In 2021, Congress enacted the Corporate Transparency Act (CTA) to prevent money laundering, financing of terrorism, tax evasion, corruption, and other illicit activity. The Financial Crimes Enforcement Network (FinCEN) was charged with enforcing this Act by establishing the Beneficial Ownership Information (BOI) reporting rules for corporations, limited liability companies, and similar reporting entities. These rules are effective in January 2024. The BOI report will be provided to certain government agencies with proper authorization to aid, prevent, and detect crime. It will do so by collecting certain identifying information about these beneficial owners and the companies that formed or registered it.

Background on the BOI Reporting Rule

According to FinCEN, beneficial owners are individuals who, directly or indirectly, (1) exercise substantial control over a reporting company; or (2) who own/control at least 25% of the ownership interests of a reporting company. Businesses that fall under this category are required to report on its company applicants when:

• It is a domestic reporting company created on or after January 1, 2024
• It is a foreign reporting company first registered to do business on or after January 1, 2024
  

A company applicant is defined as the individual who “directs or controls the filing action.” The direct filer must be identified. If there is more than one individual involved in the filing, then two company applicants must be reported (no more than two applicants can be reported).

Starting on January 1, 2024, BOI reports can be filed electronically using FinCEN’s secure filing system. Domestic or foreign reporting companies that meet the above criteria must file the initial BOI report by January 1, 2025. However, any reporting company created after this date must file a BOI report within 30 days of the earlier of:

• The date it receives actual notice,
• Or the date of creation from the public notice itself
  

In September, FinCEN proposed extending this 30-day filing period to 90 days for the initial filing year of 2024 only.

The Impact of This BOI Reporting  

There is currently no draft form available on what beneficial information must be reported. However, we know that the reporting company will need to include the following about its beneficial owners and company applicants:

• Full legal name;
• Date of birth;
• Current address;
• A unique identifying number, issuing authority form, and image from a U.S. passport, state driver's license, or another identification document by a state, local government, or tribe.

If the above information is not accessible by the reporting company, a foreign passport can be submitted.

Note: There is no annual filing requirement after the initial report. However, any changes will need to be updated within 30 days from the date this change occurred. In preparation of this new BOI reporting, organizations should consult with their legal counsel.

Small-to-medium-sized companies will be most impacted by these changes. Large companies (defined for BOI reporting purposes as having 20+ employees, more than $5 million in gross receipts on its tax return, and a physical office in the U.S.) are exempt from reporting beneficial owner information. Other exempt companies include banks, credit unions, investment companies, and insurance companies. You can find the full list of exemptions and other pertinent information here.

This means small business owners will bear most of the burden of this new reporting requirement and, as such, it is important to communicate this with clients to make them aware of the CTA. Additionally, there will be significant civil and criminal penalties, including fines of up to $500 per day that the report is not filed and possibly two years in prison.

Reporting Rule: Examples

Let’s look at some examples.

First, consider a U.S.-based start-up company created in 2023 with no gross receipts, 15 employees, and a shareholder that owns 100% in the company. This company is not exempt under the “large company” exemption noted above. Based on our initial interpretation, the start-up would need to file the required form by January 1, 2025, specifically disclosing that the shareholder is the sole beneficial owner.

Second, let us look at XYZ, LP that is engaged in rental real estate. The owners of XYZ, LP consist of a trust (a 49% limited partner), a partnership (a 50% limited partner), and an individual (a 1% general partner.). The 1% general partner controls the management of this partnership and owns another U.S.-based operating business that employees 20+ employees with more than $5 million in annual gross receipts. Further, the 1% general partner controls the trust and the partnerships. Existing guidance does not address an exemption due to aggregation of controlled entities, one or more of which may be exempt from filing. Absent further guidance, it is our interpretation that the general partner would be required to be reported as a beneficial owner of XYZ, LP. The trust and limited partnership would not be required to be reported as beneficial owners [confirm this point]. This is facts and circumstances-specific, as both the trust and limited partnership are owned by the 1% general partner. If an owner is exclusively a beneficial owner through exempt entities of the reporting company, then the beneficial owners would be all the exempt entities. However, if the owner is a beneficial owner through both exempt and non-exempt entities (in this case, the limited partnership is non-exempt), then the only beneficial owner is the 1% general partner. These are the types of interpretations that require the involvement of legal counsel.

Lastly, taxpayers should consider these filing requirements for any entity that was created by the filing of a document with their State or Indian Tribe. These documents are generally filed with a secretary of state or similar office. Notably, this would include a single member LLC which may not file a separate income tax return.  

Next Steps on Reporting

There is still much debate on whose responsibility the new CTA reporting will fall on. The AICPA and CIMA released an overview addressing preliminary concerns. Within this, they include that debate persists on whether non-attorney practitioners advising clients on the new BOI reporting form could be considered an unauthorized practice of law. This leaves the CPA profession in a difficult position, and these organizations recommend contacting your state regulators, insurance carriers, and legal counsel to further address this issue. They also advise considering whether to address this matter in your client engagement letters to clearly state if you will perform CTA reporting services. 

As more information is released by FinCEN, including draft versions of these new forms, it will be critical to be informed and communicate updates with clients.

FinCEN Alert

FinCEN recently issued the following alert on beneficial ownership reporting to its website:

Alert: FinCEN has been notified of recent fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the Corporate Transparency Act. The fraudulent correspondence may be titled "Important Compliance Notice" and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests. Please do not respond to these fraudulent messages or click on any links or scan any QR codes within them.

As with many matters these days, caution is urged with any suspicious e-mails, communications, and letters.

Additional CTA Resources:

Beneficial Ownership Information Reporting | FinCEN.gov

Beneficial Ownership Information Reporting | FinCEN.gov

FinCEN Small Entity Compliance Guide on BOI

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