The Corporate Transparency Act requires business owners to report beneficial ownership information to the federal government starting in 2024. (Beneficial owners are those who own and/or substantially control a company that has this reporting requirement.)
The Corporate Transparency Act (CTA) was enacted in 2021 as part of the Anti-Money Laundering Act (AMLA) of 2020. The CTA requires companies to report their beneficial ownership information (BOI) to FinCEN starting in calendar year 2024. As the names of the Acts suggest, the purpose of this new reporting requirement is to make it harder for “bad actors” inside and outside of the U.S. to hide their identities and launder money through shell and front companies in the U.S. FinCEN will be able to share beneficial ownership information with authorized law enforcement agencies and financial institutions.
And because the government loves acronyms, here are a few that they are talking about:
- AMLA – Anti-Money Laundering Act of 2020 (P.L. 116-283)
- BOI – beneficial ownership information
- CTA – Corporate Transparency Act
- FinCEN – Financial Crimes Enforcement Network (an agency of the Treasury Department)
- FTE employee – full-time equivalent employee
So, does your company have to worry about this? Let's review the rules.
Companies which have to report to FinCEN include any domestic company that was created by filing a document with any state under the laws of that state is a BOI reporting company. This includes:
- Corporations (S corporations and C corporations),
- LLCs (including single-member LLCs),
- LLPs, and
- Certain other limited liability organizations
This also includes any foreign entity formed under the laws of a foreign country and registered to do business in the U.S. by filing a document with any state under the laws of that state.
On the flip side, these companies do not have to report for BOI purposes:
- Sole proprietors and general partnerships that are not state entities, i.e. not LLPs, etc.
- Large companies, defined as businesses with at least 20 FTE employees, over $5 M in gross receipts, and a U.S. presence
- Publicly traded companies
- Certain federally-regulated entities including banks, insurance companies, and utilities
Aside from foreign entities, note that simply being registered or licensed to do business in a state doesn’t make a company a reporting company. For instance, a hair stylist who is a sole proprietor must be licensed to operate in her state, but her business is not a reporting company. If her business files the paperwork to become an LLC, the business will have to report BOI to FinCEN.
Unfortunately, that means all of those small S-corporations and LLCs will have to deal with this.
So what information will have to be reported? Well, beneficial owners are those who directly or indirectly own or control a company required to report and can be described as:
“Own” means that the individual directly or indirectly owns at least 25% of the company’s interests. The beneficial owner may be a stockholder, shareholder, partner in a registered partnership such as an LLP, or an LLC member. The beneficial owner could also be a general partner in a non-reporting company that has an interest in a reporting company. Let's look at some examples:
Example 1: Johnson LLC is owned by John (25%), Richard (25%), and Thomas LLC (50%). Thomas LLC has one member, Will, who owns 100% of the business. John, Richard, and Will are beneficial owners of Johnson LLC. Ruth and Lucy are direct owners and Will is an indirect owner.
Example 2: Smith LLC is owned by Helen (one-third) and Sherman Bros. (two-thirds). Sherman is a general partnership owned equally by Jim and Tom. Helen, Jim, and Tom are beneficial owners of Smith LLC. Helen is a direct owner and Jim and Tom are indirect owners. [Note that Sherman Bros. is not a reporting company itself but its general partners are beneficial owners of a reporting company.]
“Control” means that the individual directly or indirectly exercises substantial control over the company. Individuals, including senior officers, who direct, determine, or influence important decisions are beneficial owners even if they do not own 25% of the company’s interests.
Example 3: Pearson LLC is owned by Roger (40%), Manuel (40%), and Alicia (20%). Roger manages and controls Pearson's day-to-day operations and has significant influence over important decisions made by the LLC. Alicia has less than a 25% ownership interest in Harding but since she exercises substantial control over the company, she is a beneficial owner.
Now the fun part. This is the information that a reporting company will be required to report to FinCEN:
- Beneficial owners
- Name, date of birth, and home address
- A unique government-issued ID number, such as a state driver’s license or passport number (generally, not an SSN or ITIN)
- An image of the identifying document
- Company information
- Legal name and trade names, such as a D/B/A
- Principal address
- State where the company is organized
- The company’s TIN, such as an EIN
- Type of filing (initial, correction, or update)
- Company applicants (for newly created companies, discussed below)
And when do you have to report?
The deadline for submitting BOI depends on when the reporting company was created.
- Entities created before Jan. 1, 2024 must report BOI to FinCEN by Jan. 1, 2025.
- Entities created on or after Jan. 1, 2024 must report BOI to FinCEN within 30 days. Generally, this deadline runs from the time the entity receives actual notice from the state that its creation is effective.
Example 4: Clinton files articles of organization with Nebraska to become an LLC. The company receives notice from Nebraska that their application is accepted and they are an LLC starting July 1, 2024. Clinton LLC must report its BOI to FinCEN by July 30, 2024. Note that Clinton may also file Form 2553 to elect S corporation status. The IRS’s acceptance of the S election is not relevant for the company’s BOI reporting due date.
So what about newly created reporting companies? Glad you asked.
Company applicants are individuals who directly file creation documents with the state or are responsible for whoever files the documents. For newly created companies, up to two individuals may be listed as company applicants. They may or may not be beneficial owners. If the company applicant is an attorney or corporate formation agent, they would report their business address instead of their home address.
Example 5: In February of 2024, George from Harrison LLC hires his friend Anna from Tyler’s law firm to complete the required paperwork to form the business. Anna directs her assistant John to draft and file the documents with her approval. Anna and John are both company applicants and their information must be included in Harrison LLC’s BOI report. [Reporting companies in existence prior to 2024 do not include company applicants with their BOI.]
So how do you file?
Reporting companies will file their BOI reports electronically with FinCEN through the BSA e-filing system. FinCEN does not charge a fee to file the report.
The BOI report is not an annual filing. After the initial report, subsequent reports are needed only for corrections or changes in beneficial ownership. (Thank goodness) No reports will be accepted before Jan. 1, 2024.
And finally, what happens if you ignore this and don't file the form. Penalties!!!
Severe penalties apply for willful failure to complete the initial or updated BOI report or for providing false or fraudulent information to a reporting company. The penalty is $500 per day up to $10,000 and imprisonment up to two years. Penalties also apply to unauthorized disclosure of the information in the report.