As part of the U.S. government’s efforts to combat illicit activity such as tax fraud, money laundering and terrorism financing, an estimated 32 million entities face a new filing requirement that became effective on Jan 1, 2024.
The Corporate Transparency Act impacts the vast majority of BSW clients. Importantly, failure to comply may result in steep penalties. The following blog post will provide more information about the law, who it applies to, and how business owners can comply. Please contact your attorney for specific questions pertaining to your situation.
WHAT: The Corporate Transparency Act
The Corporate Transparency Act (CTA) was enacted by Congress in 2021 following the Anti-Money Laundering Act of 2020 (AMLA) and requires reporting companies to provide the Financial Crimes Enforcement Network (FinCEN) with beneficial ownership information (BOI) including names, dates of birth, addresses and IDs of direct and indirect owners of the entity. FinCEN published the following checklist in its Small Entity Compliance Guide:
WHO: Defining Reporting Companies, Exemptions, and Beneficial Ownership
Reporting Company
Reporting companies are defined as corporations, LLCs, and any other entities created by the filing of a document with a secretary of state or any similar office in the US, see FinCEN’s definition of a reporting company.
Exemptions: There are 23 types of reporting companies that are exempt from the beneficial ownership filing requirement, see here. Typically, these are entities that by nature of their business must comply with other reporting requirements. Inactive entities must meet six criteria to qualify as an exempt reporting company, see here.
Beneficial Owners
Beneficial owners are individuals who own or control at least 25 percent of the company’s ownership interest, or exercise substantial control over the reporting company.
The four ways an individual can exercise substantial control as defined for BOI purposes are:
- Acting as a senior officer
- Having authority to appoint or remove certain officers or a majority of directors
- Being an important decision-maker
- Having any other form of substantial control as explained in FinCEN’s Small Entity Compliance Guide, Chapter 2.1:
Company Applicants
For reporting companies formed on or after January 1, 2024, the individual who directly files initial documents with a secretary of state’s office and the individual who is primarily responsible for directing or controlling the filing will need to be included on the BOI report, see FinCEN’s definition of “company applicant”. Reporting companies created before January 1, 2024 are not required to disclose company applicant information on their BOI filing.
HOW: Filing BOI Reports: Procedures, Deadlines, and Penalties for Non-Compliance
Where to File
BOI filings can be completed through the FinCEN website either through an online form or via a printable PDF.
Timeline
Reporting companies created or registered before January 1, 2024 have until January 1, 2025 to file a BOI with FinCEN. Entities that are created on or after January 1, 2024 have 90 days from the formation date. Beginning in 2025, new entities have 30 days to comply. BOI forms only need to be submitted once and are not an annual requirement.
Changes to BOI
Any material changes to the reporting company or beneficial owners such as a change of address or a change in ownership will require an updated BOI filing through FinCEN within 30 days of the change.
Creating a FinCEN Identifier
The optional FinCEN identifier is a unique ID number for a beneficial owner that can be obtained and used across multiple BOI forms in lieu of entering all required information for each submission. This can be beneficial for owners of multiple entities.
Failure to Comply with the BOI Requirement
Possible civil penalties include fines of up to $500 per day. Criminal penalties can include two years imprisonment and up to $10,000.
KEEPING YOUR INFORMATION SAFE
According to FinCEN there have been fraudulent attempts to solicit information via e-mails or letters. Please note, FinCEN does not send unsolicited requests.
FinCEN states that BOI information will be stored in a secure, non-public database, see here for more information on who can access the data.
UPDATE
In a recent development a federal district court in the Northern District of Alabama ruled the Corporate Transparency Act unconstitutional. At this point, the ruling has suspended the requirement to file for the National Business Association and its members, and FinCEN continues to implement the filing requirement for all other reporting companies. It remains to be seen if there will be any ripple effects in the coming months.
RESOURCES
Link to FinCEN’s Small Entity Compliance Guide
Link to FinCEN’s FAQ
Thank you for reading!
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