New requirements associated with the Corporate Transparency Act (CTA), are requiring certain companies to disclose their “beneficial owners” — the individuals who ultimately own or control the company — to the Financial Crimes Enforcement Network (FinCEN). Non-compliance may lead to civil or criminal penalties. Effective starting January 1, 2024, the new CTA reporting rules are expected to impact 32.6 million companies in 2024.
Despite the approaching deadline, numerous businesses are unprepared. The American Institute of Certified Public Accountants (AICPA) and over 50 affiliated organizations have petitioned FinCEN for a one-year extension on the effective date for reporting beneficial ownership information (BOI).
Exemptions to Note
The rules generally apply to both domestic and foreign privately-held reporting companies. For these purposes, a reporting company includes any corporation, limited liability company, or other legal entity created through documents filed with the appropriate state authorities. A foreign entity includes any private entity formed in a foreign country that’s properly registered to do business in a U.S. state.
It’s important to note that “large operating companies” who fit the following criteria are exempt:
- Employ more than 20 employees on a full-time basis;
- Have more than $5 million in gross receipts or sales (not including receipts and sales from foreign sources); and
- Physically operate in the United States
The CTA grants exemptions for 23 entity types from the BOI reporting obligations. This includes entities like financial institutions, securities brokers, and insurance companies. Numerous exempt entities are already subject to regulation by federal or state governments and are already accustomed to fulfilling BOI filing requirements.
Extensive CTA Reporting Requirements
As explained above, a non-exempt entity must provide identifying information about its “beneficial owners.” A beneficial owner is defined as someone who, directly or indirectly, exercises substantial control over a reporting company, or owns or controls at least 25% of its ownership interests. The CTA requires reporting companies to provide detailed information about their “company applicants.” A company applicant is defined as the individual who is:
- Responsible for filing the documents that created the entity (for a foreign entity, this is the person who directly files the document that first registers the foreign reporting company to conduct business in a state), or
- Primarily responsible for directing or controlling filing of the relevant formation or registration document by another.
BOI reports must include the following information:
- The legal name of the entity (or any trade or doing-business-as name)
- The address of the entity
- The jurisdiction where the entity was formed
- The entity’s Taxpayer Identification Number
- The name, address, date of birth, unique identifying number information of the beneficial owners (such as a U.S. passport or state driver’s license number), and an image of the document that contains the identifying number.
Reporting companies have either 30 days or one year from the effective date (January 1, 2024) to comply with the reporting requirements, depending on the entity’s date of formation. Reporting companies created or registered prior to January 1, 2024, have one year from the effective date to comply by filing initial reports. On the other hand, companies created or registered on or after January 1, 2024, will have 30 days upon receipt of their creation or registration documents to file their initial reports. An extension from 30 to 90 days may be granted to entities created or registered between January 1, 2024, through January 1, 2025.
BOI reports filed with FinCEN aren’t accessible by the general public. However, certain government agencies will have access to the information, including those involved in national security, intelligence, and law enforcement, as well as the IRS and U.S. Treasury Department. An omission or fraudulent BOI filing could result in civil fines of $500 a day for as long as the reports are missing or remain inaccurate. Failure to comply may also trigger criminal penalties of a $10,000 fine — or even jail time of two years.
A Learning Curve for Many
The AICPA cites a recent survey by the National Federation of Independent Business that showed 90% of its members, particularly smaller companies, weren’t familiar with the BOI reporting rules. “Regardless of FinCEN’s activities to raise awareness, their efforts remain ineffective, and most businesses are unaware of this filing requirement,” the AICPA letter reported. It also said that FinCEN has “woefully underestimated” the time and stress the new requirements will cause businesses.
FinCEN estimates that compliance will take over 32.8 million burden hours (about one hour per entity) with a cost of up to an estimated $2,615 per entity, depending on its structure. These estimates don’t include additional resource requirements for businesses, particularly in the first year, to understand and identify who is a “beneficial owner,” who exercises “substantial control,” who is a “company applicant,” or whether a small business even is considered a “reporting company.”
Plus, businesses will need to continuously track all beneficial owners’ information for potential changes each month. According to the AICPA, something as simple as an expired driver’s license would require an updated BOI filing. The AICPA letter concludes, “FinCEN should give all businesses a fair time frame to gain awareness and a reasonable time frame to comply with the BOI requirements.”
Stay Tuned on Updates
The new CTA reporting requirements will have a widespread impact on businesses as noted above. With updates consistently being pushed out by FinCEN, stay tuned for further information or contact us with questions on reporting deadlines and guidance.
