In October of 2022, I sent out an early warning that Congress had adopted the Corporate Transparency Act (CTA), which will require small, privately held companies to report information about their ownership to the federal government. Because the CTA takes effect on January 1, 2024, I thought now would be a good time for a reminder and some updates about the CTA. You can see my earlier post here.
The agency enforcing the CTA is the Financial Crimes Enforcement Network or FinCEN. Initially FinCEN stated that companies formed on or after January 1, 2024, would have thirty calendar days after formation to file their initial BOI (beneficial owner information) report with FinCEN. More recently, FinCEN extended the reporting deadline from thirty days to ninety days. Companies in existence on 12/31/23 will still have until 1/1/25 to file their initial BOI report.
Although there have been some lawsuits filed to prevent FinCEN from enforcing the CTA as unconstitutional, the prudent course of action is to assume those challenges will not succeed. Here is a short list of the actions you should be considering:
• Determine whether your company is required to file BOI reports
• Alert your clients and contacts about this new requirement
• Rewrite your corporate documents (and tell your clients to rewrite theirs) so that investors/owners/officers/directors agree to provide the required information to the company (and any changes thereto), and consent to the company submitting that information to FinCEN
• If you or any of your clients invest in or are an officer or director of numerous companies, consider obtaining a “FinCEN Identifier” so you only have to provide your sensitive information one time directly to FinCEN, and not to every company in which they hold shares or are an officer or director.
• If you hear someone talking about forming a new company in the next few months, tell them to consider forming the entity by 12/31/23 to buy an additional year before they have to file their first BOI report (but synch up with their tax advisor to avoid triggering a tax filing or payment for 2023).
Click here to go to FinCEN’s landing page for the Corporate Transparency Act, where you can find further links to useful information such as FAQ’s and a compliance guide. For a more complete summary of the CTA, see the following outline:
What it is:
The Corporate Transparency Act (part of the Anti-money Laundering Act of 2020), a law passed by the United States Congress to prevent drug dealers, terrorists, and other bad actors from laundering their ill-gotten gains in the U.S. by hiding behind shell companies. The law requires small, privately held companies to report “beneficial ownership information” (BOI).
Who enforces it:
The Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury.
Which entities must file reports:
Basically any legal entity formed by filing articles or a similar document with a Secretary of State or similar agency (e.g. corporations, LLCs, and limited partnerships). However, 23 types of entities are exempt from filing BOI reports, including:
• Publicly traded companies
• Highly regulated companies e.g. investment advisers, broker-dealers, insurance companies, banks, etc.
• Tax-exempt entities e.g. 501(c)(3)s
• Privately held companies that have:
(a) Over 20 FT employees in the US
(b) More than $5,000,000 annual revenue, AND
(c) A physical office in the US.
Note it’s the entity itself that must file BOI reports with FinCEN, not the individuals whose information is being reported.
When reports must be filed:
• Entities already in existence on 12/31/23: by 1/1/25
• Entities formed on or after 1/1/24: 90 days after formation
• All entities: within 30 days after a change in previously reported information (including addition of a new individual who must be reported)
Individuals who must be included in the report:
- Any individual who exercises “substantial control” over the entity, including:
• Senior Officers (probably includes managers of most LLCs)
• Anyone who controls the appointment of senior officers or election of a majority of the board (note members of the board of directors are not specifically included)
• Anyone who directs, determines, or has substantial influence over important decisions made by the entity (which probably does include directors of most small companies)
- Any individual who owns or controls 25% or more of the entity:
• There are extensive rules regarding what counts as an ownership interest and how to calculate the percentage. Non-voting stock is counted. Unexercised options are counted.
• Only individuals are to be reported, whether they own their stock directly in the reporting entity or indirectly through a parent entity. Parent entities are not reported. But if an individual owns stock in a parent entity that indirectly adds up to over 25% of the reporting entity, he or she has to be included in the report. For example, individuals A and B in the below diagram would be reported, but neither parent nor individual C or D would be reported:
3. For entities formed after 12/31/23, any “Company Applicant”, which means any individual who:
• directly filed the document that created the entity; or
• was primarily responsible for directing or controlling the filing of the document that created the entity.
The regulations are unclear for many scenarios (this is another reason to consider forming a new entity prior to 12/31/23).
Information that must be reported:
• The individual’s full legal name
• Date of birth
• Home address (their residence, not their office)
• Unique identifying number from passport, driver’s license or similar government ID
• An image of that document (i.e. a pdf or jpeg)
FinCEN is required to keep the information confidential and only use it for its own law enforcement purposes or only disclose to specified other law enforcement agencies for specified purposes.
An alternative is for individuals who anticipate being included on many different entities’ BOI reports to go directly on FinCEN, submit the information only one time, and obtain a “FinCEN Identifier” to provide to each entity, rather than giving their home address and a picture of their driver’s license or passport to numerous entities.
How to file reports:
• Online in a portal being set up by FinCEN
• Format initially proposed by FinCEN was highly criticized
• FinCEN working on a new format
Penalties for willful failure to file or filing incorrect information:
• Monetary fine of up to $10,000
• imprisonment for up to two years, or
FinCEN website: https://www.fincen.gov/boi
FinCEN FAQs: https://www.fincen.gov/boi-faqs
FinCEN compliance guide: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf
This post is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.