CTA | FinCEN - Beneficial Ownership Information Reporting Begins 1/24 for Most LLCs, LLPs, LLLPs and Trusts
Millan + Co | Austin CPAs and Consultants
Article Summary
Beginning on January 1,2024 the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), under the 2021 Corporate Transparency Act, will require millions of small businesses and some corporation types (LLCs and more) to file a Beneficial Ownership Information (BOI) report.
Defining types of “Beneficial Owners”
Using a FinCEN Identifier in lieu of BOI reporting
Reporting Triggers & Timelines
Non-compliance: Civil and Criminal Violations and Penalties
Purpose of the CTA’s FinCEN BOI Reporting Rule
The Corporate Transparency Act (CTA), was enacted via bipartisan congressional legislation in 2021. The act was created to help protect the U.S. financial system and national security interests against criminal use and provide critical information to intelligence and law enforcement agencies, Tribal officials and financial institutions to uncover cartels, drug and human traffickers, corrupt officials, some oligarchs and fraudsters from using shell companies to hide and launder assets in the United States.
The CTA is the United State’s implementation of “Ultimate Benefit Ownership” (UBO) - which is a global regulatory movement in disclosure legislation aimed at tackling financial crimes. The U.S. is lagging behind other G20 countries in this area as the rest of the G20 already has UBO in place.
The Financial Crimes Enforcement Network (FinCEN), the strategic enforcement department of the U.S. Treasury, is responsible for implementing and managing the Corporate Transparency Act’s (CTA) beneficial ownership information reporting provisions.
Beginning January 1, 2024 the new U.S. Federal regulations will go into effect, requiring many corporations, limited liability companies (LLCs) and other “entities”- which are either created in or are registered to do business in the U.S.- to report information regarding their “beneficial owners” (the persons who actually own or control a company) to FinCEN.
What Entities (or “Reporting Companies”) Must Report?
The BOI rule identifies two main types of “Reporting Companies” that must comply: domestic and foreign.
A domestic Reporting Company is defined as “a corporation, limited liability company (LLC), or any entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.”
A foreign Reporting Company is defined as “a corporation, LLC or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office.”
The language of “any entity” (outside a corporation or LLC) has been criticized as too broad and further clarification is expected to help set expectations for small business owners. Generally, FinCEN expects that these definitions mean (aside from specified exemptions listed further below) limited liability partnerships (LLPs), limited liability limited partnerships (LLLPs), business trusts, and most limited partnerships -in addition to corporations and LLCs, because entities like these are generally created with a filing through a secretary of state or similar office.
Who Is Obligated To Report?
Both “Beneficial Owners” and “Company Applicants” are required to report under the new BOI rule. Let’s take a look at the specifics within each category.
Beneficial Owners
Within the BOI rule, a Beneficial Owner is defined as “any individual who, directly or indirectly, either (1) exercises substantial control over a Reporting Company, or (2) owns or controls at least 25 percent of the ownership interests of a Reporting Company.
The “substantial control” element of the rule is designed to close loopholes that allow corporate structuring which veils owners and decision makers. The spirit of the broad term is aimed specifically at unmasking anonymous shell companies. To help clarify, the BOI rule specifies a range of activities that could constitute “substantial control”. Standards are defined to specify how a Reporting Company should handle situations where ownership interests are held in a trust. The majority of reporting companies are expected to have simple ownership structures and reporting should be a straightforward process.
Five types of individuals are exempted from the definition of “Beneficial Owner.” The five exemptions include:
A minor child if the report provides information about a parent or legal guardian;
An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
An employee, acting solely as an employee, whose substantial control over economic benefits from such entity are derived solely from the employment status of the employee and who is not a senior officer;
An individual whose only interest is a future interest through a right of inheritance;
A creditor.
Company Applicants
The BOI rule defines a company applicant to be one of two persons:
The individual who directly files the document that creates the entity or registers the company to do business in the U.S.
