Beneficial Ownership Reporting is Imminent: What this Means for your Business
The government is cracking down on money laundering and tax evasion, and your business will be affected. This is the third installment of a series of newsletter articles where we have discussed the Beneficial Ownership Information Reporting Requirements final rule (the “Final Rule”) that was issued by the Financial Crimes Enforcement Network (“FinCEN”) pursuant to the Corporate Transparency Act (“CTA”). Previous newsletter articles regarding the Final Rule can be found here and here.
Beneficial Owners
Starting January 1, 2024, filing entities (i.e., corporations, limited liability companies, and limited partnerships) formed or registered to do business within the U.S. will be required to submit reports disclosing beneficial ownership information (“BOI Reports”) about their “Beneficial Owners” to FinCEN. A Beneficial Owner is (a) any individual who (directly or indirectly) owns or controls at least 25% of the ownership interest of the Reporting Company, or (b) any individual who exercises “substantial control” over the Reporting Company.
Company Applicants
Reporting Companies must also report their “company applicants” in their BOI Report. A company applicant is an individual who directly files the document that forms or registers the filing entity to do business, as well as any individual(s) that is primarily responsible for directing or controlling such filing (such as attorneys, accountants, or other third-party professional advisors).
Reporting Companies
These reporting requirements apply to all domestic entities created, or foreign entities registered to do business, by filing a document with a secretary of state or similar state office (“Reporting Companies”). The Final Rule does not apply to trusts that were not created by filing a form with a secretary of state or similar office or to sole proprietorships or general partnerships. There are also 23 types of entities that are exempt from these reporting requirements, including SEC reporting companies, banks and credit unions, tax-exempt entities, broker-dealers, investment companies, and their advisors, and entities that:
- have 20 or more full-time employees in the U.S.,
- have an operating presence through a physical office in the U.S., and
- filed a federal income tax or an information return stating more than $5 million in gross receipts or sales in the prior year.
BOI Report Deadlines; Penalties for Non-Compliance
Reporting Companies formed or registered to do business before the Final Rule becomes effective on January 1, 2024, will have until January 1, 2025, to file their initial reporting information of their Beneficial Owners. Reporting Companies that are formed or registered to do business after January 1, 2024, will have 30 days after receipt of notice of formation from the secretary of state.
Failure to timely and accurately submit the BOI Reports will be much more than a slap on the wrist. Violators will be subject to fines up to $500 for every violation, assessed an additional fine of up to $10,000, and criminal penalties including up to 2 years of imprisonment.
The Optional FinCEN ID
The FinCEN identifier (“FinCEN ID”) is an optional unique identifying number assigned to an individual who submits the beneficial ownership information details they would otherwise have to disclose on BOI Reports directly to FinCEN. This would allow Beneficial Owners and company applicants to provide their FinCEN ID on BOI Reports in lieu of submitting sensitive personal information through third parties. Thus, FinCEN ID holders benefit from additional data security because individuals are submitting their personal information directly and exclusively to FinCEN instead of submitting their personal information indirectly through one or more individuals or Reporting Companies. They will also experience more administrative efficiency if the individual is likely to be deemed a Beneficial Owner of numerous entities or if the individual is deemed a company applicant for numerous entities.
Recent Developments
On January 17, 2023, FinCEN published two notices and requests for comments from the public regarding the FinCEN ID application and the reporting process to be used to collect beneficial ownership information. The first notice and request for comments asks for feedback on the contents of the application that will be used to collect information from individuals who seek to obtain a FinCEN ID. The second notice and request for comments solicits feedback on the BOI Reports that will be used to collect beneficial ownership information. Comments from the public are due by March 20, 2023.
Prepare Now, Avoid Issues Later
All existing Reporting Companies (and anyone contemplating forming a new entity that will be a Reporting Company) will need to review their organizational structure to determine whether they qualify for an exemption to the Final Rule. If no exemption applies, a determination will need to be made to identify anyone who exercises substantial control over the company and anyone that owns or controls at least 25% of the ownership interest in the entity. Individuals who are likely to be deemed a Beneficial Owner and company applicants should consider whether they would benefit from requesting an optional FinCEN ID for additional data security and administrative efficiency.
For more information, please contact Gabe Alonso.
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