The federal government recognizes that “illicit actors frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the U.S. financial system.” To enable the government to catch and penalize these bad actors—drug dealers, money launderers, foreign operatives, and others—the Corporate Transparency Act (CTA) of 2021 imposes a reporting rule for the owners of many small businesses. Starting in 2024, the government will require registration of many entities so it can maintain a national registry of beneficial owners. Here’s what you need to know.
Any “reporting company,” domestic or foreign, must disclose to the federal government its beneficial owners. A reporting company is one that registers with a state to do business. This means corporations—C or S—and limited liability companies, limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships, regardless of size, are subject to this requirement. It doesn’t apply to sole proprietorships, independent contractors, and general partnerships. A beneficial owner is any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25% of the reporting company’s ownership interests.
The Beneficial Ownership Information (BOI) reporting rule is designed exclusively for small businesses. There are 23 exempt categories exempt from reporting, most notably “large operating companies.” These are companies employing more than 20 employees on a full-time basis in the U.S., having more than $5 million in gross receipts, and having an operating physical presence at a physical office within the U.S.
What to report
The company submits the information electronically to FinCEN through the FinCEN BSA E-Filing system, listing:
- The individual’s full name
- Date of birth
- Current residential or business street address
- Unique identifying number from an acceptable identification document, such as a driver’s license or passport or a FinCEN identifier (a unique number issued to an individual upon request).
The Treasury is developing a portal for BOI reporting. It is not yet up, but check FinCEN’s BSA E-Filing portal for any update.
When to report
This registration begins January 1, 2024. Existing businesses have one year to register (i.e., any time during 2024). Newly formed businesses must do so within 30 days of formation.
If there is a change in beneficial ownership of a company, a new registration must be filed. For this purpose, the 30 days starts at the earlier of the date on which the reporting company receives actual notice that its creation (or registration) has become effective; or a secretary of state or similar office first provides public notice (e.g., through a publicly accessible registry), that the domestic reporting company has been created or the foreign reporting company has been registered.
Penalties for noncompliance
Failure to comply with this obligation can result in severe penalties:
- Civil penalties of $500 per day ($10,000 maximum penalty)
- Criminal penalties of up to 2 years imprisonment.
Small business groups are hoping that Congress will repeal the rule, or at least delay it. Testimony from the NFIB this past July before the House Committee on Financial Services Subcommittee on National Security, Illicit Finance, and International Financial Institutions explains the concerns about the rule, which is expected to affect 32.6 million small businesses in the first year and 5 to 6 million small businesses every year thereafter.
Whether Congress will take any action or the Treasury will do anything to ameliorate the rule is uncertain (unlikely?). So, be prepared. You can review the Small Entity Compliance Guide on the BOI reporting rule.
Update: FinCEN has proposed an extension to the filing rule for new reporting companies to 90 days (instead of 30 days) for 2024.
Find more blogs regarding information reporting for small businesses here.