The New BOI (Beneficial Ownership Information) Reporting Requirements
UPDATE… Texas Federal Court issued a temporary nationwide injunction suspending BOI reporting requirements ( link to article ). The injunction is no longer in place.
UPDATE… 5th District US Federal Court REINSTATED the BOI reporting requirements on December 23, 2024 (link to article). Please review the article below to help assess your situation and filing needs.
SUMMARY –
The Beneficial Ownership Information (BOI) reporting requirements, mandated by the Corporate Transparency Act (CTA), are aimed at combating illicit activities like money laundering and fraud. Effective January 1, 2024, most small corporations, LLCs, and similar entities must file a report with the Financial Crimes Enforcement Network (FinCEN).
These reports identify individuals who own or control at least 25% of the entity or exercise substantial control over it.
Required information includes the individual’s name, birthdate, address, and a government-issued identification number.
Filing deadlines depend upon when the organization was formed:
- Entities formed before January 1, 2024 have a filing deadline of January 1, 2025. (extended to January 13, 2025).
- Entities formed in 2024 must file within 90 days of the its creation.
- Entities formed in 2025 or later will only have 30 days to file a BOI Report.
Affected organizations include LLCs (Limited Liability Companies), corporations (C-Corp and S-Corp), partnerships… any entity that was created by filing a document with a secretary of state.
Although certain organizations, such as large corporations, nonprofits, and regulated entities, may be exempt, it is most likely that your organization needs to file a BOI Report.
This isn’t just a one-time filing. Anytime the information provided to FinCEN changes, an updated BOI Report will need to be filed (within 30 days of the change). This can be a change of information to either the organization or to the beneficial owners: legal name, address, and unique-identifier document.
Significant penalties (including $591 per day) can result from noncompliance. Timely and accurate reporting is important.
Background
The Corporate Transparency Act (“CTA”) was enacted January 1, 2021, as part of the National Defense Authorization Act, representing the most significant reformation of the Bank Secrecy Act and related anti–money laundering rules since the U.S. Patriot Act. The CTA is intended to address and guard against money laundering, terrorism financing, and other forms of illegal financing by mandating certain entities (primarily small and medium size businesses) to report “beneficial owner” information to the Financial Crimes Enforcement Network (“FinCEN”). The CTA authorizes FinCEN, a bureau of the U.S. Treasury Department, to collect, protect, and disclose this information to authorized governmental authorities and to financial institutions in certain circumstances.
Affected Entities
What entities are subject to the new CTA reporting requirements? Entities required to comply with the CTA (“Reporting Companies”) include corporations, limited liability companies (LLCs), and other types of companies that are created by a filing with a Secretary of State (“SOS”) or equivalent official. The CTA also applies to non-U.S. companies that register to do business in the U.S. through a filing with a SOS or equivalent official. Since the definition of a domestic entity under the CTA is extremely broad, additional entity types could be subject to CTA reporting requirements based on individual state law formation practices.
There are a number of exceptions to who is required to file under the CTA. Many of the exceptions are entities already regulated by federal or state governments and as such already disclose their beneficial ownership information to governmental authorities.
Another notable exception is for “large operating companies” defined as companies that meet all of the following requirements:
• Employ at least 20 full-time employees in the U.S.
• Gross revenue (or sales) over $5 million on the prior year’s tax return
• An operating presence at a physical office in the U.S.
Beneficial Ownership
Who is considered a “beneficial owner” of a Reporting Company? A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” or owns or controls at least 25% of the company’s ownership interests.
An individual exercises “substantial control” if the individual (i) serves as a senior officer of the company; (ii) has authority over the appointment or removal of any senior officer or a majority of the board; or (iii) directs, determines, or has substantial influence over important decisions made by the Reporting Company. Thus, senior officers and other individuals with control over the company are beneficial owners under the CTA, even if they have no equity interest in the company.
In addition, individuals may exercise control directly or indirectly, through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control.
CTA regulations provide a much more expansive definition of “substantial control” than in the traditional tax sense, so many companies may need to seek legal guidance to ultimately determine who are deemed beneficial owners within their organization.
Phase-in of reporting requirements
As currently promulgated, the CTA’s reporting requirements will be phased-in in two stages:
• All existing Reporting Companies — those formed or registered before January 1, 2024 — must report required information no later than January 1, 2025.
• All new Reporting Companies — those formed (or, in the case of non-U.S. companies, registered) on or after January 1, 2024 — must report required information within 90 days after their formation or registration.
Penalties
Note that penalties for willfully violating the CTA’s reporting requirements include (1) civil penalties of up to $591 per day that a violation is not remedied, (2) a criminal fine of up to $10,000, and/or (3) imprisonment of up to two years.
Considerations for Your Organization
Some questions and comments for your company to consider now, although not meant to be all inclusive, include:
• Is your company subject to the CTA or do you qualify for any of the exemptions?
• If your company is not exempt, how should you calculate percentages of “ownership interests” to determine whether any owners meet the 25%-ownership threshold? In many companies with simple capital structures, the answer will be obvious. It may be much less obvious, however, for companies with complicated capital structures (given the expansive definition of “ownership interest”), or companies in which some ownership interests are held indirectly — for example, through upper-tier investment entities, holding companies, or trusts.
• How do you assess and determine each person who exercises “substantial control” over the company? There may well be multiple people who qualify, given the expansiveness (and vagueness) of the “substantial control” definition.
• What new processes and procedures should the company put in place to monitor future changes in its beneficial owners and reportable changes on existing beneficial owners that will require timely updated reports to FinCEN? Note that the types of information that must be provided to FinCEN (and kept current) for these beneficial owners include the owner’s legal name, residential address, date of birth, and unique identifier number from a non-expired passport, driver’s license, or state identification card (including an image of the unique-identifier documentation). A word of caution, this is going to be a trap for Reporting Companies, as you will need to rely on beneficial owners to timely update you on reportable changes to their information (e.g., ownership changes, moves, marriages, divorces, etc.). As a result, a company’s operative documents may need to be revised to include provisions related to the CTA such as representations, covenants, indemnifications, and consent clauses.
Take immediate action!
Most likely, your organization needs to file a BOI Report.
It is estimated that over 90% of small business organizations in the United States are subject to these BOI reporting requirements. This high percentage reflects the broad applicability of the rule, as it covers most corporations, limited liability companies (LLCs), and similar entities that are not explicitly exempt.
If you are not sure whether or not you are required to report, you need to contact legal counsel right away. As the CTA is not a part of the tax code, the assessment and application of many of the requirements set forth in the regulations, including but not limited to the determination of beneficial ownership interest, may necessitate the need for legal guidance and direction. Since we are not attorneys, our firm is not able to provide you with any legal determination as to whether an exemption applies to the nature of your entity or whether legal relationships constitute beneficial ownership.
After these determinations are made, we can assist with the compliance reporting required under this new law. At this time, this service is available exclusively to our existing clients on a first-come, first-served basis. Our established relationship with our clients equips us with the knowledge and expertise needed to accurately prepare and file BOI reports.
For additional information, or to file your BOI Report yourself, please go to FinCEN’s website.