Which companies will need to file beneficial ownership reports as a “reporting company”?
The Corporate Transparency Act requires any corporation or LLC to file a beneficial ownership report with the Financial Crimes Enforcement Network (FinCEN) unless they qualify as a “large operating company,” meaning they employ more than 20 full-time employees and show more than $5,000,000 in annual gross receipts. Some other rare exemptions are listed later in this article. It is estimated that 30,000,000 U.S. small businesses are reporting companies will need to file initial reports due in 2024.
What information must be given to FinCEN on a beneficial owner report filing?
Each reporting company must file initial reports starting in 2024. Reports will require companies to submit information about the reporting company itself and each individual with 25% or more ownership of the company or the power to make important decisions on behalf of the company. These individuals are defined as the reporting company’s beneficial owners by FinCEN. Company information filed will include the registered company name, unique tax identification number, current business address where company operations primarily take place, and any DBAs or trade names the business uses. In addition, the beneficial owner information filed contains details about each individual, including their full legal name, date of birth, current residential address, and a unique identifying number from an acceptable identification document such as a driver’s license or passport. FinCEN may also request an image of the ID. After the initial reports are filed, companies will also be required to file updated reports within 30 days should any information about the company or beneficial owners change.
When are FinCEN beneficial ownership initial reports due?
The CTA final rule will go into effect on January 1, 2024. Reporting companies registered before that time will have one year from the effectuation date to file their initial reports. Reporting companies registered after that date will have 30 days from the time of their registration to file their initial reports. Reports will primarily be filed online, but further guidance will be forthcoming regarding alternate filing options.
What are the Corporate Transparency Act Penalties for not filing or filing incorrect information?
Failure to file by the deadline or at all may result in substantial fines and/or jail time. Any party found guilty of intentional non-compliance with the CTA’s reporting requirements may accrue fines of no more than $500 for each day they deliberately fail to report. They can accumulate fines of up to $10,000 and/or be sentenced to a prison term of up to two years.
FinCEN Issues Final Ruling for the Corporate Transparency Act: Background explaining why this law was implemented.
The Corporate Transparency Act (CTA) was ratified into law on January 1, 2021 as part of the 2021 National Defense Authorization Act (NDAA). Congress enacted the CTA as part of the Anti-Money Laundering Act (AMLA) of 2020, to further advance its agenda of deterring criminals from infusing their illegal funds into the U.S. financial system.
Criminals often “launder” their money to hide the illicit activity by which they accumulate it. The Corporate Transparency Act of 2021 requires companies to report company applicant and beneficial ownership information (BOI) to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). This information can aid the government in preventing such activity by making owners known to them.
Frequently, lawbreakers use what look like legitimate business entities as fronts, or “shells” to engage in unlawful activity and “clean up” their proceeds. The previous lack of a corporate transparency framework allowed nefarious actors to hide illegal activity behind these corporate structures.
Congress estimates that more than two million corporations and limited liability companies are formed in this country every year. That number opens up a lot of potential avenues for criminals to put a clean public face on felonious activities like human trafficking, drug and arms dealing, and terrorist financing. The CTA’s purpose is to put names behind business faces and thereby make it harder for anyone to use their company to anonymously carry out their criminal intentions while evading law enforcement agencies.
Reporting Company Criteria: Which Companies are required to file Beneficial Ownership Information (BOI) reports?
Nearly 30 million companies are expected to be required to file BOI reports. The reporting obligation applies to nearly all small corporations or LLCs, defined as those with less than $5,000,000 in sales and less than 21 full-time employees.
The CTA (Corporate Transparency Act) defines potential reporting companies as “any corporation, limited liability company, or similar entity that is (i) created by the filing a document with the secretary of state or a similar office under the law of a State (or Indian Tribe); or (ii) formed under the law of a foreign county and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a State (or Indian Tribe)” (SchellBray).
Large Companies Exempt
In addition, organizations that fall into the “large operating company” category are exempt from reporting. The three criteria for an entity to be considered a large operating company are:
- They employ more than 20 full-time employees in the United States. FinCEN borrows the “full-time employees” definition from the IRS, which defines them as anyone who works at least 30 hours per week or 130 hours per month.
- They filed Federal U.S. income tax returns in the previous year that showed more than $5,000,000 in gross receipts or sales.
