The Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule requiring certain entities to file with the FinCEN reports that identify beneficial owners of the entity and individuals who have filed an application with specified governmental authorities to create the entity or register it to do business.
Who is affected?
The Corporate Transparency Act and the final rule aim at limiting money laundering, terrorist financing, sanctions evasion, and other illicit activities. However, this law and rule will affect many legitimate small businesses and individuals. For example, an LLC created to own and lease a single rental property would be required to file.
Reporting companies include every entity created by filing a document with a Secretary of State or similar office. This includes corporations, LLCs, Limited Liability Limited Partnerships, foreign entities registered to do business by filing a document with a Secretary of State, and any other entity type created by filing a document with a Secretary of State or similar office.
The Corporate Transparency Act (CTA) created exemptions for certain reporting companies already subject to considerable federal or state regulations. The following list is a sample of the 23 exemptions but does not include all the exemptions:
- Publicly-traded companies
- Banks and credit unions
- Money services businesses
- Securities brokers and dealers
- Tax-exempt entities
- Insurance companies
- Public utilities
“Large operating companies” are also exempt. To qualify, three conditions must all be met by the entity:
- Employ more than 20 full-time employees in the U.S.;
- Have an operating presence at a physical office in the U.S.; and
- Filed a federal income tax or information return in the U.S. for the previous year with more than $5 million in gross receipts or sales.
Any large operating companies that fail to meet all three conditions in the future are required to comply and file the report with FinCEN.
What action is needed?
A reporting company created before January 1, 2024, must provide information about the company and its beneficial owners. Reporting companies created on or after January 1, 2024, must provide information about the company, beneficial owners, and its company applicants.
The report must include the reporting company’s full legal name, any trade or doing business as names, the complete current street address of the principal place of business, jurisdiction of formation, and taxpayer identification number.
A beneficial owner is an individual who either exercises substantial control over the reporting company or owns/controls at least 25% of its ownership interest. A company applicant is the individual who files the document that creates the reporting company and the individual responsible for directing or controlling the filing if more than one individual is involved in the document filing.
For each beneficial owner or company applicant, the report must include their legal name, date of birth, current residential address, unique identifying number and issuing jurisdiction, and an image of the document used for the identifying number and issuing jurisdiction response (U.S. passport, state ID document, driver’s license, foreign passport, etc.)
What are the deadline and consequences?
A reporting company created before January 1, 2024, must file its initial BOI report no later than January 1, 2025. For reporting companies created on or after January 1, 2024, they must file a report within 30 days of receiving actual or public notice that its creation is effective. BOI reports, and all updates or corrections will be filed with the FinCEN through an online system available on their website. BOI reports will not be accepted before January 1, 2024.
The CTA included criminal and civil penalties for individuals who knowingly provide false or fraudulent information in connection with the beneficial ownership report and entities that fail to comply with reporting requirements. Civil fines of $500 per day for as long as reports remain inaccurate are possible. Failure to comply may also result in two years in jail or a $10,000 fine.