The Corporate Transparency Act (“CTA”) was enacted into law as part of the National Defense Act for Fiscal Year 2021. The CTA requires that certain entities disclose beneficial ownership information (“BOI”) for individuals who own a greater than 25% interest in a company or exercise substantial control of a company. The determination of a greater than 25% owner and of who exercises substantial control over an entity is complex and requires careful evaluation. These requirements are discussed later.
Beginning January 1, 2024, an estimated 32.6 million existing businesses will be required to comply with this reporting requirement. BOI reporting requirements are intended to help US law enforcement combat money laundering, the financing of terrorism and other illicit activity.
The CTA is not a part of the tax code, and BOI reporting will not be administered by the IRS. Instead, it is a part of the Bank Secrecy Act, a set of federal laws that require record-keeping and report filing on certain types of financial transactions. BOI reports will be filed with the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury.
In September 2023, FinCEN published a Small Entity Compliance Guide to the beneficial ownership information reporting requirements.
Who Must File
Domestic entities including corporations, limited liability companies or any similar entity created by filing a document with a secretary of state or any similar office under the law of a state or Indian tribe are generally required to file. The goal of the law is to identify smaller, non-regulated companies acting as shell companies.
Additionally, any entity formed under the laws of a foreign country and registered to do business in any state or tribal jurisdiction by filing a document with a secretary of state or any similar office is generally required to file. There are 23 categories of exceptions to these general rules. Businesses structured with multiple legal entities are required to report separately for each legal entity described above.
Reporting Deadlines
On November 30, 2023, FinCEN extended the reporting deadline for new entities created or registered in 2024 to require filing within 90 days of formation. New entities that are created or registered after December 31, 2024, must file within 30 days of formation. Entities that were formed prior to January 1, 2024, must file by January 1, 2025.
Additionally, reporting companies are required to report any changes in beneficial ownership or inaccuracies discovered within 30 days.
Information Required To Be Reported
Reporting companies are required to disclose certain information including full name of the reporting company, any trade name or doing business as (DBA) name, business address, state or Tribal jurisdiction of formation, and an IRS taxpayer identification number (TIN).
Additionally, information on a reporting company’s beneficial owners must be disclosed including name, birthdate, address, and unique identifying number and issuing jurisdiction from an acceptable identification document (e.g., a driver’s license or passport) and an image of such document.
Beneficial Owners
A beneficial owner is an individual who either owns or controls at least 25 percent of the ownership interests of a reporting company or exercises “substantial control” over a reporting company. To determine ownership, certain convertible instruments such as convertible debt, stock options, warrants. etc. that may be converted into equity may be required to be considered.
An individual could be viewed as exercising substantial control if the individual serves as a senior officer of the company, has authority over the appointment or removal of any senior officer or a majority of the board, or directs, determines, or has substantial influence over important decisions made by the reporting company. This includes any senior officers of the reporting company, regardless of formal title or if they have no ownership interest in the reporting company. Currently FinCEN is requiring a company to report all persons who exercise substantial control. In practice, this may be a cumbersome process and include many individuals within the company even though they do not have an ownership stake in the company.
Filing Exemptions
There are 23 categories of exemptions which exclude entities which are typically already reporting this information to the government such as public companies, banks, credit unions, tax-exempt entities, etc. One of the most notable exceptions for other operating companies is “large operating companies.”
Large operating companies include those that employ more than 20 full-time people in the United States, have reported gross receipts or sales of over $5 million on the prior year’s tax return and an operating presence at a physical office within the United States.
Certain subsidiaries of the above-described exempt companies may also be exempt from filing if they are controlled or wholly owned by an entity that meets the above exemptions.
Penalties
Penalties for not timely complying with BOI reporting requirements can be significant and may result in criminal and civil penalties. These can include civil penalties of $500 per day and criminal penalties of up to $10,000 with up to two years of jail time.
Next Steps
There currently are groups seeking to get Congress to delay the effective date of these rules but we recommend that all companies begin evaluating whether they will be subject to BOI reporting as well as who may be considered a beneficial owner. Reporting companies should also establish a plan to collect information from those it determines to be beneficial owners in order to timely comply with the reporting requirements. GBQ can assist with questions that you may have. We strongly encourage you to reach out to legal counsel with expertise in this area to assist your organization with compliance in this matter.
Reporting companies will be able to file initial reports on FinCEN’s website beginning on January 1, 2024. FinCEN has established a webpage dedicated to BOI reporting.
Article written by:
Tyler Gabalski, CPA
Manager, Tax & Business Advisory Services
Kevin Dunn, CPA
Director, Tax & Business Advisory Services