- They operate from physical premises in the United States. Under this criterion, to be exempt, the entity must own or lease the office space, the space cannot be a personal residence, and they can’t share the space with anyone other than affiliated entities.
That definition may sound like everybody, but FinCEN has listed some specific exceptions. In fact, it may be easier to figure out which companies are required to file by pinpointing the companies that are exempt from filing. Following is the list of 23 types of companies the CTA specifically excludes from reporting:
- Securities issuers
- Domestic governmental authorities
- Domestic credit unions
- Depository institution holding companies
- Money transmitting businesses
- Brokers or securities dealers
- Securities exchange or clearing agencies
- Other Securities Exchange Act of 1934 entities
- Registered investment companies and
- Venture capital fund advisers
- Insurance companies
- State licensed insurance producers
- Commodity Exchange Act registered entities
- Accounting firms
- Public utilities
- Financial market utilities
- Pooled investment vehicles
- Tax exempt entities
- Entities assisting tax exempt entities
- Large operating companies
- Subsidiaries of certain exempt entities
- Inactive businesses
These entity categories are exempt because state and Federal agencies already closely regulate them, or financial institutions have shared their information, so their beneficial ownership information is most likely known. Further exemption types will be listed later in this article.
Beneficial Owner Definition: Who Must Be Included on FinCEN BOI Reports
The Corporate Transparency Act requires reporting companies to identify their beneficial owners and company applicants. Each reporting company must report identifying details about each individual beneficial owner and company applicant, including full legal names, birth dates, residential addresses, and a unique identifying number from an acceptable official document. In other words, starting in 2024, small businesses will need to tell FinCEN who owns or makes decisions on their behalf by filing beneficial ownership reports.
FinCEN defines “beneficial owners” as any individuals who directly or indirectly:
- Own or control 25% or more of the entity’s ownership interests
- Exercises substantial control over the entity (defined below)
A reporting company must identify any and all individuals who fit into either (or both) of these two categories.
According to the CTA, the definition of beneficial owner is an individual who owns or controls not less than 25 percent of the ownership interests of the entity or exercises substantial control over the entity. Ownership interests could include (but are not limited to):
- Equity in the reporting company
- Capital or profit interests (including partnership interests)
- Convertible instruments
- Warrants or rights
- Other options or privileges to acquire equity, capital, or other interests
FinCEN purposely leaves this category broad as well, to keep wrongdoers from using complicated ownership constructions to conceal a reporting company’s true ownership. This understanding is “a way of ensuring that the underlying reality of ownership, not the form it takes, drives the identification of beneficial owners” (Dept. of the Treasury). Therefore, reporting companies will have to consider multiple details and circumstances to determine who to report as beneficial owners.
“Substantial control” is a very broad term that can be hard to quantify. For that reason, FinCEN has proposed three specific control indicators to identify those that exercise substantial control:
- Serving as one of a reporting company’s senior officers
- Having authority to appoint or remove a reporting company’s senior officers or board-of-director members
- Providing direction and determination, making decisions for, or exercising substantial influence over a reporting company’s important matters
Even with these indicators in place, however, criminals who don’t wish to be identified may be able to find loopholes. For that reason, the regulation also has a proviso clarifying that “substantial control” can have other characteristics that are not explicitly listed. In this case, reporting companies must obey the spirit rather than the letter of the law and identify the people who exercise substantial control by standing behind, supporting, and directing their company, whatever form that takes.
Company applicants are typically thirds party companies providing services to form corporations or LLCs, but do not continue to operate the company after formation. FinCEN defines a “company applicant” as follows:
- For a domestic reporting company, any individual who files the document that creates the domestic reporting company […], including any individual who directs or controls the filing of such document by another person.
- For a foreign reporting company, any individual who files the document that first registers the foreign reporting company […], including any individual who directs or controls the filing of such document by another person.
Most companies have a lawyer or paralegal file their registration document(s). Sometimes, more than one lawyer and/or paralegal is involved in the process, which means the “company applicant” could in actuality be “applicants.”
Law firms providing company formation services can benefit from using TurboCTA filing systems to automate these processed.
Beneficial Owner Information: What Information Must Be Given to FinCEN for Each Beneficial Owner?
