ownership information reporting requirements pursuant to the Corporate Transparency Act (CTA) adopted by Congress on January 1, 2021. FinCEN estimates that the final rule implementing these requirements will impact more than 32 million existing entities.
The rule takes effect on January 1, 2024. It will require certain entities organized or registered to conduct business in the U.S. (referred to in the CTA as “reporting companies”) to file information on their “beneficial owners” with FinCEN. This information will include details on the entity’s beneficial owners and applicants who assist with the formation or registration. The report must be updated each time the entity undergoes substantial ownership changes (e.g., changing its name or office address, admitting a new shareholder, hiring or firing an executive officer).
Purpose of The Reporting
Until now, many states, including Delaware and Virginia, allowed company registrations without disclosing information about entity shareholders or managers. This lack of transparency allows bad actors to hide illegal activity behind an elaborate structure of faceless entities. FinCEN’s goal in collecting beneficial ownership information is to deter financial crimes by making it more difficult for criminals to exploit shell companies to launder money, participate in corruption or counterfeit goods transfers, and evade taxes.
Protection Of Reported Information
The collected information will not be publicly accessible. All reports filed will be exempt from search and disclosure under the Freedom of Information Act of 1966. However, under certain conditions, FinCEN may disclose this information to authorized government departments, tax authorities, law enforcement, and financial institutions.
What Entities Are Subject To The Reporting Requirement?
A “reporting company” is defined broadly to include any entity that is “a corporation, limited liability company, or other similar entity” and that is either (1) created by filing a document with a secretary of state or a similar office under the laws of a state or Indian tribe, or (2) formed under the laws of a foreign country and registered to do business in the U.S. Entities not created by filing a document with a secretary of state (for example sole proprietorships, general partnerships, and certain trusts) are exempt from reporting.
What Entities Are Exempt From Reporting Requirements?
There are 23 types of entities exempt from the definition of “reporting company,” primarily because they are already subject to federal and/or state or regulation. These include, among others, banks, utility companies, insurance companies, securities issuers, brokers or dealers in securities, registered investment companies and advisers, venture capital fund advisers, and accounting firms.
The list of exempt entities also includes tax-exempt entities, inactive entities (as defined in CTA), and “large operating companies” which employ more than 20 full-time employees in the U.S., accrue more than $5,000,000 in gross receipts or sales, and operate from a physical office in the U.S. (all three requirements must be met). Subsidiaries that are controlled or wholly owned, directly or indirectly, by the exempt entities are also exempt from the reporting requirements.
What Information Is Collected In The Beneficial Ownership Information (BOI) Report?
Information to be reported includes entity’s full name (and any DBAs), the jurisdiction of formation, the business street address and the IRS tax identification number.
“Beneficial owner” and “company applicant” details will include name, birthdate, address and a unique identifying number from an acceptable official document (such as a passport or state-issued driver’s license), together with a scanned photo of the ID used.
Who Are Beneficial Owners?
A beneficial owner is any individual who, directly or indirectly, either: (a) exercises substantial control over a reporting company, or (b) owns or controls at least 25% or more of the ownership interests of a reporting company.
An individual also has substantial control over a reporting company if they direct, determine, or exercise substantial influence over the entity’s important decisions. Such influence could include serving as a senior officer, retaining authority over the appointment or removal of any senior officer or a majority of the board of directors, or holding any other position through which the individual can direct, determine, or substantially influence important decisions. Senior officers do not include officers such as a corporate secretary or treasurer whose roles entail ministerial functions with little decision-making authority.
Beneficial owners do not include minors, individuals acting as agents or custodians, creditors, or holders of future inheritance.
What Constitutes An Ownership Interest?
“Ownership interest” is broadly defined to include equity, stock, capital or profit interests and any other mechanism used to establish ownership (e.g., convertible instruments, warrants and options or certain trust arrangements).
When Are Reports Due?
Reporting companies created or registered before January 1, 2024, will have until January 1, 2025, to submit information about their beneficial owners but not about the company applicants. Entities created on or after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports with information on both beneficial owners and company applicants. The same 30-day deadline applies to reporting changes or corrections to the information in the previously filed reports. For corrections, the 30-day period starts when the company becomes aware or has reason to know of the inaccuracy of information provided in its earlier reports.
What Are Penalties For Non-compliance?
Deliberate non-compliance and fraudulent reporting will be punished with fines of up to $10,000 and imprisonment for up to two years or a combination of these penalties. There are civil penalties of $500 per day for continuous violations.
How Do I Prepare?
Affected businesses and individuals (especially those co-investing in vehicles such as limited liability companies or owning interests in multiple entities) should familiarize themselves with the requirements and consult their legal counsel. Businesses subject to reporting should start gathering the required information and take time to develop a secure system for storing and keeping track of the reported information.
FinCEN will collect all information through an electronic filing system. The reports will not be required or accepted before January 1, 2024.
Where can I find more information about BOI reporting?
FinCEN will publish a “Small Entity Compliance Guide” that will inform smaller companies about the reporting requirements. FinCEN’s website contains detailed information about BOI reporting at https://www.fincen.gov/boi
