The Corporate Transparency Act of 2021 (the “Act”) became effective on January 1, 2024. The Act requires certain reporting companies doing business in the United States to file information on its beneficial owners with the Financial Crimes Enforcement Act at work (“FinCEN”). The purpose of the Act is to prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity.
What is a Reporting Company?
A reporting company is a corporation, limited liability company or other similar entity that is created by the filing of a document with a secretary of state or any similar office in the United States. A reporting company also includes an entity organized outside of the United States that has registered to do business in the United States by the filing of a document with a secretary of state or any similar office.
A general partnership or sole proprietorship, to the extent it is not created by registering with a secretary of state or similar office in the United States, would not be considered a reporting company. A reporting company also excludes certain exempt entities, such as entities that: (i) employ more than 20 employees on a full-time basis in the United States; (ii) filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales; and (iii) has an operating presence at a physical office within the United States.
There are 23 types of entities that are exempt from filing the beneficial ownership information reporting requirements. These entities include publicly traded companies meeting specified requirements, many nonprofits, and certain large operating companies. A summary of the 23 exemptions are provided by FinCEN: https://www.fincen.gov/boi-faqs#C_2
If you wish to claim an exemption, the decision must be carefully scrutinized.
Who are Beneficial Owners?
Beneficial owners are individuals who, directly or indirectly through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity, or (ii) owns or controls 25% or more of the ownership interest.
An individual can exercise substantial control over a reporting company in four different ways:
An ownership interest is generally an arrangement that establishes ownership rights in the reporting company. Examples of ownership interests include shares of equity, stock, voting rights, or any other mechanism used to establish ownership.
Also, beneficial owner can own or control a reporting company through trusts. The following conditions indicate that an individual owns or controls ownership interests in a reporting company through a trust (this list is not exhaustive):
A beneficial owner does not include: (i) a minor child if the information of the child's parent or guardian is reported; (ii) an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual; (iii) an individual acting solely as an employee of the entity and whose control over or economic benefits from such entity is derived solely from the person’s status as an employee; (iv) a person whose only interest in the company is through a right of inheritance; or (v) a creditor unless the creditor meets the substantial control or 25% ownership test.
What must be reported?
The Act requires reporting companies to file a beneficial ownership information report (a “BOI Report”) to register the “personally identifiable information” of their “beneficial owners” with FinCEN, and update that information regularly for the life of the business. This includes the following information for each beneficial owner and applicant:
A reporting company does not report any business, tax or financial information to FinCEN
Company Applicants
Reporting companies created or registered on or after January 1, 2024, will need to also report their company applicants. A reporting company that must report its company applicants will have up to only two individuals who could qualify as a company applicant:
An accountant or lawyer could be a company applicant, depending on their role in filing the document that creates or registers a reporting company. For example, an attorney at a law firm that offers business formation services may be primarily responsible for overseeing preparation and filing of a reporting company’s incorporation documents. A paralegal at the law firm may directly file the incorporation documents at the attorney’s request. Under those circumstances, the attorney and the paralegal are both company applicants for the reporting company.
FinCEN Identifier
In lieu of providing all personally identifiable information on the BOI Report, each beneficial owner and each company applicant, if applicable, can obtain a “FinCEN identifier.” This would be a unique identifying number that FinCEN will issue to an individual upon request after the individual or reporting company provides certain information to FinCEN.
An individual may only receive one FinCEN identifier. To simplify the completion of your BOI Report, it is highly recommended that all beneficial owners and company applicants, if applicable, obtain a FinCEN identifier.
Timing of Initial Report
A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025 to file its initial BOI Report.
A reporting company created or registered on or after January 1, 2024, and before January 1, 2025, will have 90 calendar days after receiving notice of the company’s creation or registration to file its initial BOI report. This 90-calendar day deadline runs from the time the company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier.
Reporting companies created or registered on or after January 1, 2025, will have 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their initial BOI reports with FinCEN.
