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Businesses: Do You Have to Comply With the New Corporate Transparency Reporting Rules?
Your business may soon have to meet new reporting requirements that take effect on January 1, 2024. Under the Corporate Transparency Act (CTA), enacted in 2021, certain companies will be required to provide information related to their “beneficial owners” — the individuals who ultimately own or control the company — to the Financial Crimes Enforcement Network (FinCEN). Failure to do so may result in civil or criminal penalties, or both.
On November 29, FinCEN announced it was amending the beneficial ownership information (BOI) reporting rules.
The complete list of entities that are exempt from the reporting rules is too lengthy to include here — ranging from government units to not-for-profit organizations to insurance companies and more. Notably, an exemption was created for a “large operating company” that employs more than 20 employees on a full-time basis, has more than $5 million in gross receipts or sales (not including receipts and sales from foreign sources), and physically operates in the United States. However, many of these companies already must meet other reporting requirements providing comparable information.
If an entity initially qualifies for the large operating company exemption but subsequently falls short, it must then file a BOI report. On the other hand, an entity that might not currently qualify can update its status with FinCEN if it later does and obtain an exemption.
Understanding the CTA
The CTA is intended to reduce exposure to serious crimes, including terrorist financing, money laundering and other nefarious activities. But it could also open the door to the inspection of family offices, investment angels and other private individuals who’ve generally been shielded from scrutiny in the past. A business that’s characterized as a “reporting company” has either 30 days or one year to comply with the new rules. The CTA’s rules generally apply to both domestic and foreign privately held reporting companies. For these purposes, a reporting company includes any corporation, limited liability company or other legal entity created through documents filed with the appropriate state authorities. A foreign entity includes any private entity formed in a foreign country that’s properly registered to do business in the United States.
The complete list of entities that are exempt from the reporting rules is too lengthy to include here — ranging from government units to not-for-profit organizations to insurance companies and more. Notably, an exemption was created for a “large operating company” that employs more than 20 employees on a full-time basis, has more than $5 million in gross receipts or sales (not including receipts and sales from foreign sources), and physically operates in the United States. However, many of these companies already must meet other reporting requirements providing comparable information.
If an entity initially qualifies for the large operating company exemption but subsequently falls short, it must then file a BOI report. On the other hand, an entity that might not currently qualify can update its status with FinCEN if it later does and obtain an exemption.
Determining who is and isn’t a beneficial owner
Under the CTA, a nonexempt entity must provide identifying information about its beneficial owners. A beneficial owner is defined as someone who, directly or indirectly, exercises substantial control over a reporting company, or owns or controls at least 25% of its ownership interests. An individual has substantial control of a reporting company if he or she:- Is a senior officer of the company,
- Has authority over the senior officers or a majority of the company’s board,
- Has substantial influence over the company’s important decisions, or
- Has any other type of substantial control over the company.
- Someone acting as a nominee, intermediary, custodian or agent on behalf of a beneficial owner,
- An employee of the reporting company who has substantial control over the entity’s economic benefits because of his or her employment status (but only if the individual isn’t a senior officer of the entity),
- An individual whose only interest in a reporting company is a future interest through a right of inheritance,
- Any creditor of the reporting company (unless the creditor exercises substantial control or has a 25% ownership interest in the reporting company), or
- A minor child.
Defining company applicants
The CTA also requires reporting companies to provide identifying information about their company applicants. A company applicant is someone who’s:- Responsible for filing the documents that created the entity (for a foreign entity, this is the person who directly files the document that first registers the foreign reporting company to conduct business in a state), or
- Primarily responsible for directing or controlling filing of the relevant formation or registration document by another individual.
Addressing other CTA reporting requirements
The CTA’s reporting requirements are extensive. Specifically, the report to FinCEN must include the following information:- The legal name of the entity (or any trade or doing-business-as name),
- The address of the entity,
- The jurisdiction where the entity was formed,
- The entity’s Taxpayer Identification Number, and
- The name, address, date of birth, unique identifying number information of each beneficial owner (such as a U.S. passport or state driver’s license number), and an image of the document that contains the identifying number.