In 2021, Congress passed the Corporate Transparency Act on a bipartisan basis. The Corporate Transparency Act authorizes the Financial Crimes Enforcement Network (“FinCEN”) to enforce a new Beneficial Ownership Information (“BOI”) reporting requirement. The requirement aims to provide the government with additional details regarding the owners of entities engaged in the U.S. market. Through the new information on ownership structures, FinCEN believes it can further counteract illegal financial activities such as money laundering and tax evasion.

If a reporting company was created or registered before Jan. 1, 2024, the reporting company will have until Jan. 1, 2025, to file its initial BOI report. If a reporting company is created or registered on or after Jan. 1, 2024, the reporting company will only have 90 days to file a beneficial ownership report. 

The rule promulgated by FinCEN is deliberately far-reaching and will principally affect small businesses. Furthermore, compliance with the reporting requirement is imperative, as there are harsh civil and criminal penalties for noncompliance. Civil penalties include fines of $500 per day of violation and criminal penalties range from a maximum of two years imprisonment to fines up to $10,000. For these reasons, it is vital that affected entities file timely and accurate reports with FinCen.

FinCEN requires both domestic and foreign companies to file BOI reports. Domestic reporting companies are defined as corporations, limited liability companies (LLCs), or any other entity created by filing with a secretary of state or similar office within the U.S. Foreign reporting companies are entities formed under the law of a foreign country that have registered to do business in the U.S. by filing through a secretary of state or similar office.

Notably, there are 23 types of entities that are exempt from BOI reporting requirements. Despite the large number of exemptions, each exception is strictly tailored and must be claimed on an entity-by-entity basis. The major exempt categories include publicly traded companies, non-profits, banks and credit unions, and “large operating companies.” The large operating company exemption requires evidence of 20 full-time employees in the U.S., a federal income tax return demonstrating more than $5,000,000 in U.S. gross receipts or sales for the prior year, and an operating presence at a physical office in the U.S.

The classification of “beneficial owners” is designed encourage broad reporting. FinCEN considers any individual who exercises substantial control over the reporting company or owns or controls at least 25% of the company’s ownership interests a beneficial owner.

FinCEN outlines substantial control through four different tests. The tests include senior officer status, appointment and removal authority, decision making authority and a catchall test. First, substantial control is attributed to individuals holding key executive roles, such as president, CFO, CEO, COO, or general counsel. Next, individuals possessing the power to appoint or remove specific officers or a majority of directors within the company are recognized as having substantial control. Substantial control also extends to individuals who play a role in making critical decisions related to the business, finances or structure of the reporting company. For example, noteworthy financial decisions include those concerning the sale, lease, mortgage or transfer of principal assets. Lastly, the catchall category is designed to encompass any other form of substantial control that may not fit explicitly into the defined categories. It accommodates the unique ways individuals may exert substantial control, especially in dynamic and evolving corporate structures.

An ownership interest is generally anything that establishes ownership rights in the reporting company. This includes owning shares of equity, stock or voting rights. An ownership interest may also include capital or profit interest, convertible interests, opinions or privileges. FinCEN also created a catchall category to include any unlisted mechanism used to establish ownership rights.

The BOI report must include each entity’s legal name, any trade names, the address of its principal place of business, the jurisdiction of registration, and the taxpayer identification number, or the taxpayer identification number provided by the foreign country of registration. As for beneficial owners, the entity must provide each individual’s name, date of birth, residential address, identifying number from a passport or driver’s license, and a photo of the license or passport. 

Beginning on Jan. 1, entities may file electronically through FinCEN’s website. There is no fee to submit a report. Moreover, there is no annual reporting requirement. Reporting companies only need to file one initial BOI report and then update or correct their reports as needed. Reports must be updated within 30 days of a change to beneficial ownership or upon becoming aware of inaccurate information. Due to the complexity and breadth of the new reporting requirement, FinCen has published a 50-page small entity compliance guide.

Lastly, FinCEN has issued a warning regarding fraudulent attempts to solicit information from individuals and entities that may be subject to reporting requirements. FinCEN advised individuals to be cognizant of email correspondence titled “Important Compliance Notice” directing recipients to click on a URL or QR code. FinCEN has emphasized it does not send unsolicited requests for information.