There is a new
federal reporting requirement that readers need to be aware of because the deadline to file the required report will be here very
soon.
Congress passed the Corporate Transparency Act (“CTA”) back in 2021 and it went into effect January 1, 2024. That law requires most legal entities formed by filing a document with a Secretary of State, or corresponding tribal office, to submit certain information to a federal law enforcement agency called the Financial Crimes Enforcement Network (“FinCEN”). Again, the law applies to most all legal entities.
Specifically, the law creates a beneficial ownership reporting requirement as part of the government’s efforts to make it more difficult for criminals to hide or benefit from ill-gotten gains through shell companies or other complicated ownership structures. As a result, entities have to report certain information about their “beneficial owners.”
There are 23 specific exemptions from the reporting requirement, including the following:
- Entities
in industries that are already highly regulated (banks, credit unions,
insurance companies, CPA firms that are registered with the PCAOB, public
utilities, etc.),
- “Large
operating companies” – which must employee more than 20 full time
employees throughout the year, have an operating presence at a
physical location in the U.S., and have filed a federal income tax or
information return for the previous year showing more than $5,000,000
in gross receipts or sales;
- Inactive
entities that hold no assets whatsoever and meet the other
requirements for exemption;
- Governmental
authorities;
- Entities
that are federally recognized as tax-exempt under section 501(c) of the
Internal Revenue Code; and
- Certain
trusts.
Otherwise, it does not matter if the entity is an LLC, a corporation, or some other type of legal entity. Please note that this reporting requirement also applies to entities only owning real estate as investment property or only owning an ownership interest in another entity.
A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” or owns or controls at least 25% of the entity’s ownership interests. An individual exercises “substantial control” if the individual (i) serves as a senior officer of the entity; (ii) has authority over the appointment or removal of any senior officer or a majority of the board of directors; or (iii) directs, determines, or has substantial influence over important decisions made by the entity. Thus, senior officers and other individuals with control over the entity are beneficial owners under the CTA, even if they have no ownership interest in the entity.
Entities are required to report the required information to FinCEN
electronically through FinCEN’s website. Failure to file an initial,
updated, or corrected report or providing false or fraudulent information can
lead to serious consequences. This includes hefty fines and the possibility of
facing criminal charges.
The deadline to report for entities that were formed prior to 2024 is by January 1, 2025, or, practically speaking, before this year ends, so the clock is ticking. All new entities formed in 2024 have to report within 90 days of formation. New entities formed after this year will only have 30 days from formation to file the report.
Importantly, if any of the information reported in the BOI Report filed changes, the entity must report that change within 30 days of the change. That could be a change of address, a change of ownership, a change in officer, etc.
