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As of January 1, 2024, many companies now have to report beneficial ownership information (“BOI”) to Treasury’s Financial Crimes and Enforcement Network (“FinCEN”) which is a bureau of the United States Department of the Treasury, as required by the Corporate Transparency Act (the “CTA”), which was enacted in 2021 as part of the National Defense Authorization Act for Fiscal Year 2021. This reporting requirement will impact many clients who have state-registered businesses, including single member limited liability companies (“SMLLCs”). The following provides information regarding key elements of the CTA’s BOI reporting requirements. Additionally, FinCEN has published helpful guidance on its website (available HERE), including The Small Entity Compliance Guide published (available HERE) and Frequently Asked Questions (available HERE).
Why is This Important?
Why is This Important?
The new reporting requirements stem from the federal government’s efforts to prevent money laundering and terrorism. Failure to comply with the new reporting requirements can result in civil penalties ($591 per day) and criminal ramifications due to willful failure to file (felony charge and up to two years of imprisonment or up to ten years imprisonment if combined with other anti-money laundering violations and $10,000 in fines). Companies and beneficial owners can be subject to these penalties and charges.
What Is the Timing for Reporting Company Filings?
What Is the Timing for Reporting Company Filings?
The date by which a reporting company must file a BOI report with FinCEN is determined based on the date of creation or registration with the state agency.
Reporting companies created or registered to do business before January 1, 2024, will have until January 1, 2025 to file an initial BOI report.
Reporting companies created or registered to do business after December 31, 2023 and before January 1, 2025 will have 90 calendar days to file an initial BOI report.
Reporting companies created or registered to do business after December 31, 2024, will have 30 calendar days to file an initial BOI report.
What Is a Reporting Company?
The reporting requirements impact domestic companies and foreign companies.
A domestic reporting company will include a domestic corporation, LLC, or other entity created by filing of a document with a secretary of state or similar office under state law OR under the law of an Indian tribe.
A foreign reporting company will include a company that is a corporation, LLC, or other entity formed under the law of a foreign country AND has registered to do business in a U.S. state or Indian-Tribal level office.
The term “state” for these purposes includes Washington D.C., Puerto Rico, the Northern Mariana Islands, American Samao, Guam, U.S. Virgin Islands, and any other commonwealth, territory, or possession of the United States.
Please note that a limited partnership is likely to fall under the reporting company requirement, as many states have adopted the Uniform Liability Partnership Act of 2001), and thus require such a limited partnership to file a document with the secretary of state. However, most states do not require a filing for a general partnership, and thus general partnerships in states where no filing requirement exists do not constitute a reporting company. Nonetheless, states such as Delaware do require a filing, and thus a general partnership formed in Delaware and required to file a document with the Delaware secretary of state would constitute a reporting company.
Further, similar to general partnerships, many states do not require trusts to file a document with a secretary of state, and thus would not constitute a reporting company. However, as an example, a Delaware Statutory Trust (often used for 1031 exchanges) must file a certificate of trust with the secretary of state, and as a result, a Delaware Statutory Trust would constitute a reporting company. Nonetheless, even if a trust is not a reporting company (i.e., not created by filing a document with a state), the CTA can impact trusts that have ownership of reporting companies (please see below discussion under Who Are Beneficial Owners?).
In short, corporations (C corporations and S corporations), LLCs (including single member LLCs), limited partnerships (LPs), limited liability partnerships (LLPs), limited liability limited partnerships (LLLPs), and business trusts (e.g., statutory trusts such as DSTs) are likely to constitute reporting companies.
Are There Exceptions to the Term Reporting Company?
There are 23 exceptions to the term “reporting company”. Many of the exceptions result from companies already having requirements to disclose information to the federal government due to other regulatory requirements, including a public accounting firm registered in accordance with Section 102 of the Sarbanes-Oxley Act of 2002.
The Small Entity Compliance Guide lays out the exceptions and checklists to determine whether a company meets an exception. The exception that may have the broadest application is an exception for a large operating company. This exception would apply to a company that has:
Please note that all three requirements must be met by a single entity, and thus an owner could not apply common control rules to aggregate employees and gross receipts from multiple commonly controlled entities to meet this exception.
Additionally, if a company is owned by an exempt reporting company, the wholly owned company of the exempt reporting company would also be exempt from the reporting requirements.
Who Are Beneficial Owners?
