11-29-23 -The Corporate Transparency Act Takes Effect on January 1, 2024 - What Businesses Need to Know.
Executive Summary:
- Starting January 1, 2024, your company may be required to report information on its “beneficial owners” to the U.S. Treasury Department’s Financial Crimes Enforcement Division (FinCEN).
- Certain exemptions may apply, particularly for larger companies and regulated companies.
- “Beneficial owners” refers to individuals who exercise substantial control, or who own or control more than 25% of the company.
- The reporting deadline is January 1, 2025 for companies formed or registered before January 1, 2024. Companies formed or registered on or after January 1, 2024 must file beneficial ownership and formation applicant information within 30 days.
- Non-compliance may result in strict civil and criminal penalties.
For more information, contact Kate Polozie, Esq. at (585) 987-2910 or kpolozie@woodsoviatt.com or, for tax-exempt organizations,Danielle Ridgely,, Esq. at (585) 987-2914 or dridgely@woodsoviatt.com, or another member of the Business and Tax Department at Woods Oviatt Gilman LLP.
Discussion:
As of January 1, 2024, federal law requires certain small business companies formed or registered in the U.S. to report information about the company and the people who own or control it (“Beneficial Owners”). For companies formed or registered on or after January 1, 2024, information about the person(s) who formed or registered those companies (“Company Applicants”) must also be reported. This information must be filed in a Beneficial Ownership Information Report (“BOI Report”) with the U.S. Treasury Department’s Financial Crimes Enforcement Division (FinCEN). The purpose of this reporting is to prevent criminals from using anonymous corporate shells for money laundering, tax evasion, fraud and other crimes.
Which companies will have to report BOI?
A legal entity is subject to reporting as a “Reporting Company” if it (a) is formed or registered to do business in the U.S. and (b) came into existence as a result of a legal filing. For example, a U.S. LLC with one owner is subject to reporting, but a U.S. sole proprietorship or general partnership is not. We anticipate that most of our clients will need to file a BOI Report per Reporting Company.
However, 23 entity types are exempt from the requirement to file BOI Reports. These exempt companies are typically already regulated or large companies. For example, public companies, banks and credit unions, certain tax-exempt entities, public utilities and larger companies that meet specific parameters are exempt. You should consult your Woods Oviatt Gilman LLP attorney to assist in determining whether an exemption applies to your entity.
What information will Reporting Companies need to provide on the BOI Report?
A Reporting Company must report its:
- Legal name and any trade name or DBA;
- Address;
- Jurisdiction of formation (state, tribal or foreign);
- Jurisdiction in which it was first registered (if foreign); and
- Taxpayer identification number.
A Reporting Company must report the following about its Beneficial Owners and, for Reporting Companies formed or registered on or after January 1, 2024, Company Applicants:
- Legal name;
- Birthdate;
- Address;
- Identifying number from passport or state ID or other approved document; and
- A picture of the identifying document.
Who is a Beneficial Owner?
A Beneficial Owner is any person who directly or indirectly (a) exercises substantial control over the Reporting Company, or (b) who owns or controls at least 25% of the Reporting Company. The definition is very broad. For example, a Beneficial Owner includes, not just an owner of 25% or more of the equity of the Reporting Company, but also a senior officer in title or function, including a company’s CEO, CFO, COO and general counsel, or someone with authority to control major decisions, regardless of title or equity ownership in the Reporting Company. Because this determination is complex, you should consult your Woods Oviatt Gilman LLP attorney to assist you in making this determination.
Who is a Company Applicant?
A Company Applicant is the person that formed or registered the Company by filing a document with the secretary of state or similar agency that created or registered the Reporting Company. There can be up to two individuals that qualify, including (i) the individual that directly files the documents, and (ii) if there was more than one individual involved in the filing of the document, the individual who is primarily responsible for directing or controlling the filing. Remember that Reporting Companies that were formed or registered prior to January 1, 2024 do not need to file information on the Company Applicant.
When do Reporting Companies Need to Report?
If the Reporting Company was formed or registered before January 1, 2024, the Reporting Company has a full year (until January 1, 2025) to file its first BOI Report (but please don’t wait that long!).
After January 1, 2024, newly formed or registered Reporting Companies have 30 days from notice of its creation or registration to file its first BOI Report. There is pending legislation to extend the 30 day period to 90 days for entities newly formed or registered between January 1, 2024 and December 31, 2024, but that extension is not final as of yet. For entities formed on and after January 1, 2025, the deadline for the initial report would revert back to 30 days.
Reporting Companies must update their BOI Reports if any information changes.
What if information on the BOI Report changes?
Reporting Companies must report any changes in the reported information (examples include: change of address, hiring or firing of beneficial owners, death of a beneficial owner, mergers and acquisitions, changes due to change in passport or name or address, etc.) within 30 days after the change occurs (special rules apply as to timing in the event of a death of a beneficial owner).
How are BOI Reports filed and who has access to them?
FinCEN has a secure filing system through which reports are filed. FinCEN’s database is not open to the public, but rather is available to be used by federal agencies for security, intelligence and law enforcement, for state law enforcement, or in certain situations by competent foreign authority, in each case, as permitted by law. Financial institutions and their regulators may also have access to this information under certain circumstances.
What are the penalties for non-compliance?
Civil penalties can be assessed of up to $500 per day for each day that the violation continues. Criminal penalties can include imprisonment for up to two years and a fine of up to $10,000. Senior officers of a Reporting Company that fail to file may be held responsible. Civil or criminal penalties may be also be imposed on a person who willfully causes a Reporting Company either not to file or to file an incomplete or false BOI Report.
Practical Considerations and Next Steps.
Although some companies will clearly fall within an exemption, complicated beneficial ownership information questions will arise, particularly related to affiliations between entities, and affiliations between exempt and non-exempt entities. To prepare for compliance, companies will need to develop internal policies to assess their reporting obligations, identify all beneficial owners, and implement procedures to manage ongoing reporting obligations to avoid potential penalties. For companies engaged in M&A activity, it will also be critical to ensure that target companies have satisfied their reporting obligations.
We are prepared to help your company navigate the reporting obligations of the CTA. If you have any questions, please reach out to Kate Polozie, Esq (585) 987-2910 or kpolozie@woodsoviatt.com or, for tax-exempt organizations, Danielle Ridgely, Esq. (585) 987-2914 or dridgely@woodsoviatt.com , or another member of the Business and Tax Department at Woods Oviatt Gilman LLP.
