Congress passed the Corporate Transparency Act of 2021 (CTA) to enhance transparency and combat illicit activities such as money laundering, terrorism financing and tax evasion. As part of this legislation, some businesses may soon be required to report their beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury — providing contact information on many entities, as well as those who own or control certain entities.
This program is a federal effort at data collection that will directly or indirectly impact corporations, limited liability companies, and other similar entities formed or registered under state law on an ongoing basis. The information in this type of database has never been compiled before, since typically entity formation and creation are handled at the state, tribal or foreign government level. As a result, owners and management must be aware of the new rules and know if and when they need to comply.
Below are important general Q&As to help companies understand the new regulations and their implications.
1. Who Needs to File BOI?
The first step to this program is identifying your reporting company. A reporting company meets the following definition:
- Corp, LLC, or similar entity that is:
- Created by filing a document with any domestic secretary of state or Indian Tribe, or
- Formed under the laws of a foreign country and registered with any domestic secretary of state or Indian Tribe to do business in the US.
- Not of an entity type specifically exempted under the Corporate Transparency Act (see next FAQ).
If your company meets the definition of a reporting company, then a filing is required.
2. Who May Be Exempt from Reporting BOI?
The CTA does not require an entity to report BOI if it can be categorized in at least one of 23 types of entities exempted from the reporting obligation:
- Securities reporting issuer
- Governmental authority
- Credit union
- Depository institution holding company
- Money services business
- Broker or dealer in securities
- Securities exchange or clearing agency
- Other Exchange Act-registered entity
- Investment company or investment adviser
- Venture capital fund adviser
- Insurance company
- State-licensed insurance provider
- Commodity Exchange Act-registered entity
- Accounting firm
- Public utility
- Financial market utility
- Pooled investment vehicle
- Tax-exempt entity
- Entity assisting a tax-exempt entity
- Large operating company
- Subsidiary of certain companies
- Inactive entity
However, there are many nuances to these exemptions, so you must reference FinCEN guidance if you think your business is exempted from filing. For example, the requirements behind the large operating company exemption state a company must:
- Employ more than 20 full-time employees in the U.S.,
- Have filed federal income tax returns in the U.S. demonstrating more than $5 million in gross receipts or sales in the previous year (including the receipts or sales of subsidiaries and other entities through which the entity operates), and
- Have an operating presence at a physical office within the U.S.
In addition, if an entity is initially exempted from reporting, a future change in entity activity or classification could unexpectedly trigger a future filing requirement.
FinCEN estimates that in the first year of the program (2024), more than 39 million reports will be filed, which will take 126 million hours at a compliance cost of over $22 billion.
3. How Do Reporting Companies Get Started?
If your entity meets the definition of a reporting company, your next step is to identify each beneficial owner and applicant.
Who Qualifies as a Beneficial Owner?
A beneficial owner is defined as someone who:
- Through any contract, arrangement, understanding, relationship or otherwise:
- Exercises substantial control over the entity; or
- Owns or controls not less than 25% of the ownership interests of the entity; and
- Who is not:
- A minor if the parent is being reported;
- Individual acting as nominee or agent for another;
- Individual acting solely as an employee for the reporting company;
- Individual whose interest is only through a right to inheritance; or
- Creditor unless they meet above definition of control or ownership.
Who Is an Applicant?
An applicant is defined as any individual who, for entities created on or after Jan. 1, 2024:
- Files an application to form a corporation, LLC, or similar entity under the laws of a state or Indian tribe; or
- Registers or files an application to register a corporation, LLC, or other entity formed under the laws of a foreign country to do business in the U.S. by filing a document with the secretary of state or similar office under the laws of a state or Indian tribe.
4. What Information Needs to be Reported?
The reporting company is responsible for reporting BOI about their organization and for each beneficial owner and applicant. The information required is as follows:
- Full legal name;
- Trade name or DBAs, if applicable;
- Current U.S. business address (no P.O. boxes);
- State, tribal or foreign jurisdiction information; and
- IRS TIN or EIN.
Beneficial Owner and Applicant Information
- Full legal name,
- Date of birth,
- For beneficial owners, complete current address of their primary residence
- For company applicants, the business address, and
- Identifying number and issuing jurisdiction from, and image of one of the following non-expired documents:
- U.S. passport,
- State driver’s license,
- Identification document issued by state, local government or tribe,
- Foreign passport if any of the above documents are not available, OR
- FinCEN identifier, which can be obtained via application to FinCEN.
5. When Does BOI Reporting Begin?
FinCEN will begin accepting reports on Jan. 1, 2024, but when your company may be required to report will depend on when your company was (or is) established.
|Date Company Was/Is Established
||Initial BOI Report Submission Deadline
|Prior to Jan. 1, 2024
||Jan. 1, 2025
|Anytime in 2024
||30 days from formation (currently 90 days from formation is being proposed as a rule change, so this could change)
|2025 or later
||30 days from formation
If there is any change to a report that has been already made with FinCEN (such as new address, new contact information, change in control or correction of information), you must report changes within 30 days after the change is made or the error is discovered. Additionally, if your company previously qualified for an exemption, but no longer qualifies, you are required to file a BOI report within 30 calendar days of the date your company stops qualifying for exemption.
6. What Are the Penalties for Noncompliance?
Reporting companies who do not comply will the CTA’s reporting obligations may face civil penalties up to $500 per day that a violation continues. Criminal penalties include a $10,000 fine and/or up to two years of imprisonment. If a report is filed that contains mistakes or an omission of information, you can correct the report within 90 days to avoid penalties.
7. How Secure is Your BOI Information?
The CTA emphasizes the importance of maintaining the confidentiality and security of the reported information. FinCEN is required to establish secure systems to store and protect the data, ensuring it is only accessible to authorized government agencies for legitimate purposes.
FinCEN will permit federal, state, local and tribal officials, as well as certain foreign officials, to obtain BOI for authorized activities related to national security, intelligence and law enforcement. Financial institutions will also have access to information with consent of the reporting company.
The Corporate Transparency Act’s BOI reporting requirements represent a significant step toward the government’s efforts at collecting entity information, which it believes will protect the U.S financial system from illicit use and promote transparency in the business sector. Compliance will involve additional administrative burdens, but it can also assist businesses in conducting thorough due diligence on potential clients, partners and suppliers.
There are currently two bills in Congress that propose a delay in reporting, but business owners and management teams must be aware this extensive effort is on the near-term horizon. For existing entities, no immediate action is likely needed until the latter half of 2024. For new entities created in 2024, action will be important so that the initial report is filed timely. Also note that states could establish their own requirements. For example, as of the publish date of this article, the State of New York has a bill creating a similar transparency requirement that is awaiting Governor Kathy Hochul’s signature.
Beyond the Congressional-proposed delays of BOI reporting requirements, there are other unknowns — such as what the reporting form looks like and how long it will take to complete, and when software solutions will be available to assist. Your accounting team can help you understand the rules, their impact on your organization and what you will be required to do, as well as assist with required filings and changing requirements.
Contact Katie Blake at firstname.lastname@example.org, Jason Jones at email@example.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.