If you are a business owner or manager, you may be wondering what the new beneficial ownership information reporting requirements are and how they affect you. Here is a brief overview of what you need to know.
What are the new requirements?
The new requirements are part of the Corporate Transparency Act (CTA), enacted in January 2021 as part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA). The CTA aims to prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity by requiring certain entities to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN) by January 1, 2024.
A beneficial owner is a natural person who owns or controls 25% or more of the equity interests of an entity or who exercises substantial control over the entity or its management. The CTA defines an entity as a corporation, limited liability company, or any similar entity created by filing a document with a secretary of state or a similar office under the law of a state or Indian Tribe.
The CTA also requires entities to report individuals who have filed an application with specified governmental authorities to create or register the entity to do business. These individuals are called applicants, and this is required for entities created on or after January 1, 2024.
Why must companies report beneficial ownership information to the U.S. Department of the Treasury?
Very few U.S. states or territories require companies to disclose information about their beneficial owners—the individuals who own or control companies. This lack of transparency allows criminals, corrupt officials, and other bad actors to hide their identities and launder illicit funds through the United States using shell and front companies. This hurts ordinary Americans because the lack of transparency results in an uneven playing field for honest and legitimate U.S. businesses. The inaccessibility of beneficial ownership information makes it hard for law enforcement to track and prosecute criminal activity.
In 2021, Congress, with bipartisan support, enacted the Corporate Transparency Act to address this problem. The Corporate Transparency Act requires certain U.S. and foreign entities to report information about their beneficial owners to the Treasury Department’s Financial Crimes Enforcement Network, commonly known as FinCEN. FinCEN is responsible for safeguarding the U.S. financial system from illicit use. Subject to strict safeguards and controls, FinCEN will disclose the reported beneficial ownership information to certain authorized government authorities, financial institutions, and other authorized users.
By collecting beneficial ownership information and sharing it with law enforcement, financial institutions, and other authorized users, FinCEN makes it harder for bad actors to hide or benefit from their ill-gotten gains. Companies that report beneficial ownership information will contribute to this important goal.
Who needs to report?
Certain companies — referred to as “reporting companies” — will be required to report their beneficial ownership information to FinCEN. There are two types of reporting companies — domestic reporting companies and foreign reporting companies.
A domestic reporting company is defined as —
a limited liability company, or
any other entity created by filing a document with a secretary of state or any similar office under the law of a state or Indian tribe.
A foreign reporting company is any entity that is —
a corporation, limited liability company, or other entity formed under the law of a foreign country, AND
registered to do business in any U.S. state or any Tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a U.S. state or Indian tribe.
The Corporate Transparency Act exempts 23 types of entities from the beneficial ownership information reporting requirement. Please see question #8 of FinCEN FAQs for a complete list of exemptions, including:
Large operating companies with at least 20 full-time employees, more than $5,000,000 in gross receipts or sales, and an operating presence at a physical office within the United States
Publicly traded companies that have registered under Section 102 of SOX
What information needs to be reported?
A reporting company will have to report the following:
Its legal name;
Any trade names, “doing business as” (d/b/a), or “trading as” (t/a) names;
The current street address of its principal place of business if that address is in the United States (for example, a domestic reporting company’s headquarters), or, for reporting companies whose principal place of business is outside the United States, the current address from which the company conducts business in the United States (for example, a foreign reporting company’s U.S. headquarters);
Its jurisdiction of formation or registration; and
Its Taxpayer Identification Number.
For each individual who is a beneficial owner or a company applicant, a reporting company will have to report:
The individual’s name, date of birth, and address;
A unique identifying number from an acceptable identification document; and
The name of the state or jurisdiction that issued the identification document.
The information must be updated within 30 days of any change in beneficial ownership information, including address changes.
How to report?
Entities can file their reports electronically through FinCEN's Beneficial Ownership Information Reporting Portal (BORP), which will be available by October 1, 2023. Entities can also file their reports by mail using FinCEN Form 8300-BOR.
Entities that are created before January 1, 2024, must file their initial reports before January 1, 2025. Entities that are created on or after January 1, 2024, must file their initial reports within 30 calendar days of the earlier of the date on which it receives actual notice that its creation has become effective or the date on which a secretary of state or similar office first provides public notice that the domestic reporting company has been created.
What are the penalties for non-compliance?
The CTA imposes civil and criminal penalties for failing to report or providing false or fraudulent information. The civil penalty is up to $500 per day for each day that the violation continues. The criminal penalty is up to a $10,000 fine and/or up to two years of imprisonment.
How can we help?
We understand that this new rule may pose some challenges and questions for our clients. That's why we are here to help you navigate this complex regulatory landscape and ensure compliance with the CTA. While we are still waiting for additional guidance on who can help clients complete these initial filings, there are areas we can assist that would not be considered the unauthorized practice of law. We can assist you with the following:
o Identifying your beneficial owners and applicants and collecting their information
o Developing policies and procedures to comply with the CTA
o Providing training and guidance to your staff on the CTA requirements
If you have any questions or concerns about the new beneficial ownership information reporting requirements, please do not hesitate to contact us. We are committed to providing you with the best service and support possible.
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