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BOI Reporting Demystified: How to Comply and Safeguard Your Small Business

Attention business owners: On January 1, 2021, the Corporate Transparency Act (CTA) was enacted by Congress as part of the larger Anti-Money Laundering Act of 2020. This legislation aims to enhance national security, intelligence, and law enforcement efforts against money laundering, terrorism financing, and other illegal activities. The CTA primarily affects smaller, unregulated companies, requiring them to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of the Treasury. This information includes the identities of the individuals who ultimately own or control the company, as well as those who formed the entity. After passing the CTA, in September 2022, FinCEN issued the final Beneficial Ownership Information Reporting Requirements (Reporting Rule). This rule mandates that certain domestic and foreign entities submit a report containing beneficial ownership information (BOI) to FinCEN. 

It is estimated that at least 32 million entities (most U.S. small businesses) will need to file BOI reports upon the rule’s effective date, with an additional 5 million reporting companies created annually. Failing to submit the required information or providing false or misleading data can lead to serious repercussions, such as daily civil penalties of $500 for ongoing violations, fines up to $10,000, or imprisonment for up to two years – or even a combination of these penalties. It’s crucial to invest time now in understanding the reporting requirements and plan to seek out professional assistance. Just as a business hires an accountant for tax filings, hiring an affordable attorney for CTA compliance protects your business and avoids these expensive consequences, ensuring you can focus on your business and keep operations running smoothly. You can find local specialized CTA attorneys in your state here.

FinCEN is authorized to share BOI information with government authorities and financial institutions under specific circumstances. The agency is also responsible for proposing rules on the collection and sharing of this information while adhering to strict confidentiality obligations. According to FinCEN, these BOI reports will significantly aid U.S. government departments, agencies, law enforcement, tax authorities, and financial institutions in protecting the nation’s financial system from illicit activities that threaten national security and foreign policy interests. In line with the CTA’s objectives, the BOI reporting requirement effectively bans anonymous shell companies.

Who Needs to Submit Beneficial Ownership Reports?

The Beneficial Ownership Information Reporting Rule applies to various entities. If your business is a corporation, limited liability company (LLC), or an entity created through filing with a Secretary of State or similar office under the law of a state or Indian tribe, you must comply with the Reporting Rule. Additionally, foreign corporations, LLCs, or other entities formed under foreign laws and registered to do business in any state or tribal jurisdiction are also subject to the rule.

As a result, the following types of entities must file reports unless they qualify for an exemption (referred to as “Reporting Companies”):

  1. U.S. corporations
  2. U.S. LLCs
  3. Other similar U.S. entities, including limited partnerships and business trusts/statutory trusts
  4. Non-U.S. corporations, LLCs, and other similar entities registered to do business in the United States

Is my company exempt from Beneficial Ownership Reporting?

Yes, the Reporting Rule outlines 23 types of entities exempt from being classified as Reporting Companies and, therefore, not required to file reports. 

Most likely exemption – While there are twenty-three exemptions for filing Beneficial Ownership Information (BOI) reports, most of these exemptions rarely apply to small businesses. The most common exemption is for “large operating companies,” which must meet three specific criteria to qualify. To be considered a large operating company, a business must:

  1. Generate over $5,000,000 in gross receipts or sales
  2. Employ more than 20 full-time employees
  3. Maintain an operating presence at a physical office location in the U.S.

All three conditions must be met to qualify for this exemption.

