Understanding ‘Beneficial Owner Information’ (BOI) Reporting Requirements

2024-04-12

Reading time: 3 minutes 30 seconds Starting January 1, 2025, corporations, limited liability companies and similar entities will be required to report certain “beneficial owner information” (BOI) to FinCEN — the Financial Crimes Enforcement Network arm of the U.S. Treasury Department — under the provisions of a 2020 law called the Corporate Transparency Act (CTA). … Continued

Reading time: 3 minutes 30 seconds

Starting January 1, 2025, corporations, limited liability companies and similar entities will be required to report certain “beneficial owner information” (BOI) to FinCEN — the Financial Crimes Enforcement Network arm of the U.S. Treasury Department — under the provisions of a 2020 law called the Corporate Transparency Act (CTA).

What is most notable about the BOI reporting requirement is it primarily applies to small businesses. Large companies – defined as having more than 20 employees, more than $5 million in consolidated gross receipts and a physical place of business in the U.S. – are exempt from the reporting requirement. (See the end of this article for a full list and description of exempt entities.)

An ongoing legal challenge has the potential to impact the BOI reporting requirement, but until it plays out in federal courts the requirement remains in place, and affected businesses should plan to file their BOI reports by next January 1. Specifically, a federal court in Alabama ruled in March 2024 that the Corporate Transparency Act is unconstitutional. However, the ruling is narrow and applies only to members of the plaintiff organization that brought the suit, National Small Business United.

The Treasury Department has announced it will appeal the Alabama ruling, and until the results of the appeal are known, the BOI reporting requirements remain in place for more than 32 million small businesses nationwide.

The law is not widely understood, and many owners of affected small companies may be unaware of their reporting obligations.

For entities that already existed on January 1, 2024, the first BOI report must be made on or before January 1, 2025. Entities formed after January 1, 2024, will be required to file their first BOI reports within 90 days of registration.

While the law requires BOI reporting of individuals who hold 25% or more ownership interest, it also more broadly applies to individuals who exercise “substantial control” over the company, either directly or indirectly. Therefore, individuals exercising substantial control do not need to have ownership in the company, and this category automatically includes any company senior officers.

It is important to note that the BOI reporting information is submitted by the company, not the individual. Hence, penalties for noncompliance fall on the company and they are steep, including $591 a day up to $10,000 in fines and up to two years in jail.

What is the Corporate Transparency Act?

Enacted in late 2020, the CTA is intended to help national security, intelligence, and law enforcement agencies fight money laundering, the financing of terrorism, and other illicit activity and bring the U.S. into compliance with international anti-money laundering standards.

The legislation’s chief sponsor (now-former) Rep. Carolyn Maloney, D-NY, characterized the measure as addressing “malicious actors using shell corporations” to hide money. However, the CTA has been criticized for having broadly written regulations that will apply to hundreds of thousands of small businesses.

Among other provisions, the CTA will require affected companies to report to FinCEN certain information of any person who:

• Exercises substantial control over the company, or
• Owns or controls at least 25% of the ownership interests of the company

The Corporate Transparency Act defines companies that must report BOI information as:

• Domestic corporations, LLCs and other entities registered under U.S. state law;
• Foreign corporations, LLCs or entities formed under foreign law registered to do business in any U.S. state.

There are 23 types of entities exempt from BOI reporting, including:

• Banks, credit unions and tax-exempt entities registered with the IRS.
• Large operating companies with more than 20 full-time employees, more than $5 million in sales, and a physical office in the U.S. Subsidiaries of large companies that are exempt from BOI reporting are also exempt. (See below for a detailed description of exempt entities.)

Reports will include information about beneficial owners of the company.

• A beneficial owner is either someone who directly or indirectly exercises substantial control over the company, or
• Who directly or indirectly owns 25% or more of the company?

Reporting companies must provide the following information:

• Legal name of the company
• Trade names (i.e., DBA)
• Street address of principal place of business in the U.S.
• Jurisdiction of formation or registration
• Tax ID# of the company

Beneficial owner information to be reported includes:

• Individual’s name, date of birth and residential address
• Unique ID# from acceptable ID document, and copy of ID (U.S. driver’s license, U.S. passport or other government-issued ID)

How you may be affected

If you own or control a corporation, limited liability company or similar entity – or you hold at least a 25% ownership interest – the entity may be required to report your identity to FinCEN before next January.

If you have formed a new corporation, limited liability company or similar entity since January 1, 2024, you may be required to file a BOI report within 90 days of the entity’s registration.

More information is available at FinCEN’s Beneficial Ownership Information web page. On the website, you are able to create a FinCEN ID, which will expedite your BOI report filing.

If you have any questions or concerns about your company’s BOI reporting obligations, JLK Rosenberger can help. For more information, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.

