Quick Answer
Congress passed the Corporate Transparency Act (CTA) in 2020 as a part of the Anti-Money Laundering Act. Business owners need to be aware that a section of the CTA went into effect on January 1, 2024 that will impact most small business entities. Beneficial ownership information must be filed by small business entities with the Financial Crimes Enforcement Network (FinCEN).
See the following general rules along with the five steps to get prepared. Be sure to download the Small Entity Compliance Guide published by FinCEN for all the details (see link below under Where to Find Additional Information).
General Rules
- The part of the CTA that goes into effect is the Beneficial Ownership Information (BOI) Reporting Rule (The Reporting Rule).
- Certain small business entities must file beneficial ownership information (BOI) reports (basically almost all small business entities) with FinCEN.
- BOI reports must include beneficial owners and company applicants.
- A beneficial owner is any individual who, directly or indirectly exercises substantial control over a reporting company, or owns or controls at least 25% of the ownership interests of a reporting company.
- A company applicant is an individual who directly files or is primarily responsible for the filing of the document that creates or registers the company.
- Information that must be reported for each beneficial owner of a business or company applicant include legal name, date of birth, current address, and unique identifying number (U.S. passport, state driver’s license, state or local government ID, foreign passport, etc.).
- The first step is to determine who will be responsible for filing the BOI reports. Will it be one of the owners of the company, a tax professional or CPA, an attorney, or other?
- The second step is to determine if your company is considered a reporting company.
- Reporting companies are any entity that is a corporation, limited liability company (LLC), or created by filing a document with a U.S. secretary of state or any similar office under the law of a state or tribal jurisdiction. Reporting companies can be domestic or foreign.
- The third step is to determine if your company is exempt from the reporting requirements.
- Generally, any business that is already in a heavily regulated field will be exempt. For example, any issuer of securities that is an issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or required to file supplementary and periodic information under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 780(d)) is exempt.
- Large operating companies are also exempt. A large operating company is one in which the entity employes more than 20 full time employees, and more than 20 full time employees are employed in the United States, and the entity has an operating presence at a physical office within the United States, and the entity filed a federal income tax or information return in the United states for the previous year showing more than $5,000,000 in gross receipts or sales, and when gross receipts or sales from sources outside the United States are excluded from the entity’s amount of gross receipts or sales, the amount remains greater than $5,000,000.
- The fourth step is to determine who the beneficial owners or company applicants are and to gather the required reporting information for each.
- The fifth step is to file the BOI report with FinCEN.
- Failure to file the BOI report or filing fraudulent information in a BOI report can lead to a fine up to $10,000 and/or imprisonment for up to two years.
- Entities that existed prior to January 1, 2024 have until January 1, 2025 to comply. Entities created on or after January 1, 2024 have 90 days after entity creation to comply (changes to 30 days starting January 1, 2025).
- The information must be kept up to date by filing an updated BOI report when information for a beneficial owner or applicant changes (within 30 days of the change).
Benefits
- The goal of the law is to prevent the hiding of illicit money or other property in the United States.
- Prior to the Corporate Transparency Act, there were not any uniform beneficial ownership information reporting requirements in the United States and this hindered law enforcement’s ability to investigate entities being used for illegal purposes.
- Beneficial ownership information will provide law enforcement, intelligence, and national security professionals with vital information as they try to protect the United States from criminals who exploit anonymous shell companies to engage in money laundering, corruption, tax evasion, fraud, drug trafficking, and other criminal enterprises.
Where to Find Additional Information
- Small Entity Compliance Guide published by FinCEN – https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf
- BOI information and resources – https://www.fincen.gov/boi
- BOI E-Filing System – https://boiefiling.fincen.gov/
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