Starting January 1, 2024, many small businesses will be required to file a Beneficial Ownership Information (“BOI”) Report (“BOI Report”) with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”); FinCEN is a bureau of the U.S. Treasury, which monitors illegal activity in the financial system. This new requirement was brought under the Corporate Transparency Act (“CTA”), an anti-money laundering statute which “establishes uniform beneficial ownership information reporting requirements for certain” companies, and requires FinCEN to collect that information.
What Is a “Beneficial Owner”?
A beneficial owner is: “any individual (1) who directly or indirectly exercises "substantial control" over the reporting company, or (2) who directly or indirectly owns or controls 25 percent or more of the ‘ownership interests’ of the reporting company.” FinCEN utilizes a broad definition for defines “substantial control” and “ownership interests.”
Whether an individual has ‘substantial control’ over a reporting company depends on the power they may exercise over a reporting company. For example, an individual will have substantial control of a reporting company if they direct, determine, or exercise substantial influence over, important decisions the reporting company makes. In addition, any senior officer is deemed to have substantial control over a reporting company. Other rights or responsibilities may also constitute substantial control.
"Ownership interests" generally refer to arrangements that establish ownership rights in the reporting company, including simple shares of stock as well as more complex instruments.
Compliance with the BOI Report Filing Regulations
Any company registered with their state Secretary of State (or similar state office) will be required to file a BOI Report when this law goes into effect. These reports will be filed electronically, through FinCEN’s website, and must include information about the company’s beneficial owners and company applicants, including their name, date of birth, legal address, and a copy of their ID (passport, state or local ID, driver’s license, etc.) and associated ID number.
BOI Reports must also include identifying information about the reporting company, including but not limited to the company’s full legal name, trade or business name, legal address, state of incorporation, and taxpayer identification number.
Pre-existing companies (i.e., companies formed prior to January 1, 2024) must file their BOI Reports, by January 1, 2025. Companies created after January 1, 2024, must file a BOI report within thirty (30) days of formally forming the company with the appropriate governmental agency. These reports will not be accepted prior to January 1, 2024. If the BOI Report contains any errors, the company must amend the report within thirty (30) days of noticing said errors. Further, companies will be under continuing obligations to update their reports within thirty (30) days of any of the information within the report changing.
Some companies will be exempted from this requirement. The CTA lists 23 exemptions within 31 U.S.C. §5336(a)(11)(B). These exemptions generally only apply to larger companies and include:
- Certain types of securities reporting issuers;
- A U.S. governmental authority;
- Certain types of banks;
- Federal or state credit unions as defined in section 101 of the Federal Credit Union Act;
- Bank holding company as defined in Section 2 of the Bank Holding Company Act of 1956, or any savings and loan holding company as defined in section 10(a) of the Home Owners’ Loan Act;
- Certain types of money transmitting or money services businesses;
- Any broker or dealer, as defined in Section 3 of the Securities Exchange Act of 1934, that is registered under section 15 of that Act (15 U.S.C. 78o);
- Securities exchanges or clearing agencies as defined in section 3 of the Securities Exchange Act of 1934, and that is registered under sections 6 or 17A of that Act;
- Certain other types of entities registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934;
- Certain types of investment companies as defined in Section 3 of the Investment Company Act of 1940, or investment advisers as defined in section 202 of the Investment Advisers Act of 1940;
- Certain types of venture capital fund advisers;
- Insurance companies defined in Section 2 of the Investment Company Act of 1940;
- State-licensed insurance producers with an operating presence at a physical office within the United States, and authorized by a State, and subject to supervision by a State’s insurance commissioner or a similar official or agency;
- Commodity Exchange Act registered entities;
- Any public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002;
- Certain types of regulated public utilities;
- Any financial market utility designated by the Financial Stability Oversight Council under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010;
- Certain pooled investment vehicles;
- Certain types of tax-exempt entities;
- Entities assisting a tax-exempt entity;
- Large operating companies with more than twenty (20) full-time employees, more than five million dollars ($5,000,000) in gross receipts or sales, and an operating presence at a physical office within the United States;
- The subsidiaries of certain exempt entities; or
- Certain types of inactive entities that were in existence on or before January 1, 2020, the date the Corporate Transparency Act was enacted.
What Is a “Company Applicant”?
According to FinCEN, a company applicant is one of two individuals: (1) “the individual who directly files the document that creates, or first registers, the reporting company; and (2) the individual that is primarily responsible for directing or controlling the filing of the relevant document.”
Failure to Comply with the BOI Reporting Regulations
According to the CTA failure to comply with the BOI Report filing regulations can result in a fine of five hundred dollars ($500) for each day that the filing is late. Willfully providing, or attempting to provide, fraudulent information on a BOI Report can result in a fine of up to ten thousand dollars ($10,000) or up to two (2) years imprisonment. Further, those who make unauthorized use of BOI information may be subject to fines of five hundred dollars ($500) for each day the unauthorized use continues, up to two hundred fifty thousand dollars ($250,000), or imprisonment for up to five (5) years.