The federal government is imposing significant new reporting requirements on businesses throughout the United States. These requirements will take effect on January 1, 2024. It is critical that businesses and their owners and executives carefully evaluate whether they are required to report in compliance with these requirements, and if so, what information must be reported and when the report is due.
Pursuant to the federal Corporate Transparency Act (CTA), the Financial Crimes Enforcement Network (FinCEN) (part of the U.S. Treasury Department) issued the Beneficial Ownership Information Reporting Requirements rule (the BOI Reporting Rule) on September 30, 2022. The BOI Reporting Rule implements the CTA’s beneficial ownership information (BOI) reporting provisions. In this Client Alert, we provide an overview of the key requirements of the CTA as implemented by the BOI Reporting Rule.
The CTA was enacted and the BOI Reporting Rule was promulgated for the purpose of preventing abuse of corporate structures, such as shell companies, which may be used for illegal purposes such as money laundering, trafficking in illegal goods, and terrorist funding.
The BOI Reporting Rule requires a reporting company to file an initial report and updated reports. In its initial report, a reporting company must provide information about the reporting company itself, its beneficial owner(s), and its company applicant(s) (depending on when the company was created or registered). Each of these terms is discussed in more detail below.
Reporting Company
A reporting company can be either domestic or foreign.
A domestic reporting company is a corporation, a limited liability company, or any other entity created by the filing of a document with a secretary of state or similar office.
A foreign reporting company is a corporation, limited liability company, or other entity that is formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or similar office.
There are twenty-three types of entities that are exempt from being considered a reporting company. These exempt entities generally include larger companies as well as entities that are subject to comprehensive regulation by a government agency. Examples of exempt entities include—subject to specific definitions—banks, credit unions, securities brokers, investment companies, insurance companies, public accounting firms, tax-exempt entities, large operating companies (among other requirements, must employ more than 20 full time employees in the U.S. and must demonstrate over $5,000,000 in gross receipts or sales in the previous year), and inactive entities. An important category of exempt entity is “large operating companies”, defined as an entity that, among other requirements:
- Employs more than 20 full time employees in the United States;
- Has a physical office in the United States; and
- Had more than $5,000,000 in gross receipts or sales in the previous year as shown on a filed tax return.
Beneficial Owner
The beneficial owner of a reporting company is an individual (i.e., a human being) who, directly or indirectly, either exercises substantial control over the company or owns or controls at least 25 percent of its ownership interests.
An individual exercises substantial control over a reporting company when the individual has substantial influence over important company decisions. Substantial control can arise in a variety of ways, including, for example, as a result of:
- Serving as a senior officer of a reporting company;
- Being able to appoint or remove senior officers or a majority of the reporting company’s board of directors;
- In any other way having the ability to direct or control important decisions of the reporting company; or
- Having any other form of substantial control over the reporting company.
Even if someone does not exercise substantial control over a reporting company, an individual may be a beneficial owner by directly or indirectly owning or controlling at least 25 percent of the ownership interests. An ownership interest includes a variety of arrangements used to establish ownership; the BOI Reporting Rule lists several (see 31 CFR 1010.380(d)(2)(i)). Ownership or control of an ownership interest may also occur through a variety of arrangements. The BOI Reporting Rule lists several specific arrangements (see 31 CFR 1010.380(d)(2)(ii)) that comprise ownership or control of an ownership interest, including when an individual owns or controls the ownership interests of intermediary entities which in turn own or control ownership interests of the reporting company.
There are five exceptions to who is considered a beneficial owner. These exceptions include:
- Minor children (provided the parent or legal guardian’s information is included);
- Individuals acting as a nominee, intermediary, custodian, or agent;
- Employees acting solely as employees (subject to certain specifications including not being a senior officer);
- Those whose only interest is a future interest through a right of inheritance; and
- Creditors (as specified) (see 31 CFR 1010.380(d)(3)).
Reporting companies, especially those with complex ownership or control structures, will need to carefully assess who their beneficial owners are and gather required information that must be reported on each beneficial owner. Where the beneficial owners of a reporting company include other business entities or trusts, this process will require gathering and assessing information on owners, control persons and beneficiaries of those business entities and trusts (or layers of business entities and/or trusts, until the relevant ultimate individuals who are the reporting company’s beneficial owners are identified).
Company Applicant
A company applicant means both: (1) the individual who directly files the document that creates (in the case of a domestic reporting companies) or first registers (in the case of a foreign reporting companies) the reporting company, and (2) the individual primarily responsible for directing or controlling the filing if more than one individual is involved.
Information That Must Be Reported
- Information that must be reported about the reporting company includes its legal name, any trade name or d/b/a name, address, jurisdiction of formation, jurisdiction of registration (if a foreign reporting company), and Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN) or tax identification number issued by a foreign jurisdiction, if applicable).
