If you have beneficial ownership in a small company, such as a limited liability company or similar entity, you must become familiar with this new legislation.
New legislation went into effect on January 1, 2024, that requires certain corporations, limited liability companies (LLCs), and other similar entities (“Reporting Company (ies)”) to disclose information regarding its beneficial owners, i.e., the individuals (natural persons) who own or control a Reporting Company, to the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”).
Congress imposed this requirement in a statute called the Corporate Transparency Act (“CTA”), with FinCEN issuing the regulations providing details on who must file a report, what information must be reported, and when it must be filed. Each Reporting Company must determine if it is subject to this new requirement, as non-compliance may result in severe penalties. In this post, we address common questions about the CTA.
What is the purpose of the Corporate Transparency Act?
At its core, the CTA is an anti-money laundering law. Congress believes that individuals may seek to conceal their ownership and activities in Reporting Companies to facilitate money laundering, the financing of terrorism, tax fraud, and other illegal acts. The CTA is intended to protect national interests and better enable efforts to counter illegal acts by requiring that beneficial ownership information be submitted to FinCEN.
What entities are subject to the reporting requirements?
Domestic and foreign entities subject to the Act include certain domestic corporations, LLCs, or similar entities created by filing a document with a Secretary of State or any similar office under the law of a state. Foreign Reporting Companies include privately formed entities and similar entities formed under the law of a foreign country that are registered to do business in the United States.
The CTA identifies certain exempt entities that are not considered Reporting Companies. Examples of exempt entities include banks, credit unions, SEC-reporting companies, insurance companies, and public accounting firms.
What information must be reported?
All Reporting Companies must submit a report to FinCEN about some, but not all, of their owners and managers.
Specifically, this report must include information about every individual who owns at least 25% of the entity or exercises substantial control (serves as a senior officer, or directors of the entity, as well as anyone who has the right to appoint them, or directs, determines, or has substantial influence over important decisions of the company such as decisions regarding the nature and scope of the company’s business, the company’s structure, major financial decisions, compensation of senior officers, significant contracts, governance documents, etc).
For each individual, the report must include the individual’s name, date of birth, residential address, and government I.D. number, along with a copy of the individual’s I.D. For newly formed entities, this information must also be submitted for the individual who filed the entity’s formation documents.
When does the initial beneficial ownership report have to be filed with FinCEN?
A domestic Reporting Company created before January 1, 2024 must file its initial beneficial ownership report (“BOI”) by January 1, 2025.
A domestic Reporting Company created on or after January 1, 2024 and before January 1, 2025 must file a report within 90 calendar days of the date on which it receives actual or public notice that its creation has become effective.
A domestic Reporting Company created on or after January 1, 2025 must file a report within 30 calendar days of the date on which it receives actual or public notice that its creation has become effective.
What are the penalties for failure to report?
Any individual who provides false information or fails to comply with reporting requirements is liable for civil penalties of no more than $500 for each day that the violation continues. Violators are also subject to criminal penalties of imprisonment for up to two years and fines of up to $10,000.
Does the new law apply to trusts?
Trusts used for estate planning purposes generally are not considered Reporting Companies themselves. However, where a trust has substantial control over a Reporting Company or owns or controls 25% or more of the ownership interests in a Reporting Company, the CTA looks through the trust and requires information on the trustee and, in some cases, the beneficiaries and settlor of the trust to be reported.
When a trust owns or controls a Reporting Company, the following individuals must be registered as beneficial owners with FinCEN:
- a trustee of the trust or other individual (if any) with the authority to dispose of trust assets;
- a beneficiary who is the sole permissible recipient of income and principal from the trust;
- a beneficiary who has the right to demand a distribution of or withdraw substantially all assets from the trust; and,
- a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust.
Next Steps
If you have beneficial ownership in a small company, such as an LLC or similar entity, you should begin taking steps now to comply with the CTA’s reporting requirements based on the key effective dates for initial reporting described above. You may also wish to discuss the CTA requirements with your attorney or CPA to assist with the fulfillment of these new obligations.
For additional information regarding the CTA, please visit https://www.fincen.gov/boi
To view frequently asked questions about the CTA, please visit:
https://www.fincen.gov/boi-faqs
https://www.fincen.gov/boi/beneficial-ownership-information-frequently-asked-questions