Beginning January 1, 2024, a substantial range of existing or new business entities registered, created, or operating in the United States will be required to submit beneficial ownership information (“BOI”) to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCen”).
What is the Corporate Transparency Act?
The Corporate Transparency Act (“CTA”) is a law passed by Congress on January 1, 2021 as part of the Anti-Money Laundering Act of 2020. The CTA’s stated goal is to provide national security and law enforcement agencies greater ability “to counter money laundering, the financing of terrorism, and other illicit activity.” Small, unregulated business entities are the primary focus of the CTA, particularly entities considered “shell companies”, where ownership information is hidden and funds aiding illicit activity can pass through. FinCen published its final rule for the Beneficial Ownership Information Reporting Rule (the “Reporting Rule”) on September 29, 2022.
Beneficial Ownership Reporting Requirements
FinCen currently estimates that there will be at least 32 million entities that will be required to report BOI on the effective date of the Reporting Rule, with another five million reporting entities created each following year.
The Reporting Rule requires a broad spectrum of “reporting companies”, both domestic and foreign, to submit BOI:
- Domestic Companies including any corporation, limited liability company, or any other entity created through a filing with a secretary of state or a similar state or tribal office. Limited liability partnerships, limited partnerships, business trusts, and other similar non-corporate entities will likely fall under this category.
- Foreign companies include any foreign reporting company that is a corporation, limited liability company, or any 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 a similar office.
While the Reporting Rule covers a broad range of reporting companies, the rule is geared towards smaller, otherwise unregulated business entities, as can be seen by several of its 23 exemptions from the rule, including:
- Regulated companies (consisting of banks, bank holding companies, insurance companies or state-licensed insurance providers, public utilities, etc.)
- Large operating companies, or companies with 20 or more full-time U.S. employees, more than $5million in revenue generated in the U.S., and physical operating presence in the U.S.
- Issuers registered with the Securities and Exchange Commission
- Tax exempt entities
- Inactive companies
What is Beneficial Ownership Information?
In providing BOI, reporting companies will submit forms that include their: (i) name, (ii) business street address, (iii) jurisdiction of formation (or registration for foreign companies), (iv) and a unique identifier such as the Employer Identification number.
Companies will have to submit identifying information for beneficial owners and company applicants, including:
- Full legal name
- Date of birth
- Current residential or business street address
- A unique identifying number from an acceptable identification document (such as a State issued ID or passport), along with an image of the document
What is a Beneficial Owner?
- Any individual who, directly or indirectly, exercises substantial control over a reporting company, or
- owns at least 25% of the ownership interests of the reporting company. Substantial control is defined as someone who is serving as a senior officer, is able to remove any senior officers or members of a board of directors, or has substantial influence or control over important matters of the reporting company.
Who is a Company Applicant?
- 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., or
- the individual who is primarily responsible for directing or controlling the filing of the relevant document by another.
Penalties
While FinCen, in its press releases and final rule, has stated that it will focus on educating and raising awareness amongst business entities and beneficial owners, there are significant criminal and civil penalties for failure to comply (fines of up to $500 a day, capped at $10,000, and imprisonment for up to 2 years).
Timing
January 1, 2024 is the effective date of the Reporting Rule. Companies that exist prior to the effective date will have until January 1, 2025 to submit their BOI, while companies that are created after the effective date will have 30 days to submit their BOI. Any change in BOI must be reported within 30 days.
Key Takeaways
Starting January 1, 2024, companies created or operating in the United States will need to become extremely diligent in reporting their BOI to FinCen. Considering that numerous small business entities often do not place emphasis on administrative corporate governance tasks (such as the taking of company minutes, filing annual reports, maintain votes of stockholders or directors, etc.), these entities will need to become proficient at maintaining, updating, and reporting BOI so as not to run afoul of civil or criminal penalties. While existing entities have a year from the effective date to submit their BOI, complicated ownership structures may delay reporting ability. Business owners should either familiarize themselves with the requirements or reach out to attorneys to begin helping them prepare the new reporting landscape.
