By: Mark Mirsky, CPA & Vidhya Sundaram, CPA
Key Takeaways:
- The Corporate Transparency Act (CTA) was enacted in 2020 requiring thousands of small businesses to report owner information to FinCEN beginning January 1, 2024.
- It primarily affects small businesses. Large companies and other entities are exempt.
- BOI reporting applies to individuals who hold at least 25% ownership or exercise substantial control over an affected company.
- Penalties for noncompliance or false reporting can include hundreds of dollars in daily fines and criminal charges.
- Owners of affected entities should discuss filing obligations with legal counsel.
Anti-Money Laundering Effort Focuses on Small Businesses
The federal Corporate Transparency Act (CTA) was enacted in 2020 and its most significant provision – requiring the reporting of names and personal information of owners and officers of thousands of small businesses to the federal government – will take effect on January 1, 2024.
Corporations, limited liability companies and similar entities (potentially trusts or other entities formed with a secretary of state) registered with a secretary of state office within the United States (whether by a foreign or domestic business or individual) will be required to report certain “beneficial owner information” (BOI) to FinCEN — the Financial Crimes Enforcement Network arm of the U.S. Treasury Department — under the provisions of the Corporate Transparency Act (CTA).
FinCEN will begin accepting BOI reports on January 1, 2024. Corporations, LLCs and other entities that had already registered with a secretary of state prior to January 1, 2024 will have another year – until January 1, 2025 – to file their first BOI reports. But entities formed after December 31, 2023 and before January 1, 2025, will be required to file their first BOI reports within 90 days of creation or registration. Entities formed after December 31, 2024, will have only 30 days from creation or registration to file their initial filing. For 2024, we recommend that you discuss with your legal counsel to determine when you should file the form. Some attorneys have recommended waiting until closer to the deadline. Be aware that substantial penalties for late or incorrect filings may apply.
Impact Falls Mainly on Small Business (Reporting Companies)
What is most significant about the BOI reporting requirement is that it primarily applies to small businesses. Large companies – defined as having more than 20 employees, more than $5 million in gross receipts in 2023 and a physical place of business in the U.S. – are among several entities that are exempt from the reporting requirement.
Further, disregarded entities owned by individuals will be required to report. Examples are sole proprietors who operate through an LLC filing on Schedule C as well as individuals owning real property rentals within an LLC with 1 owner filed on Schedule E.
The law is not widely understood, and many owners of affected small companies may be unaware of their reporting obligations.
While the law requires BOI reporting of individuals who hold 25% or more ownership interest, it also more broadly applies to individuals who exercise “substantial control” over the company, either directly or indirectly. Therefore, individuals exercising substantial control do not need to have ownership in the company, and the reporting requirement applies automatically to any senior officers of a company (president, CFO, general counsel, CEO, COO), anyone who has the authority to appoint or remove certain officers or a majority of directors, or makes important decisions about a reporting company’s business, finances and structure.
It is important to note that the BOI reporting information is submitted by the company, not the individual. Penalties for noncompliance are steep, including civil penalties of up to $500 a day up that the violation continues and criminal penalties of up to $10,000 and two years in jail. Willfully failing to file, willfully filing false BOI information, or willfully failing to update BOI information may subject the entity to penalties. A BOI or any individual who willfully causes an entity to fail to file, timely file or update a filing may subject to penalties.
What is the Corporate Transparency Act?
Enacted in 2020, the CTA is intended to help national security, intelligence and law enforcement agencies fight money laundering, the financing of terrorism and other illicit activity, as well as bring the U.S. into compliance with international anti-money laundering standards.
The legislation’s chief sponsor (now-former) Rep. Carolyn Maloney, D-NY, characterized the measure as addressing “malicious actors who have been using shell corporations” to hide money. However, the CTA has been criticized for having regulations so broadly written that it will apply to thousands of small businesses.
Among other provisions, the CTA will require affected companies to report to FinCEN certain information of any person who:
- Exercises substantial control over the company (interpreted fairly broad), or
- Owns or controls at least 25% of the ownership interests of the company.
The Corporate Transparency Act defines companies that must report BOI information as:
- Domestic corporations, LLCs and other entities registered under U.S. state law.
- Foreign corporations, LLCs or entities formed under foreign law that are registered to do business in any U.S. state.
There are 23 types of entities exempt from BOI reporting, including but not limited to:
- Banks, credit unions, tax-exempt entities registered with the IRS, brokers or dealers in securities, inactive entities that had been in existence prior to January 1, 2020 and had less than $1,000 in transactions over the prior 12 months, and venture capital fund advisors.
- Large operating companies with more than 20 full-time employees, more than $5 million in sales, and a physical office in the U.S. Subsidiaries of large companies that are exempt from BOI reporting also are exempt.
Reports will include information about beneficial owners of the company.
- A beneficial owner is either someone who directly or indirectly exercises substantial control over the company, or
- Who directly or indirectly owns 25% or more of the company.
Entities formed after December 31, 2023 will also need to report company applicants.
- Company applicant is the individual who directly files the document that creates or registered the company
- If more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing is the company applicant.
Reporting companies must provide the following information:
- Legal name of the company.
- Trade names (i.e., DBA).
- Street address of principal place of business in the U.S.
- Jurisdiction of formation or registration.
- Tax ID# of the company.
Beneficial owner information (and company applicant information) to be provided includes:
- Individual’s name, date of birth and residential address.
- Unique ID# from acceptable ID document, and copy of ID (U.S. driver’s license, U.S. passport or other government-issued ID) or FinCEN unique identifier obtained from FinCEN
More information is available at FinCEN’s Beneficial Ownership Information web page. Additionally, FinCen has released a 56-page Small Entity Compliance Guide.
How You May be Affected
If you own or are in a position to substantially control a corporation, limited liability company or similar entity – or you hold at least a 25% ownership interest – the entity may be required to report your identity to FinCEN. Many CPA firms are recommending that their clients either self-report or reach out to their attorneys to assist with these filings. However, if you have questions about compliance with the BOI reporting requirement, contact your KRD advisor.
