It is crucial for businesses to stay compliant with regulations, and a significant change is on the horizon. The Corporate Transparency Act, which was passed in 2021, introduces new ownership information reporting requirements for businesses in the US, which will be effective from January 1, 2024.
This new regulation is aimed at promoting transparency and combating financial crimes. Certain entities must report their Beneficial Ownership Information to the Financial Crimes Enforcement Network (FinCEN) and the federal government. Let’s take a closer look at what this means for your business.
What Is Beneficial Ownership?
Beneficial ownership is a concept used to determine who has substantial control over a company, often beyond the normal scope of ownership.
A beneficial owner can be identified as any person, including family members, who directly or indirectly exercise substantial influence over the activities and decisions of an entity but does not necessarily show up on paper as a formal title holder like CEO or President.
Any individual with over 25% or potentially controlling over 50% of ownership interests in a business might be considered an owner.
Other measures can be used to determine beneficial ownership, such as having one’s name listed as holding beneficial rights on legal documents or being the sole signatory of documentation for finances.
Who Needs to Report Beneficial Ownership Information (BOI)?
You might need to file a report if you operate a domestic or foreign entity, limited liability company (LLC), or a similar legal entity in the US. The law specifically targets “Reporting Companies” – legal entities formed or registered in any US state through official channels. However, FinCEN has outlined 23 exempt entities, including large operating companies, tax-exempt entities, and inactive entities.
Identifying Beneficial Owners
A crucial part of the ownership information reporting process is identifying the “Beneficial Owners” of your company. These individuals either own or control at least 25% of the company’s ownership interests or have substantial control over the company, even if they don’t hold a 25% stake.
What Information Will You have to report to FinCEN?
Reporting company owners must comply with the Bank Secrecy Act (BSA). This requires providing FinCEN with details about their business, including its legal name, any DBAs used, location of formation, and taxpayer identification number.
In addition to this information, beneficial owners must provide personally identifiable information. Beneficial owners are individuals who control or hold at least 25% of the company’s ownership. FinCEN requires that each beneficial owner provide a legal name, birthdate, home address, identifying number from a passport or driver’s license, and an image of the document associated with that number.
Companies formed after January 1st, 2024, must submit additional information about their applicants. It is important that businesses accurately report this data, as failure to do so could result in costly fines or legal action against you or your company.
- For the company: Full legal name, DBA name, business street address, jurisdiction of formation, and Taxpayer Identification Number (TIN).
- For each Beneficial Owner: Full legal name, date of birth, residential address, and a unique identifying number.
What are the consequences if the information I reported changes or if I discover it was inaccurate when the report was filed?
If you report inaccurate information or your business information changes due to events such as an increase in beneficial owners or a modification to the registry, you must update the Beneficial Ownership Information (BOI) report within 30 days of becoming aware.
The new report should include detailed and accurate information on the current beneficial owners and any changes that occurred since the previous report. It is important to note that intentionally filing false or inaccurate reports with FinCEN can be subject to criminal penalties under federal law, so take care to submit only accurate and up-to-date information about your business.
How Will The Information Be Used
The personal and company information you provide will be used by federal agencies involved in national security, intelligence, or law enforcement, as well as by state and local law enforcement agencies under certain conditions, like if a court has authorized the agency to seek the information in a criminal or civil investigation.
How and When to File
Filing will be done electronically through FinCEN’s website using a secure system that will be available starting January 1, 2024. The filing deadlines vary:
- Companies existing before January 1, 2024, have until January 1, 2025.
- New companies formed on or after January 1, 2024, will have a 30-day deadline (or 90 days under a recent proposal) to file after being officially recognized.
Consequences of Non-Compliance
Failure to meet the regulatory requirements or unauthorized disclosure of Beneficial Ownership Information can result in civil or criminal actions and potential penalties.
Willful failure to file a complete initial or updated report with FinCEN is subject to a US$500-per-day fine (up to US$10,000) and imprisonment for up to two years. An individual who knowingly discloses BOI, without authorization is subject to a US$500-per-day penalty (up to US$250,000) and up to five years’ imprisonment.
Review FinCEN’s Small Entity Compliance Guide
The Small Entity Compliance Guide was published by FinCEN, providing comprehensive guidance on compliance obligations under the beneficial ownership information reporting rule.
The new FinCEN reporting requirements are a significant development for businesses operating in the US. It’s crucial to start assessing which of your entities need to report and who their Beneficial Owners are. Consider gathering the necessary information in advance to ensure compliance.
If you’d like support in reviewing the new requirements, contact our Tax Experts!