Beginning January 1, 2024, many companies in the US will have to report information about the individuals who ultimately own or control the company to the Financial Crimes Enforcement Network (FinCEN) bureau of the U.S. Department of the Treasury. The Corporate Transparency Act (CTA), passed as part of the National Defense authorization Act of 2021, is designed to improve business activity transparency through the reporting of Beneficial Ownership Information (BOI) as part of the US government’s efforts to make it harder to use shell companies or other opaque ownership structures.
Who Has to Report?
Unless your company qualifies for an exemption, you will be required to report information about its beneficial owners if your company is any type of entity created by filing a document with a secretary of state or any similar office under the law of a state or Indian tribe.
Reporting companies typically include:
- Limited liability companies or partnerships
- Most limited partnerships
Who Does Not Have to Report?
Basically, companies that have a similar reporting requirement under other reporting structures are exempt from reporting. A partial list of exempt companies includes:
- Securities reporting issuers
- Governmental authorities
- Credit unions
- Depository institution holding companies
- Money services businesses
- Brokers or dealers in securities
- Securities exchange or clearing agencies
- Other Exchange Act registered entities
- Investment company or investment advisers
- Venture capital fund advisers
- Insurance companies
- State-licensed insurance producers
- Commodity Exchange Act registered entities
- Accounting firms
- Public utilities
- Financial market utilities
- Pooled investment vehicles
- Entities exempt from tax under Sec. 501(a) of the Code
- Entities assisting a tax-exempt entity
- Subsidiaries of certain exempt entities
- Inactive companies
In addition, privately held operating companies that meet the following three criteria are exempt from filing:
- employs more than 20 full time employees in the US
- has an operating presence at a physical office within the US that it owns or leases
- has filed a Federal income tax return in the US for the previous year demonstrating more than $5 million in gross receipts or sales (excluding gross receipts or sales from sources outside the US)
Where Will the Data Be Stored?
FinCEN will establish and maintain a national registry of beneficial owners of reporting companies in a secure private database. Information will be disclosed only to federal and state law enforcement agencies in specified circumstances and — with the reporting company’s consent — to financial institutions in connection with know-your-customer (KYC) obligations.
How Do I Report?
Reporting companies will have to report beneficial ownership information electronically through FinCEN’s website: www.fincen.gov/boi which will not be active until January 1, 2024.
Who is a beneficial owner of my company?
A beneficial owner is any individual who exercises substantial control over your company, or who owns or controls at least 25 percent of your company.
What information does my company need to report?
A reporting company will need to provide:
- its legal name and any trade name or DBA;
- its address;
- the jurisdiction in which it was formed or first registered, depending on whether it is a U.S. or foreign company; and
- its Taxpayer Identification Number (TIN).
For each of your company’s beneficial owners and each company applicant (if required), your company will need to provide the individual’s:
- legal name;
- residential address (use of the business address is unacceptable); and
- an identifying number from a driver’s license, passport, or other approved document for each individual, as well as an image of the source document.
When Do I Report?
Reports will be accepted starting on January 1, 2024. If your company was created or registered prior to January 1, 2024, you will have until January 1, 2025, to report BOI. If your company is created or registered on or after January 1, 2024, you must report BOI within 30 days of notice of creation or registration. Any updates or corrections to beneficial ownership information previously filed with FinCEN must be submitted within 30 days of the event.
Willfully providing false information to FinCEN or failing to report complete information to FinCEN can result in fines up to $10,000 and imprisonment for up to two years. The CTA contains a safe harbor from such civil and criminal liability for the submission of inaccurate information if the person who submitted the report voluntarily and promptly corrects the report within 90 days.
Why Was the Corporate Transparency Act Passed?
Help Law Enforcement
When people use shell companies it can be very hard for law enforcement to investigate wrongdoing if the business has a very complex structure (e.g., a shell company owns a shell company) and anonymous ownership.
Mirror Global Compliance Standards
There are 30 other countries who have similar corporate transparency laws on the books including the United Kingdom and members of the European Union.
Stop Illegal Activity
According to a Small Business Administration report, in 2020, about 1.07 million business establishments opened for the first time. As of March 2023, there are 33,185,550 small businesses in the US and of those 81.7% have no employees (termed “non-employer firms”). Persons in the US and abroad frequently set up shell companies in the US to commit illicit activities such as money laundering, terrorist financing, tax fraud, corruption, foreign nationals hiding their identities and drug sales.
Protect National Security
Global adversaries such as China have purchased Smithfield Foods (controlling 26% of the pork industry) and attempted purchase farmland adjacent to Air Force bases (according to testimony in a September 28, 2023 U.S. Senate hearing). In addition, foreign nationals have established LLCs and purchased US food and agricultural assets, property, and farmland. In 2021, the U.S. Department of Agriculture reported that foreign investors held about 40 million acres of U.S. agricultural land (3% of the total amount) with Canada as the largest holder followed by The Netherlands, Italy, the United Kingdom.
What should I do now?
Contact your legal advisor and determine if you are subject to the CTA. This blog is not intended to be legal advice and there are substantial penalties for getting this wrong!
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