Ownership Reporting Required for Most Small Businesses Starting in 2024
As 2023 draws to a close, business owners should take notice of a new federal reporting regulation that will take effect on January 1, 2024. Here’s the who, what, when, where, how and why of the Corporate Transparency Act.
What:
The Corporate Transparency Act was passed by Congress in 2021. The Beneficial Ownership Information Reporting Requirements Rule, which was issued on September 30, 2022, implements the Corporate Transparency Act by describing who must file reports, what information must be provided and when the reports must be filed. The Reporting Rule was promulgated by the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). FinCEN administers and enforces the Reporting Rule.
Starting January 1, 2024, this law will require businesses that qualify as a “reporting company” to submit beneficial ownership information to the federal government through FinCEN. Specifically, reporting companies will have to file information about the business itself (name, address, jurisdiction of registration, and Taxpayer Identification Number), as well as information about two categories of individuals associated with the business: beneficial owners and company applicants (name, date of birth, residential address and an identification number from a driver’s license or passport for each).
Generally speaking, a beneficial owner is an individual who owns or controls at least 25% of a company or has substantial control over the company (for example, a non-owner executive officer). A company applicant is an individual who directly files or is primarily responsible for the filing of the document that creates or registers the company (for example, an individual incorporator/organizer, or a business attorney and staff that file the articles).
Why:
The Corporate Transparency Act was passed “as part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.”[1] Unfortunately, efforts to subvert bad actors will just mean yet another legal requirement with real consequences for legitimate small business owners. Keep in mind that willful failure to report complete beneficial ownership information may result in civil penalties ($500.00 for each day that the violation continues) or criminal penalties (imprisonment for up to two years and/or a fine of up to $10,000.00).
Who:
Domestic corporations, limited liability companies and other entities created by the filing of a document with a secretary of state or similar office in the United States are reporting companies subject to the law’s requirements. Foreign entities (including corporations and limited liability companies) that have registered to do business in the United States by filing with a secretary of state or any similar office are also reporting companies. While the definition of a reporting company is very broad, there are 23 different types of reporting companies that are exempt from filing requirements, including certain publicly traded companies, many nonprofits, certain large operating companies (more than 20 full time employees and more than $5,000,000 in gross receipts and sales for the prior taxable year with an operating presence at a physical office within the U.S.) and inactive entities.
When:
FinCEN will start accepting beneficial ownership information reports on January 1, 2024.
A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025 to file its initial beneficial ownership report.
A reporting company created or registered to do business on or after January 1, 2024, will have 90 days from its official organization to file its initial beneficial ownership information report.
A reporting company created or registered on or after January 1, 2025, will have 30 days from its official organization to file its initial beneficial ownership information report.
Where:
Businesses that are required to report their beneficial ownership information to FinCEN will do so electronically through a secure filing system available through FinCEN’s website.
How:
“How” remains to be seen. FinCEN will publish instructions and other technical guidance on how to complete and submit the beneficial ownership information report form sometime before January 1, 2024. Reports cannot and will not be accepted prior to January 1, 2024.
A great deal of information is available to businesses on the FinCEN beneficial ownership information website: www.fincen.gov/boi. This site includes a Small Entity Compliance Guide, Frequently Asked Questions, and informational videos, among other resources. The attorneys at Sanford, Pierson, Thone & Strean can help you determine whether your business is a reporting company, whether it qualifies for an exemption from reporting, who constitutes a beneficial owner or company applicant for your reporting company, when your initial report is due, if and when an update is necessary, and whether a FinCEN identifier is right for you.
[1] “Beneficial Ownership Information Reporting: Frequently Asked Questions” fincen.gov/boi-faqs#B_1