Corporate Transparency Act and BOI Filings

July 24, 2024 General

In 2021, a new federal law entitled the Corporate Transparency Act was passed under the auspices of being an anti-money laundering act. However, the new law and related regulations adopted in late 2023 by the Financial Crimes Enforcement Network (“FinCEN”) will have a substantial impact on most small and medium businesses by imposing new reporting requirements for such businesses and penalties for failing to do so.

In short, any company that is considered a “reporting company” under the regulations is required to report its full legal name, any trade names or DBAs, its current U.S. address, its jurisdiction of formation, its Employer Identification Number, and its “beneficial owners” to FinCEN. Reporting companies include all entities that are formed or registered to do business in the United States by the filing of a document with a secretary of state such as corporations, limited liability companies, and limited partnerships. The report must include each beneficial owner’s full legal name, date of birth, current residential street address, a unique identifying number (such as a driver’s license or passport – not a social security number), and an image of the document containing such unique identifying number.

While there are twenty-three (23) exemptions for entities that may otherwise be a reporting company, the most common will be: (i) large companies that employ more than twenty (20) full time employees and generate more than Five Million Dollars ($5,000,000) in gross receipts in a fiscal year; (ii) publicly traded companies; (iii) banks; and (iv) tax-exempt entities. The exemptions are fluid – if an exempt company falls below an exemption threshold, it may suddenly be required to report its beneficial owners to FinCEN.

The definition of “beneficial owner” includes not only individuals who own twenty-five percent (25%) or more of a reporting company, but also any individual who exercises “substantial control” over such reporting company, which, depending on the structure of a given reporting company, may include senior executive officers and directors who do not actually own an equity stake in the reporting company. This subjective criteria may make it difficult for businesses to determine whether they are a reporting company and who their beneficial owners are.

Reporting companies formed prior to January 1, 2024 have until January 1, 2025 to file this information with FinCEN. Companies formed on or after January 1, 2024 through December 31, 2024 currently have ninety (90) calendar days following their formation date to file this information with FinCEN.  Companies formed on or after January 1, 2025 have thirty (30) calendar days following their formation date to file this information with FinCEN.  Additionally, for companies formed after January 1, 2024, two “company applicants” must be identified in the company’s report: (i) the individual who actually files the document with the reporting company; and (ii) the individual who is primarily responsible for directing the filing.

In addition, the reporting obligations to FinCEN are ongoing. Except for changes to previously reported personal information about a company applicant, if any information that was reported to FinCEN changes, even if it is a change in address of a beneficial owner, the FinCEN report must be amended within thirty (30) days of such change.

The penalties for failing to timely and accurately report beneficial owners are severe. Failing to report or filing false or fraudulent ownership information may result in civil penalties of up to Five Hundred Dollars ($500) per day that the violation continues and/or criminal penalties of imprisonment of up to two (2) years and a Ten Thousand Dollar ($10,000) fine. Any person who qualifies as a beneficial owner and willfully provides false information for a FinCEN report may also be subject to civil and criminal penalties.

In conclusion, businesses should work to comply with the Corporate Transparency Act sooner rather than later. It may take some time to collect the required information from all of a business’s beneficial owners. They should also begin to put processes in place to help ensure that their reporting obligations remain up to date.