The individual who is primarily responsible for directing or controlling the filing of the relevant document by another.
“FinCEN Identifier” - An Alternate Compliance Method
Individuals will be permitted to obtain a “FinCEN Identifier'', a unique number issued by FinCEN to an individual or entity upon request, which can then be provided to FinCEN on a BOI report in place of the required information about the person if they provide their four pieces of report information directly (see required four pieces of information below).
Usage of a FinCEN Identifier places the burden of updating the applicable BOI on the applicable individual or Reporting Company. Any updated applications must be filed within 30 calendar days from the date on which:
- A change occurs;
- The individual or Reporting Company becomes aware or has reason to know of an inaccuracy within an application;
- A Reporting Company can only apply for a FinCEN Identifier at or after the time that an entity submits an initial report;
- An individual can submit an application for a FinCEN Identifier which contains all of the BOI that otherwise has to be provided in the initial report about the individual. See details of what must be reported directly below.
What Must Be Reported?
The Reporting Company will be required to provide identification information about itself, and report four pieces of information about each of its Beneficial Owners and Company Applicants. Information required about the Reporting Company itself includes:
The full legal name and any trade name or “doing business as” name of the Reporting Company;
A complete current address;
The State, Tribal, or foreign jurisdiction of formation or registration of the Reporting Company; and
The IRS Taxpayer Identification Number (TIN) (including an Employer Identification Number) of the Reporting Company.
Information required of the Beneficial Owners are:
Full legal name;
Birthdate;
Address;
A unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of such document).
Reporting Triggers + Timelines
Non-compliance: Civil and Criminal Violations and Penalties
Failure to comply with the reporting requirements or unauthorized disclosure of BOI may result in civil or criminal actions.
Intentional failure to file a complete initial or updated report with FinCEN is subject to a US $500-per-day fine (up to US $10,000) and imprisonment for up to two years.
An individual who knowingly discloses BOI, without authorization, is subject to a US$500-per-day penalty (up to US$250,000) and up to five years’ imprisonment.
Privacy - A Secure Nonpublic Database (BOSS system)
Congress has directed the U.S. Treasury to maintain BOI in a secure nonpublic database to protect non-classified data at the highest security level possible. To meet this requirement, FinCEN has developed the Beneficial Ownership Secure System (BOSS) to receive, store, and maintain BOI. BOSS is expected to open on 1 January 2024, and Reporting Companies will provide the required BOI to FinCEN through BOSS.
BOI will be provided upon request by: federal agencies engaged in national security, intelligence, or law enforcement activity and to a State, local, or Tribal law enforcement agencies when a court of competent jurisdiction has authorized the law enforcement agency to seek the information in a criminal or civil investigation.With the consent of the Reporting Company, a financial institution can obtain BOI to facilitate compliance with customer due diligence requirements of a financial institution.
Summary
The application of the CTA is still evolving in some areas. In July of 2023, the House Financial Services Committee held hearings regarding the potential unintended consequences of FinCEN’s BOI rulemaking. Also, new proposals have been introduced that would modify FinCEN’s scope to include programs and research aimed at financial technology with machine learning, data analytics, and cryptocurrency.
The CTA will have significant implications for domestic and foreign businesses as it imposes new burdens on entities formed or operating in the United States. Determining reporting obligations and exemption eligibility is a case by case analysis that will need to be assessed with each Reporting Company’s unique circumstances. In addition, the tracking of an entity’s operation and ownership will be ongoing as changes in operations, leadership, investment or ownership may change reporting status.
Millan + Co. CTA and FinCEN Related Services
Millan + Co. offers organizations and individuals with BOI guidance, FinCEN filings, change filings, and management of overall FinCEN compliance.
Our decades of experience with international accounting regulations helps mitigate FinCEN penalty risks.
Consultation on business incorporation services are also available for LLCs, LLPs, LLLPs, S-corps and Corporation entity formations.
This is a live document which will be updated with any significant changes to BOI regulations and dates.