Updates to Filing
If there is any change to the required information about your company or its beneficial owners in a BOI Report that your company filed, your company must file an updated report no later than 30 days after the date of the change.
A reporting company is not required to file an updated report for any changes to previously reported information about a company applicant.
Penalties/Non-Compliance
There are civil and potential criminal penalties for non-compliance. The statute itself defines a reporting violation as a willful filing of false information or the willful failure to report, complete or update beneficial ownership information to FinCEN.
There is a civil penalty of up to $500 per day for as long as the violation continues. This civil penalty amount is adjusted annually for inflation. With inflation adjustment the daily penalty amount is currently $591.
Willful non-compliance may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000.
Act Now
There are many rules and requirements under the Act and this circular is not intended to be an exhaustive review of the requirements of the Act.
Reporting Companies should consider (i) incorporating policies and procedures that require beneficial owners to report relevant changes to the reporting company’s management, and/or (ii) requiring beneficial owners to obtain individual FinCEN identifiers and submit them to the reporting company.
In the meantime, if you are a member of a limited liability company, a partner in a partnership, or a beneficial owner in any entity that might be a reporting company, whether directly or as a Trustee or beneficiary of a trust, you should review your reporting obligations under the Act and if required, file your BOI Report with FinCEN before the January 1, 2025 deadline for a reporting company established prior to 2024, or pursuant to the timeline required. You can do so electronically through a secure filing system available via FinCEN’s BOI E-Filing website: https://boiefiling.fincen.gov/
It is expected that many, if not most, reporting companies will be able to submit their BOI Report to FinCEN on their own. However, if you would like our assistance with your company’s FinCEN report due January 1, 2025, please let us know by no later than October 30, 2024.
This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This alert is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have.
What is a Reporting Company?
A reporting company is a corporation, limited liability company or other similar entity that is created by the filing of a document with a secretary of state or any similar office in the United States. A reporting company also includes an entity organized outside of the United States that has registered to do business in the United States by the filing of a document with a secretary of state or any similar office.
A general partnership or sole proprietorship, to the extent it is not created by registering with a secretary of state or similar office in the United States, would not be considered a reporting company. A reporting company also excludes certain exempt entities, such as entities that: (i) employ more than 20 employees on a full-time basis in the United States; (ii) filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales; and (iii) has an operating presence at a physical office within the United States.
There are 23 types of entities that are exempt from filing the beneficial ownership information reporting requirements. These entities include publicly traded companies meeting specified requirements, many nonprofits, and certain large operating companies. A summary of the 23 exemptions are provided by FinCEN: https://www.fincen.gov/boi-faqs#C_2
If you wish to claim an exemption, the decision must be carefully scrutinized.
Who are Beneficial Owners?
Beneficial owners are individuals who, directly or indirectly through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity, or (ii) owns or controls 25% or more of the ownership interest.
An individual can exercise substantial control over a reporting company in four different ways:
- The individual is a senior officer (e.g., president, chief officer, general counsel, or similar executive function);
- The individual has authority to appoint or remove senior officers or a majority of directors (or similar body) of the reporting company;
- The individual is an important decision-maker for the reporting company; or
- The individual has any other form of substantial control over the reporting company.
An ownership interest is generally an arrangement that establishes ownership rights in the reporting company. Examples of ownership interests include shares of equity, stock, voting rights, or any other mechanism used to establish ownership.
Also, beneficial owner can own or control a reporting company through trusts. The following conditions indicate that an individual owns or controls ownership interests in a reporting company through a trust (this list is not exhaustive):
- A Trustee (or any other individual) has the authority to dispose of trust assets;
- A is the sole permissible recipient of income and principal from the trust, or has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or
- A or settlor has the right to revoke the trust or otherwise withdraw the assets of the trust.
