Last year, the Financial Crimes Enforcement Network (“FinCEN”) issued the Corporate Transparency Act’s beneficial ownership information (BOI) reporting rule (the “Reporting Rule”) as part of its effort to increase U.S. national security and protect the U.S. financial system and institutions against certain individuals. Pre-existing entities registered to conduct business in the U.S. (“reporting companies”) will be required to report information about the entity, its beneficial owners, and company applicants beginning on January 1, 2024. The filing deadline for existing reporting companies is January 1, 2025.
On September 18, 2023, FinCEN published its “Small Entity Compliance Guide” (the “Compliance Guide”) to help small businesses comply with the Reporting Rule and understand its requirements. On September 29, 2023, FinCEN next published two 30-day notices in the Federal Register for the purpose of gaining commentary (1) on the form that it intends to use for Reporting Companies to file their BOI report (the “Form Notice”), and (2) on the form application that FinCEN intends to require beneficial owners and company applicants to use in order to obtain a FinCEN Identifier (a unique number that FinCEN will provide to individuals or reporting companies following their providing of the requested information to FinCEN) (the “ID Form Notice”). Finalization of the Form Notice and ID Form Notice is expected shortly.
What Companies Must Report its Beneficial Owners to FinCEN?
A company will only be required to report its beneficial owners if it qualifies under the Reporting Rule’s definition of a “reporting company” and does not fall under one of the exemptions (described below).
There are two categories of “reporting companies”:
- Domestic Reporting Companies: Any corporation, LLC or other entity formed under U.S. law through a secretary of state or similar office under a U.S. law or Indian tribe.
- Foreign Reporting Companies: Any company formed under the laws of a foreign country that is registered to do business in any U.S. state or tribal jurisdiction through a secretary of state or similar office.
In order to determine whether a reporting company qualifies for an exemption, please see Chart 2 in the Compliance Guide for the full list of entities that qualify for an exemption, which include banks, accounting firms, and investment companies. Most partnerships, limited liability companies and small business corporations will not qualify for an exemption.
What Information does a Reporting Company Need to Disclose?
Each qualifying company under the Reporting Rule will need to report the following information regarding the relevant entity, including:
- Legal name of the reporting entity (in addition to any trade or “doing business as” names);
- Address;
- State of formation;
- IRS taxpayer identification number; and
- Details concerning the beneficial owners.
Please see Chart 7 of the Compliance Guide for more information.
Who Qualifies as a “Beneficial Owner”?
An entity falling within the definition of a Reporting Company, must next determine the company’s beneficial owner(s). Under this rule, a beneficial owner is any individual who, directly or indirectly:
- exercises substantial control over a reporting company; or
- owns or controls at least 25 percent of the ownership interests of a reporting company.
See Chart 3 and Chart 4 of the Compliance Guide for further information regarding what constitutes substantial control and ownership interests.
Please note that there are five exemptions to the beneficial owner definition, which include (1) minor children; (2) a nominee, intermediary, custodian, or agent; (3) an employee; (4) an inheritor; and (5) a creditor.
What Are the Penalties for Non-Compliance?
Under the Reporting Rule, the willful failure to report complete and accurate BOI to FinCEN (or willful provision of/attempt to provide false information) may result in:
- Civil penalties of up to $500 for each day that the violation continues; or
- Criminal penalties including imprisonment for up to 2 years and/or a fine of up to $10,000.
An individual may also be subject to civil and/or criminal penalties for willfully causing a company not to file a required BOI report or to report incomplete/false information.
Which Companies Need to Report Their Company Applicants on Initial Filings?
Certain entities will also be required to disclose information about their company applicants. These are either:
- “direct filers” – individuals who “directly filed the document that created a domestic reporting company, or the individual who directly filed the document that first registered such company” (Section 3.2 of the Compliance Guide).; or
- an “individual who was primarily responsible for directing or controlling the filing of the creation or first registration document” (Section 3.2 of the Compliance Guide).
Please see Section 3.1 of the Compliance Guide to determine whether a company is required to report its company applicants.
What Are the Filing Deadlines?
For companies already in existence prior to January 1, 2024: January 1, 2025.
For companies created or registered to do business after January 1, 2024: Within 90 days after receiving actual or public notice that its creation or registration is effective.
Please note that BOI reports will not be accepted before January 1, 2024.
What if there are Changes/Inaccuracies in Reported Information?
In addition to filing an initial BOI report, reporting companies must also update and correct information in their previously filed BOI reports. Individuals who obtain FinCEN identifiers must also update and correct information previously reported to FinCEN. If you should find an inaccuracy in a BOI report, then your company must correct it within 30 days after the date your company was made aware of the inaccuracy (or should have known about such inaccuracy).
Conclusion
With January 1, 2024 fast approaching, entities affected by the Reporting Rule should begin preparing the required documentation, as well as pay close attention to any new developments or guidance issued by FinCEN in the interim, as many details have yet to be clarified. Of course, we at KTAP are available to assist you should you have any questions on whether the Reporting Rules apply to you or on how to complete the required BOI report if you are so required. The Reporting Rule will likely have significant impacts on businesses and place a substantive burden on domestic and foreign entities, as determining reporting obligations and eligibility for certain exceptions will require additional time and personnel. Further, entities will need to incorporate certain protocols to gather, store and keep track of information that needs to be reported. Representations and warranties provisions in relevant agreements, as well as standard documents such as purchase agreements, operating agreements, subscription agreements etc. will likely need to be scrutinized and amended in such a way to abide by the new requirements.