Each reporting company must report certain identifying factors about each individual beneficial owner and company applicant.
The CTA requires all reporting companies to report each beneficial owner’s and company applicant’s:
- Full legal name
- Date of birth
- Residential address
- Unique identifying number from an acceptable official document such as a state ID, drivers license, or passport.
The name and birthdate requirements are very straightforward and require no further explanation.
In order for the CTA report to be useful for law enforcement, intelligence, and national security purposes, it must provide “investigative value” to government entities should they find the need to scrutinize a company. PO boxes and business addresses have limited value in this regard, as they don’t establish a beneficial owner’s residency and can function as fronts for illegal activity.
Additionally, several people are generally associated with each business address, which can muddle matters. Therefore, FinCEN has determined that filing companies should provide their beneficial owners’ residential street addresses to clearly establish their identities.
On the other hand, FinCEN requires company applicants (those that form companies on behalf of others) provide a business address rather than a personal address. Applicants usually work as corporate formation agents and file the applications in the course of their business, which makes their business address more relevant in terms of identifying them and establishing their companies’ patterns.
Unique Personal ID Identifying Number
Beneficial owners must also be identified by a “unique identifying number from an acceptable identification document” (Dept. of the Treasury). In addition to the number itself, FinCEN requires the reporting company to provide a scanned copy of the official document from which the number was taken. Acceptable identification documents might include a passport, a state-issued driver’s license, or a FinCEN unique ID (Foley & Lardner).
Company Information Required on CTA Beneficial Ownership Reports reports
Each reporting company must report certain identifying factors about the corporation or LLC including their unique tax ID number, primary address where the business operations occur, and any trade names or DBAs the company uses.
Unique Business Tax Identification Number
Along with each beneficial owner’s information, the CTA expects reporting companies to identify themselves not only by their names, but by their own unique numbers.
Specifically, the reporting company can submit their TIN (Taxpayer Identification Number—including an Employer Identification Number (EIN). Companies without TINs are expected by FinCEN to acquire an EIN prior to the deadline.
The only exemption to this requirement is for foreign reporting companies in a line of business that does not subject them to U.S. tax. These companies may submit a tax ID number issued by a foreign government
CTA’s overarching objective is to identify the people who own, control, and register relevant corporations and “ensure that information is […]highly useful” (Dept. of the Treasury). A company’s name is not always “highly useful” in and of itself because many companies have very similar or even identical names, depending on the state laws regulating business names where the company was formed. Companies with similar names could be hard to distinguish between in a database search, and in the case of a FinCEN investigation, much could be at stake for all concerned parties. Therefore, having unique identifying numbers in place helps authorities zero in on exactly the entity they are seeking.
DBAs and Trade Names required for beneficial ownership reports
Reporting companies must include any DBA or trade name the business uses on their beneficial ownership reporting. This requirement includes trade names or DBAs registered with a state government and names that the company uses but has failed to register.
Principal place of business address
Companies must include the address where the company primarily conducts its business operations. FinCEN considers PO boxes or registered agent addresses unacceptable for beneficial ownership reporting. For U.S. based companies, this will be an office address or potentially a home address for small businesses operated from home. Foreign companies operating from overseas must use their best U.S. address and not their overseas address.
Corporate Transparency Act Filing Deadlines for Beneficial Ownership Reports
Newly-formed entities—those which register as businesses after the effective date of January 1st, 2024—will have to file their CTA reports within 30 days of incorporation. This is an extension from the previous directive that domestic reporting companies in this category file their report within 14 calendar days of the date they were officially formed or registered. FinCEN extended this deadline so as not to place undue burden on the reporting companies.
Newly-created entities will still be required to report company applicant information in the same time frame, but they won’t be required to update it.
Existing entities—reporting companies created before January 1st, 2024—must submit their beneficial ownership reports by January 1st 2025. In other words, they have a full calendar year (from the effective date) to do their due diligence, compile their list of beneficial owners and company applicants, assemble all the required information, and get it to FinCEN through their Secretaries of State or similar offices.
The final rule also sets a 30-day deadline for updating beneficial ownership information and correcting reports, and it eliminates a prior proposed condition that entities created before the regulation’s effective date report company applicant information.