If a company is a reporting company, then the reporting requirements for owners are triggered. The requested information is focused on identifying “beneficial owners” which includes individuals who directly or indirectly exercise substantial control over the company OR who directly or indirectly control 25% or more of the company’s ownership interests. The computation of ownership is computed on a fully diluted basis (i.e., as if options and convertible securities have been exercised). When looking at partnership interests, outstanding capital and profits interests of partners are taken into account.
For corporations, the applicable percentage (i.e., whether 25% or more) is based on the greater of:
Total combined voting power of all classes of ownership interest as a percentage of total outstanding voting power of all classes of ownership entitled to vote; or
Total combined value of ownerships interests as a percentage of total outstanding value of all classes of ownership interests.
Guidance provides that where information is not available for such analysis, then if an individual owns 25% or more of any class of stock or other type of ownership, one should report such individual’s ownership to ensure compliance.
The “substantial control” element will trigger reporting of information for company officers who direct, determine, or exercise influence important decisions regarding the company even if such officer has no ownership. Further, a senior officer, which includes a president, CEO, CFO, COO, generally counsel, or any other officer who performs a similar function is deemed to have “substantial control”, and thus the company will need to report information regarding such senior officer.
Please note that with regard to trusts, the term “beneficial owner” can include:
A beneficiary of the trust who has ownership of an interest in a reporting company held by the trust if the beneficiary;
There are certain exceptions to BOI reporting for certain owner. These would include:
An individual acting as a nominee, intermediary, custodian, or agent acting on behalf of another;
An employee acting solely as an employee (NOT including a senior officer) whose “substantial control” over economic benefits from such entity is derived solely from employment status as an employee;
An individual whose only interest in the reporting company is a FUTURE interest through the right of inheritance; and
A creditor of a reporting company.
What Information Must Be Reported?
There are three types of information that may need to be reported by a reporting company.
Beneficial Owner Information
FinCEN will also require the submission of an image of the applicable identification document.
Please note that a reporting company files a single report with all owners’ and company applicants’ information a single filing (i.e., owners would not file separate reports for a single reporting company).
What If a Person Has to Report for Multiple Companies?
If an individual anticipates being included in multiple reporting company reports, such individual could file an application with FinCEN to obtain a FinCEN Identifier. The individual would then provide the applicable reporting companies with the FinCEN Identifier in lieu of the otherwise required beneficial ownership information. Such an individual would need to ensure that the information reported in respect of such FinCEN Identifier remains accurate (i.e., individual response for filing updated information and corrections).
Is This an Annual or One Time Filing?
The BOI reporting requirement is complete upon the filing of the information within the respective time window. This is not an annual reporting. However, if information changes (e.g., company address change, company name change, change of ownership, change of company officer, etc.), then the reporting company will have to file a subsequent report to update the company’s information on file with FinCEN. A company will also have to file an updated report if it discovers an error in a previously filed report. In all such circumstances, whether due to an update or an error, the company should file updated information within 30 calendar days of the modification or discovery of error. However, there is a safe harbor provision precluding if an updated report upon identification of an error is filed within 90 calendar days of the deadline for filing the initial report.
Where Does One File?
The reporting can be done on FinCEN’s website (located HERE). Filers can either submit a fillable PDF through the website or file directly through the website. Please note that if use the fillable PDF, one should save to files, as could utilize the saved PDF and update with new information and re-submit if a later update occurs, as an updated report would require submission of all required information, not just updated information.
Third-party providers may also file the reports through an application programming interface (“API”).
FGMK will not be filing these reports. However, if questions arise as to elements of the required filing, please contact your FGMK professional who can involve colleagues who have insight as to the new FinCEN reporting requirements.
This reporting regime is new and still evolving. FinCEN continues to release new guidance and questions remain as to certain issues (e.g., how should series LLCs report?). Companies that existed prior to 2024 may want to monitor evolving guidance prior to filing, given the ability to file any time during 2024.
Finally, states also starting to establish similar reporting regimes. On December 22, 2023, New York enacted a state reporting regime applicable to LLCs formed in New York or formed in other jurisdictions but registered to do business in New York and that constitute reporting companies under the CTA. BOI will have to be filed at the time of the LLC’s registration. Any LLCs formed prior to December 22, 2023 and required to report will have until the end of 2024 to file. Additionally, legislation has been proposed in California with regard to LLCs.
FGMK encourages its clients to review the FinCEN filing requirements and consult their attorneys with regard to whether filings are required.
The summary information in this document is being provided for education purposes only. Recipients may not rely on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.
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