A beneficial owner does not include: (i) a minor child if the information of the child's parent or guardian is reported; (ii) an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual; (iii) an individual acting solely as an employee of the entity and whose control over or economic benefits from such entity is derived solely from the person’s status as an employee; (iv) a person whose only interest in the company is through a right of inheritance; or (v) a creditor unless the creditor meets the substantial control or 25% ownership test.
What must be reported?
The Act requires reporting companies to file a beneficial ownership information report (a “BOI Report”) to register the “personally identifiable information” of their “beneficial owners” with FinCEN, and update that information regularly for the life of the business. This includes the following information for each beneficial owner and applicant:
- Full legal name;
- Date of birth;
- Current business or residential street address; and
- ID number from an unexpired driver's license or passport, or other government ID document.
A reporting company does not report any business, tax or financial information to FinCEN
Company Applicants
Reporting companies created or registered on or after January 1, 2024, will need to also report their company applicants. A reporting company that must report its company applicants will have up to only two individuals who could qualify as a company applicant:
- The individual who directly files the document that creates or registers the company; and
- If more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing.
An accountant or lawyer could be a company applicant, depending on their role in filing the document that creates or registers a reporting company. For example, an attorney at a law firm that offers business formation services may be primarily responsible for overseeing preparation and filing of a reporting company’s incorporation documents. A paralegal at the law firm may directly file the incorporation documents at the attorney’s request. Under those circumstances, the attorney and the paralegal are both company applicants for the reporting company.
FinCEN Identifier
In lieu of providing all personally identifiable information on the BOI Report, each beneficial owner and each company applicant, if applicable, can obtain a “FinCEN identifier.” This would be a unique identifying number that FinCEN will issue to an individual upon request after the individual or reporting company provides certain information to FinCEN.
An individual may only receive one FinCEN identifier. To simplify the completion of your BOI Report, it is highly recommended that all beneficial owners and company applicants, if applicable, obtain a FinCEN identifier.
Timing of Initial Report
A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025 to file its initial BOI Report.
A reporting company created or registered on or after January 1, 2024, and before January 1, 2025, will have 90 calendar days after receiving notice of the company’s creation or registration to file its initial BOI report. This 90-calendar day deadline runs from the time the company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier.
Reporting companies created or registered on or after January 1, 2025, will have 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their initial BOI reports with FinCEN.
Updates to Filing
If there is any change to the required information about your company or its beneficial owners in a BOI Report that your company filed, your company must file an updated report no later than 30 days after the date of the change.
A reporting company is not required to file an updated report for any changes to previously reported information about a company applicant.
Penalties/Non-Compliance
There are civil and potential criminal penalties for non-compliance. The statute itself defines a reporting violation as a willful filing of false information or the willful failure to report, complete or update beneficial ownership information to FinCEN.
There is a civil penalty of up to $500 per day for as long as the violation continues. This civil penalty amount is adjusted annually for inflation. With inflation adjustment the daily penalty amount is currently $591.
Willful non-compliance may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000.
Act Now
There are many rules and requirements under the Act and this circular is not intended to be an exhaustive review of the requirements of the Act.
Reporting Companies should consider (i) incorporating policies and procedures that require beneficial owners to report relevant changes to the reporting company’s management, and/or (ii) requiring beneficial owners to obtain individual FinCEN identifiers and submit them to the reporting company.
In the meantime, if you are a member of a limited liability company, a partner in a partnership, or a beneficial owner in any entity that might be a reporting company, whether directly or as a Trustee or beneficiary of a trust, you should review your reporting obligations under the Act and if required, file your BOI Report with FinCEN before the January 1, 2025 deadline for a reporting company established prior to 2024, or pursuant to the timeline required. You can do so electronically through a secure filing system available via FinCEN’s BOI E-Filing website: https://boiefiling.fincen.gov/
It is expected that many, if not most, reporting companies will be able to submit their BOI Report to FinCEN on their own. However, if you would like our assistance with your company’s FinCEN report due January 1, 2025, please let us know by no later than October 30, 2024.
This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This alert is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have.