Corporate Transparency Act Penalties for Not Filing or Filing Fraudulent Beneficial Ownership Information: Criminal and Civil
Companies who meet reporting criteria must report BOI by the deadline; failure to do so is illegal. The CTA is more than a set of guidelines or best practices; it’s law. Individuals who fail to report or who supply falsified information will be subjected to civil and criminal penalties. These penalties may include assessment of a $500-per-day fine every day the violation continues (up to $10,000), up to a two-year prison sentence, or both.
Only eligible companies are required to file the reports; the beneficial owners and company applicants don’t file individually. Therefore, reporting companies must ensure that these individuals provide valid, accurate, and current information in order to meet their legal obligations.
To be clear, these consequences apply to persons who willfully provide false or fraudulent information or who purposely fail to report as required, despite knowing the law. No civil or criminal penalties apply to negligent violations. In other words, if individuals provide inaccurate information, but they 1) didn’t know about the inaccuracy, 2) weren’t attempting to evade reporting requirements, and 3) willingly and swiftly correct any inaccurately-reported information within 90 days after submission, safe harbor rules apply. A safe harbor is a legal provision whereby a person can “sidestep or eliminate legal or regulatory liability in certain situations, provided that certain conditions are met.”
Corporate Transparency Act Exemptions You Should Know
FinCEN’s final ruling establishes standards that determine whether an individual has an ownership interest in a reporting company. They define ownership interest as “any instrument, contract, arrangement, understanding or mechanism used to establish ownership.”
Examples include, but are not limited to:
- Capital or profit interest
Additionally, a person can directly or indirectly own or control ownership interest in a reporting company via:
Some examples of the above factors might include joint ownership, various trust arrangements, and someone acting as an intermediary, custodian, or agent on behalf of someone else.
In reporting companies, some beneficial owners are exempted from reporting their personal identifying information (PII). For instance, minor children don’t have to report, and neither do individuals acting as nominees, intermediaries, custodians or agents. Employees acting solely in the capacity of employees and not as senior officers don’t report their PII; nor do company creditors or individuals whose only interest in a reporting company is by virtue of future inheritance.
Corporate Transparency Act Timeline
Corporate Transparency Act 2020 Updates
On January 1, 2021, Congress enacted a new, anti-money laundering legislation and included it as part of the National Defense Authorization Act (NDAA), which is a series of federal laws that primarily allocate the US Department of Defense’s annual budget and expenditures. The legislation included the Anti-Money Laundering Act of 2020 (AMLA), and was an expansive effort to update and amend the country’s anti-money laundering laws. For years, the United States trailed other developed countries in preventing illicit money from flowing through its economic systems, and this legislation was written to correct that problem.
Corporate Transparency Act 2021 Updates
On December 7, 2021, FinCEN issued a Notice of Proposed Rulemaking (NPRM), which addressed, among other things:
- Who must report beneficial ownership information
- When they must report it
- What information they must provide.
FinCEN strongly encouraged anyone whom the proposed rules would affect to submit written comments, which they would carefully consider before posting their final ruling.
Corporate Transparency Act Final Ruling
On September 30th, 2022, a final rule on the Corporate Transparency Act was published. FinCEN mostly adhered to their proposed rule, but they made certain modifications in response to public comments they received about the proposed regulations in an effort to minimize reporting companies’ burdens. After considering these comments, they made changes to the proposed rule in the areas of:
- Submission timelines
- Business/residential address requirements
- Beneficial owners’ TIN numbers
The CTA rules that the Treasury must maintain BOI “in a secure, nonpublic database, using information security methods and techniques that are appropriate to protect non-classified information security systems at the highest security level.” To that end, FinCEN has created the Beneficial Ownership Secure System (BOSS) to collect, store, and maintain BOI. The BOSS filing system will be secured at the highest information security level. TurboCTA will simplify the process of batch filing with the BOSS system once the technical specifications are published.
On March 17, 2020, the Department of Treasury, Bureau of the Fiscal Service put out a notice stating that they intended to “negotiate a sole source procurement […] to Northrop Grumman Systems Corporation for the Bank Secrecy Act (BSA) Electronic Filing (E-Filing) System Development Services and Operational Support,” which means that they will have a BOI e-filing system in place late, with the potential for batch filing, by late 2022 or into 2023.