MANY BUSINESSES ARE NOW REQUIRED TO FILE REPORTS WITH THE FINANCIAL CRIMES ENFORCEMENT NETWORK

Beginning this year, a sweeping new federal law called the Corporate Transparency Act (“CTA”) will require most US small businesses to report information about their beneficial owners.  The information must be reported to the Financial Crimes Enforcement Network (“FinCEN”). FinCEN is a bureau of the U.S. Department of the Treasury.  According to FinCEN, the goal of the law and filing system is to “crack down on illicit finance and enhance corporate transparency.”

Who does this law apply to?

The law applies to all corporations, limited liability companies (LLCs) and other entities that were created in the United States by filing a document with a secretary of state or any similar office.  Although there are exceptions under the law for larger companies and certain highly regulated companies (as described below), most small business – no matter when formed – will be required to report.

What filings are required? 

Existing companies must file a report with FinCEN before the end of 2024.  We recommend that existing businesses file earlier in the year to avoid possible delays in the filing at the end of the year.

Any new company formed in 2024 must file within 90 days of formation.  Any new company formed in 2025 or thereafter must file within 30 days of formation.

FinCEN will not be charging companies a filing fee for filing a report.

What updates are required?

Importantly, any updates or corrections to the beneficial ownership information previously filed with FinCEN must be submitted within 30 days of the change.  This means any sale of stock, sale of membership interests, changes to the board of directors, changes to officers, change to managers, etc must be reported within 30 days.

How is the information reported?

Companies must report beneficial ownership information electronically through FinCEN’s website: www.fincen.gov/boi.  Any updates, changes or corrections must also be reported through this web site.   

What happens if my company does not make the required filing or provides false or incorrect information?

The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information, may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000.

Note that Senior officers of an entity that fails to file a required report may be held accountable for that failure.

Also note that the failure to update beneficial ownership information after an initial filing could result in a violation as described above.

Additionally, a person may be subject to civil and/or criminal penalties for willfully causing a company not to file a required report or to report incomplete or false beneficial ownership information to FinCEN. For example, an individual who qualifies as a beneficial owner might refuse to provide information, knowing that a company would not be able to provide complete beneficial ownership information to FinCEN without it. Also, an individual might provide false information to a company, knowing that information is meant to be reported to FinCEN.

What companies are exempt under the reporting requirements?

The law exempts 23 specific types of entities from the reporting requirements.  An entity that qualifies for any of these exemptions is not required to submit reports to FinCEN.  Most of these types of exempt entities are already highly regulated by the US or state government and will not apply to most operating businesses. 

The most helpful exemption applies to “large operating companies”.  A company qualifies as a large operating company if ALL of the following factors are satisfied:

• The entity 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 of the entity are employed in the “United States,” as that term is defined in 31 CFR 1010.100(hhh).
• The entity 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.
• The entity filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 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.   
• The entity reported this greater-than-$5,000,000 amount as gross receipts or sales (net of returns and allowances) on the entity’s IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form.
• 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.

Another exemption is appliable to a 501(c)(3) tax exempt entity.  This exemption applies if the entity is an organization that is described in section 501(c) of the Internal Revenue Code of 1986 (“Code”) (determined without regard to section 508(a) of the Code) and exempt from tax under section 501(a) of the Code.

Who is a beneficial owner of a company?

As noted above, unless a company is exempt, the company must report all beneficial owners.  Below is a general description of the definition of beneficial owner.  However, this definition is extremely broad and companies should be careful in determining their beneficial owners as a failure to list all beneficial owners could subject the company and its officers to the penalties described above.    

In general, a beneficial owner of company is someone who:

• Exercises substantial control over a reporting company; OR
• Owns or controls at least 25 percent of the ownership interests of a reporting company.

While the ownership criteria may be clear for many companies, the “substantial control” element could be difficult to determine.  According to FinCEN, someone exercises substantial control if the person meets ANY of the following criteria:

• the individual is a senior officer (this includes President, CEO, CFO, COO, General Counsel or “any other officer, regardless of official title, who performs a similar function to these officers”).
• the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company (this likely includes “managers” of a limited liability company);
• the individual is an important decision-maker; or
• the individual has any other form of substantial control over the reporting company.

Note that each criteria above is not particularly specific and the last criteria is a “catch-all” that could include someone who doesn’t have a title and isn’t an officer or director or manager – but who exerts control over the company.  

What information must reporting companies provide?

In its report filed with FinCin, the company must report the following information regarding itself:  (1) full legal name of the Company; (2) any trade name or “doing business as” (DBA) name; (3) complete current U.S. address; (4) state, tribal, or foreign jurisdiction of formation; and (5) Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)).

The company must provide the following information regarding its beneficial owners: (1) full legal name; (2) date of birth; (3) complete current address (residential street address); (4) unique identifying number and issuing jurisdiction from, and image of, one of the following non-expired documents: U.S. passport, state driver’s license, identification document issued by a state, local government, or tribe. 

Note that an image of the identifying document is required and companies will need to obtain this information from all of their beneficial owners (as defined above). 

In addition, for companies formed in 2024 and thereafter, the company will also need to provide similar information regarding up to 2 “company applicants.”

For individuals who own interests in numerous entities, is there an expedited way to provide this information?

FinCEN permits any individual to obtain a “FinCEN identifier” from FinCEN by providing the information described above.  Once an individual has a FinCEN identifier, any company in which they own an interest can use that FinCEN identifier instead of providing the other information described above. 

Who has access to this information?

According to FinCEN, the information reported may be disclosed to (1) US Federal agencies engaged in national security, intelligence, or law enforcement activity; (2) US State, local, and Tribal law enforcement agencies; (3) foreign law enforcement agencies, judges, prosecutors, central authorities, and competent authorities (foreign requesters); (4) financial institutions using the information to facilitate compliance with customer due diligence requirements under applicable law; (5) Federal functional regulators and other appropriate regulatory agencies acting in a supervisory capacity assessing financial institutions for compliance with customer due diligence requirements under applicable law; and (6) Treasury officers and employees.  According to FinCEN, “each category of authorized user will be subject to specific security and confidentiality requirements, in line with the CTA, to protect the security and confidentiality” of the information.  A Fact Sheet discussing these requirements can be found here:  Fact Sheet: Beneficial Ownership Information Access and Safeguards Final Rule | FinCEN.gov.      

Additional Information

The above description of the new CTA filing rule is very general and the rule itself is much more detailed and nuanced.  Additional information can be found in the FinCEN Small Entity Compliance Guide found at BOI Small Compliance Guide v1.1 (fincen.gov).  Instructions regarding filing the reports can be found at BOI Report Filing Instructions (fincen.gov).  Reports can be filed at BOI E-FILING (fincen.gov).

Please feel free to contact Harrison Gibbs or Peter Mellette if you have any questions or would like assistance in navigating the new rules.  Please note that we will not be filing reports on behalf of our clients and such filings must be made by the company itself.