Exempt Organizations

1. Securities reporting issuer – Any issuer of securities that is: (A) an issuer of a class of securities registered under Sec. 12 of the Securities Exchange Act of 1934, or (B) required to file supplementary and periodic information under Sec. 15(d) of the Securities Exchange Act of 1934.
2. Governmental authority – Any entity that: (A) is established under the laws of the United States, an Indian tribe, a State, or a political subdivision of a State, or under an interstate compact between two or more States, and (B) exercises governmental authority on behalf of the United States or any such Indian tribe, State, or political subdivision.
3. Bank – Any bank, as defined in: (A) Sec. 3 of the Federal Deposit Insurance Act, (B) Sec. 2(a) of the Investment Company Act of 1940, or (C) Sec. 202(a) of the Investment Advisers Act of 1940.
4. Credit union – Any Federal credit union or State credit union, as those terms are defined in Sec. 101 of the Federal Credit Union Act.
5. Depository institution holding company – Any bank holding company as defined in Sec. 2 of the Bank Holding Company Act of 1956, or any savings and loan holding company as defined in Sec. 10(a) of the Home Owners’ Loan Act.
6. Money services business – Any money transmitting business registered with FinCEN under 31 U.S.C. 5330, and any money services business registered with FinCEN under 31 CFR 1022.380.
7. Broker or dealer in securities – Any broker or dealer, as those terms are defined in Sec. 3 of the Securities Exchange Act of 1934, that is registered under Sec. 15 of that Act.
8. Securities exchange or clearing agency – Any exchange or clearing agency, as those terms are defined in Sec. 3 of the Securities Exchange Act of 1934, that is registered under Secs. 6 or 17A of that Act.
9. Other Exchange Act registered entity – Any entity other than that described in exemption 1 (Securities reporting issuer), exemption 7 (Broker or dealer in securities), or exemption 8 (Securities exchange or clearing agency) that is registered with the SEC under the Securities Exchange Act of 1934.
10. Investment company or investment adviser – Any entity that is: (A) an investment company as defined in Sec. 3 of the Investment Company Act of 1940, or is an investment adviser as defined in Sec. 202 of the Investment Advisers Act of 1940, and (B) registered with the SEC under the Investment Company Act of 1940 or the Investment Advisers Act of 1940.
11. Venture capital fund adviser – Any investment adviser that: (A) is described in section 203(l) of the Investment Advisers Act of 1940, and (B) has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the SEC.
12. Insurance company – Any insurance company as defined in Sec. 2 of the Investment Company Act of 1940.
13. State-licensed insurance producer – Any entity that: (A) is an insurance producer that is authorized by a State and subject to supervision by the insurance commissioner or a similar official or agency of a State, and (B) has an operating presence at a physical office within the United States.
14. Commodity Exchange Act registered entity – Any entity that: (A) is a registered entity as defined in Sec. 1a of the Commodity Exchange Act, or (B) is: (1) a futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor, each as defined in Sec. 1a of the Commodity Exchange Act, or a retail foreign exchange dealer as described in Sec. 2(c)(2)(B) of the Commodity Exchange Act and (2) registered with the Commodity Futures Trading Commission under the Commodity Exchange Act.
15. Accounting firm – Any public accounting firm registered in accordance with Sec. 102 of the Sarbanes-Oxley Act of 2002.
16. Public utility – Any entity that is a regulated public utility as defined in 26 USC 7701(a)(33)(A) that provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States.
17. Financial market utility – Any financial market utility designated by the Financial Stability Oversight Council under Sec. 804 of the Payment, Clearing, and Settlement Supervision Act of 2010.
18. Pooled investment vehicle – Any pooled investment vehicle that is operated or advised by a person described in exemptions 3 (bank), 4 (credit union), 7 (broker or dealer in securities), 10 (investment company or investment adviser), or 11 (venture capital fund adviser).
19. Tax-exempt entity – Any entity that is: (A) an organization that is described in Sec. 501(c) of the Internal Revenue Code of 1986 (determined without regard to Sec. 508(a) of the Code) and exempt from tax under Sec. 501(a) of the Code, except that in the case of any such organization that ceases to be described in Sec. 501(c) and exempt from tax under Sec. 501(a), such organization shall be considered to continue to be described as a tax-exempt entity for the 180-day period beginning on the date of the loss of such tax-exempt status, (B) a political organization, as defined in Sec. 527(e)(1) of the Code, that is exempt from tax under Sec. 527(a) of the Code, or (C) a trust described in paragraph (1) or (2) of Sec. 4947(a) of the Code.
20. Entity assisting a tax-exempt entity – Any entity that: (A) operates exclusively to provide financial assistance to, or hold governance rights over, any entity described in exemption 19 above (tax-exempt entity), (B) is a United States person, (C) is beneficially owned or controlled exclusively by one or more United States persons that are United States citizens or lawfully admitted for permanent residence, and (D) derives at least a majority of its funding or revenue from one or more United States persons that are United States citizens or lawfully admitted for permanent residence.
21. Large operating company – Any entity that: (A) employs more than 20 full time employees in the United States, with “full time employee in the United States” having the meaning provided in 26 CFR 54.4980H-1(a) and 54.4980H-3, except that the term “United States” as used in those sections of the CFR have the meaning provided in 31 CFR 1010.100(hhh), (B) has an operating presence at a physical office within the United States, and (C) filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales, as reported as gross receipts or sales (net of returns and allowances) on the entity’s IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under Federal income tax principles. For an entity that is part of an affiliated group of corporations within the meaning of 26 USC 1504 that filed a consolidated return, the applicable amount shall be the amount reported on the consolidated return for such group.
22. Subsidiary of certain exempt entities – Any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities described in exemptions 1, 2, 3, 4, 5, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 19, or 21 set forth above.
23. Inactive entity – Any entity that: (A) was in existence on or before January 1, 2020, (B) is not engaged in active business, (C) is not owned by a foreign person, whether directly or indirectly, wholly or partially, (D) has not experienced any change in ownership in the preceding twelve-month period, (E) has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12 month period, and (F) does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.