Effective January 1, 2024, as part of the National Defense Authorization Act, the Corporate Transparency Act requires domestic and foreign reporting companies to report beneficial ownership information to the Financial Crimes Enforcement Network (“FinCEN”).
KingSpry’s Taisha Tolliver-Duran, Esq. has kept abreast of the changes in legislation, and details what businesses must know about the new law to avoid civil and criminal penalties.
Enacted in 2021, the Corporate Transparency Act (“CTA”) aims to protect U.S. national security, combat money laundering, terrorist financing, tax fraud and other criminal activity. Effective January 1, 2024 , businesses that meet certain criteria must report their beneficial ownership information (“BOI”) to FinCEN. The failure to comply with such reporting obligations may result in severe civil and/or criminal penalties.
Purpose and Significance
The CTA aims to identify individuals who engage in illegal activity by attempting to conceal their ownership of business entities in the United States. Such activity includes money laundering, financing terrorism, tax fraud, and other acts of foreign corruption that may harm national security interests.
The CTA permits FinCEN to collect BOI from business entities to protect national security interests and enable efforts to identify malign actors and illicit activities.
While the CTA’s reporting requirements are intended to flag and penalize malign actors, compliant companies, too, will be significantly impacted. As such, all companies must familiarize themselves with the new law.
The reporting requirement under the CTA became effective on January 1, 2024. The reporting timeline is as follows:
- Entities registered prior to January 1, 2024 have until January 1, 2025 to file their BOI reports;
- Entities registered between January 1, 2024 and January 1, 2025 must file their BOI reports within ninety (90) calendar days of formation; and
- Entities registered after January 1, 2025, must file their BOI reports within thirty (30) calendar days of formation.
Who is Required to Report?
BOI reports must be filed by domestic and foreign reporting companies (“reporting companies”).
Domestic Reporting Companies: Includes any corporation, limited liability company, or entity created by the filing of a document with a secretary of state (or similar office).
Foreign Reporting Companies: Includes any corporation, limited liability company, or entity formed under the law of a foreign country AND registered to do business in the United States or tribal jurisdiction by the filing of a document with a secretary of state (or similar office).
Large operating companies that meet the following criteria are exempt from the CTA’s reporting requirements:
- Entities that employ more than twenty (20) full-time employees in the United States;
- Entities that have an operating presence at a physical office in the United States; and
- Entities that demonstrate more than $5 million in gross receipts or sales on their federal income tax return.
Other exempt entities include, but are not limited to: governmental authorities, banks, credit unions, money services businesses, brokers in securities, investment companies, accounting firms, inactive entities and insurance companies. In total, there are 23 exemptions enumerated under the CTA. To determine whether your business is exempt, a comprehensive review of the complete list of exemptions under the CTA should be conducted.
Who are Beneficial Owners?
Beneficial owners are any individual who (1) exercises substantial control over a reporting company; or (2) owns or controls at least twenty-five percent (25%) of ownership interests of a reporting company.
Individuals who exercise substantial control over a reporting company may be senior officers, important decision makers, and/or an individual who has the authority to appoint or remove officers or directors.
Ownership interest includes equity, stock, voting rights, capital interest, profit interest, convertible instruments, among other mechanisms used to establish interest.
Many companies can and often will have more than one beneficial owner. Reporting is required for each beneficial owner.
Individuals who directly file documentation in connection with entity formation or registration of a foreign entity to conduct business in the U.S. (“company applicants”) must also adhere to the CTA reporting requirements.
Exemptions to the Beneficial Owner Definition
The CTA exempts the following types of individuals from its definition of a beneficial owner:
- A minor child, provided that the reporting company reports the required information of the minor child’s parent or legal guardian;
- An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
- An individual acting solely as an employeeof a reporting company in specified circumstances;
- An individual whose only interest in a reporting company is a future interest through a right inheritance; and
- A creditor of the reporting company.
Filing the Beneficial Ownership Information Report
Reporting companies must provide the following information about their entity:
- Full name;
- Trade name;
- Street address of the main place of business or headquarters;
- Jurisdiction of formation; and
- Federal tax identification number (TIN).
Individual beneficial owners and company applicants must provide FinCEN with their:
- Full legal name;
- Date of birth;
- Street address;
- Driver’s license, passport, or state ID identification number; and
- Image to authenticate their identity.
Reports must be filed with FinCEN through its BOI E-filing System. Entities should be aware that FinCEN is developing a new Beneficial Ownership Secure System (“BOSS”), which will be used to collect, store, and maintain filed reports in the future. As such, filing requirements are anticipated to change in the future.
If a reporting company willfully fails to file complete or updated BOI to FinCEN, they may face civil and/or criminal penalties. Civil penalties include up to five hundred dollars ($500) per day of the continued violation. Criminal penalties include imprisonment for up to two (2) years and/or fines of up to ten thousand dollars ($10,000).
Senior officers of reporting companies that fail to file required BOI reports may be held accountable for such failure and face penalties.
Are BOI Reports Publicly Available?
No. Filed reports are not publicly available nor are they subject to Freedom of Information Act requests.
Can Reports Be Amended After Filing?
Yes. If a reporting company is aware of changes or inaccuracies to filed reports, they must file an updated report within thirty (30) calendar days of said change.
Key Takeaways for Businesses
The CTA imposes new reporting requirements, which sets higher standards for corporate transparency. Businesses must be proactive in determining whether they are a reporting company under the CTA. If so, reporting companies should identify beneficiary owners and company applicants, and ensure that all BOI is reported to FinCEN on or before the filing deadlines.