- Information that must be reported about beneficial owners and company applicants (depending on the date of the reporting company’s creation or registration) includes the individual’s name, date of birth, address, a unique identifying number and the issuing jurisdiction (from one of a number of documents specified in the BOI Reporting Rule), and an image of such document.
Note, however, that if a reporting company was created or registered before the Rule becomes effective (January 1, 2024), it is not required to include information concerning a company applicant, and if a reporting company forms or is registered after the BOI Reporting Rule becomes effective, it is not required to update previously submitted information concerning a company applicant.
Rather than the reporting company submitting these items of an individual beneficial owner or company applicant’s personal information, the individual may submit this information directly to FinCEN and obtain a FinCEN identifier. The reporting company may then use this FinCEN identifier instead of the individual’s personal information.
Special rules apply for the content, form, and manner of reports for:
- Reporting companies owned by exempt entities;
- Minor children;
- Foreign pooled investment vehicles; and
- Company applicants for existing companies.
Deadlines for Initial, Updated and Corrected Report Filings
- Initial Report: A reporting company created or registered on or after January 1, 2024 has only 30 days from notice of creation or registration to file a report. A reporting company created or registered before January 1, 2024 is given until no later than January 1, 2025 (one year after the effective date) to file a report.
- Updated Report: If, after filing a report, required information concerning the reporting company or its beneficial owner(s) changes, then the reporting company has 30 days from when the change occurs to file an updated report reflecting any change to such information. This includes changes of ownership arising from, among other things, sale of ownership interests, the death or divorce of a beneficial owner, a beneficial owner who was a minor child attaining adulthood, and distributions of ownership interests to trust beneficiaries. If an entity becomes exempt from the definition of “reporting company” after filing an initial report, it must file an updated report indicating this change of status.
- Corrected Report: Reporting companies are also obligated to correct inaccurate information. If a report was inaccurate when it was filed and remains inaccurate, the reporting company has 30 days from when it learned about the inaccuracy (or should have learned about it) to file a corrected report.
Consequences for Noncompliance
The CTA and the BOI Reporting Rule make it unlawful for any individual, reporting company, or other entity to willfully provide, or attempt to provide, false or fraudulent information, or to willfully fail to report complete or updated beneficial ownership information. The CTA provides for civil and criminal penalties in the case of such actions. Someone who violates these rules may be liable for a civil penalty of up to $500 for each day that the violation continues or has not been remedied. Such a person may also be subject to criminal penalties, including fines of up to $10,000, imprisonment for up to 2 years, or both.
A safe harbor is available to persons who violate these requirements, so long the inaccurate report was submitted in good faith. Under the safe harbor provision, such a person will not be subject to civil or criminal penalties if the person has reason to believe that any report submitted by the person contains inaccurate information, and, voluntarily and promptly, and in no case later than 90 days after the date on which the person submitted the report, submits a corrected report.
Who Has Access to Reported Information
Under the CTA, information in filed reports is confidential and will not be publicly available. Such information may be made available, subject to various restrictions, to:
- Federal agencies for national security, intelligence or law enforcement purposes;
- State, local or tribal law enforcement agencies, if authorized by a court in connection with a criminal or civil investigation;
- Federal agencies acting on behalf of a foreign prosecutor, judge or law enforcement agency pursuant to a treaty or similar arrangement;
- Other federal regulatory agencies if certain conditions are met; and
- Financial institutions to facilitate compliance with customer due diligence requirements under applicable law, with the consent of the reporting company and subject to certain other conditions.
Sources of Additional Information
FinCEN has released the following resources for additional information on the CTA and the BOI Reporting Rule:
- BOI Reporting BOI Reporting Rule (includes extensive supplementary information and the relevant provision in the Code of Federal Regulations);
- BOI Reporting Rule Fact Sheet;
- BOI Reporting Frequently Asked Questions;
- BOI Report Filing Dates; and
- BOI Reporting Key Questions
What Business Entities Should Do Now
Business entities should begin preparing now for compliance with the BOI Reporting Rule. Existing business entities with complex or multi-layered ownership, control or financial structures should begin as soon as possible in view of the complexities that may be involved in identifying and gathering information about beneficial owners. Business entities will need to take the following steps:
- Determine whether the business entity is a reporting company;
- If the business entity is a reporting company, identify and gather required information on beneficial owners and, if applicable, company applicants;
- Organize and confirm the accuracy and completeness of all required information for the business entity’s initial report filing; and
- File the BOI report by the applicable deadline.
BLM&H can help you understand and comply with the BOI Reporting Rule. If you have questions about the BOI Reporting Rule or if you need help preparing for and making your company’s initial, updated or corrected filings, please contact:
Kevin J. Loechl, kloechl@blmhlaw.com, 404.266.3205
Hunter Holliday, hholliday@blmhlaw.com, 404.266.3206
Quincy H. Jackson, qjackson@blmhlaw.com, 404.266.3212
Colton E. Francoeur, cfrancoeur@blmhlaw.com, 404.266.3217