Other exemptions – Most of the remaining 22 exemptions typically apply to businesses in highly-regulated industries, where agencies already have access to their beneficial ownership information. These remaining exemptions include:

  1. U.S. banks
  2. Domestic credit unions
  3. Bank holding companies and savings and loan holding companies
  4. Securities issuers
  5. U.S. governmental authorities
  6. Registered money transmitting businesses
  7. Licensed and registered broker-dealers
  8. Securities exchange or clearing agents
  9. Exchange Act registered companies
  10. Registered investment companies and advisers
  11. Registered venture capital fund advisers
  12. State-regulated insurance companies
  13. State-licensed insurance producers
  14. Commodity Exchange Act registered companies
  15. Public accounting firms
  16. Public utility companies
  17. Financial market utility companies
  18. Pooled investment vehicles
  19. Tax-exempt entities
  20. Entities assisting tax-exempt entities
  21. Wholly-owned subsidiaries of exempt entities
  22. Inactive entities

Key exemptions to know for corporations:

  1. Large operating companies meeting specific employment or tax reporting criteria: Entities with over 20 full-time U.S. employees, more than $5,000,000 in gross receipts or sales reported in the previous year’s U.S. federal income tax returns (excluding foreign sources), and an operating presence at a physical office within the U.S.
  2. Publicly traded companies that are issuers of securities and registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) or required to file supplementary and periodic information under Section 15(d) of the Exchange Act.

Key exemptions related to funds:

  1. SEC-registered investment advisors
  2. SEC-registered investment companies
  3. Venture capital fund advisors with specific SEC filings
  4. Commodity pool operators and commodity trading advisors registered with the CFTC
  5. Funds operated or advised by a bank, federal or state credit union, SEC-registered broker-dealer, SEC-registered investment company or investment advisor, or venture capital fund advisor

Important subsidiary exemption rules:

  1. Subsidiaries controlled or wholly owned, directly or indirectly, by certain exempt entities are also exempt from the Reporting Rule.
  2. The subsidiary exemption does not apply to subsidiaries of money services businesses, pooled investment vehicles, or entities assisting tax-exempt entities.
  3. Entities registered in a state or tribal jurisdiction that are subsidiaries of large foreign companies may still be required to report BOI under the Reporting Rule if they don’t qualify for the large operating company exemption due to insufficient U.S. presence or gross receipts, unless another exemption applies.

Despite the numerous exemptions, the Reporting Rule is expected to impact private investment funds and entities structured for group investments. While registered investment advisors are exempt, private fund advisors, foreign private advisors, and family offices are not. Furthermore, the rule doesn’t provide a blanket exemption for subsidiaries of private funds, potentially affecting some feeder fund vehicles, AIVs, and other subsidiaries of private funds, as well as holding company entities not eligible for an exemption. Certain pooled investment vehicles, such as real estate vehicles relying on the Section 3(c)(5)(c) exemption under the Investment Company Act of 1940 (the “1940 Act”), specific commodity pools, and certain foreign pooled investment vehicles, are also not exempt from the Reporting Rule.

To find out if you qualify for an exemption, we recommend asking a local attorney specialized in beneficial ownership reporting.

What Information Must Be Reported on a Beneficial Ownership Report?

As a Reporting Company, you are required to provide the following information:

  1. Entity name (including any alternative trade or “doing business as” names)
  2. Primary address where business operations occur.
  3. Jurisdiction of formation, and for foreign entities, the State or Tribal jurisdiction of registration
  4. A unique identification number (TIN, EIN, etc.)

Additionally, Reporting Companies need to identify their beneficial owners and, for certain companies created after 2024, the “company applicants” responsible for filing or directing the filing of the entity’s formation documents. The required identifying information for beneficial owners and company applicants includes:

  1. Full legal name
  2. Date of birth
  3. Current residential address for beneficial owners or business street address for company applicants.
  4. A unique identifying number from an acceptable identification document (such as a State-issued ID or passport), along with an image of the document

Who is a Beneficial Owner?

A beneficial owner, as defined by the Reporting Rule, is an individual who directly or indirectly:

  1. Exercises substantial control over a Reporting Company, or
  2. Owns or controls at least 25% of the ownership interests of a Reporting Company.

Understanding Substantial Control – An individual is considered to have substantial control over a Reporting Company if they:

  1. Serve as a senior officer of the Reporting Company. This includes positions or roles such as president, CEO, CFO, COO, general counsel, or any other officer with similar authority.
  2. Have authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of the Reporting Company.
  3. Direct, determine or have substantial influence over significant matters of the Reporting Company (e.g., reorganization, dissolution or merger, selection or termination of business lines or ventures, or amendment of governance documents).
  4. Possess any other form of substantial control over the Reporting Company.

The last criterion is a catch-all provision meant to include unconventional control methods or atypical governance structures. This provision aims to encompass anyone who can make crucial decisions on behalf of the entity.

Understanding Ownership Interest – In the Reporting Rule, “ownership interest” refers to any instrument, contract, arrangement, understanding, or mechanism that establishes ownership. This includes equity, stock, capital, or profit interests. An individual can directly or indirectly own or control an ownership interest in a Reporting Company through joint ownership, certain trust arrangements, or by acting as an intermediary, custodian, or agent on behalf of another.

Convertible instruments, warrants, and other rights to purchase, sell, or subscribe to an ownership interest are included, whether classified as debt or equity. Puts, calls, and other options to buy or sell ownership interests are also covered, except when created and held by a third party without the Reporting Company’s knowledge or involvement.

The term “beneficial owner” does not include:

  1. Minor children (as long as a parent or legal guardian’s information is reported)
  2. Individuals acting as nominees, intermediaries, custodians, or agents
  3. Employees acting solely as employees and not as senior officers
  4. Individuals with only a future interest in a Reporting Company through inheritance rights
  5. Creditors of a Reporting Company (unless they meet the beneficial owner definition by exercising substantial control or owning or controlling 25% or more of the entity’s ownership interests)

Do I Need to Report a Company Applicant – Under the Reporting Rule, if your company was created or registered on or after the rule’s effective date of January 1, 2024, you are required to provide identifying information for Company Applicants. However, if your company was created or registered prior to January 1, 2024, you are not required to report Company Applicants.

For those who need to report Company Applicants, a business address must be provided if the Company Applicants create or register companies as part of their business. In contrast, a residential address is required for beneficial owners.

When Do I Need to File My Beneficial Ownership Report?

The Reporting Rule becomes effective on January 1, 2024.

For Reporting Companies created before January 1, 2024, they have until January 1, 2025, to file the required information about their beneficial owners. However, these companies don’t need to report information about their Company Applicants.

Reporting Companies formed or registered on or after January 1, 2024, must file the required information within 30 days of receiving notice of effective formation or registration. These companies must report information on both Company Applicants and beneficial owners.

If there’s a change in the information previously reported about a reporting company or its beneficial owners, it must be reported to FinCEN within 30 days of the change. No updates are needed for Company Applicant information. Inaccuracies must be reported within 30 days of discovering them. Note that any change in an entity’s ownership might require filing a BOI report or updating an existing one, even if the entity wasn’t a Reporting Company before the change.

Who Has Access to the Information I Report?

FinCEN is authorized by the CTA to disclose BOI to:

  1. U.S. government agencies
  2. Certain foreign agencies and authorized persons
  3. Financial institutions using the information for specific KYC purposes

The information reported to FinCEN under the Reporting Rule won’t be publicly accessible and isn’t subject to Freedom of Information Act requests.

The Proposed Access Rule allows three types of U.S. government agencies to access BOI directly from FinCEN’s database:

  1. Federal agencies involved in national security, intelligence, and law enforcement activities
  2. Department of the Treasury officials and employees performing their official duties, including tax administration
  3. State, local, and Tribal law enforcement agencies involved in criminal or civil investigations

Federal agencies must provide a brief justification for their request, while State, local, and Tribal agencies need to present a court document authorizing access to the BOI from FinCEN’s database.

Foreign law enforcement agencies and other authorized foreign requestors don’t have direct access to FinCEN’s BOI database. They must submit a request to a federal agency acting as an intermediary to retrieve the BOI information. The federal agency can only provide BOI in response to a request for assistance in an investigation or prosecution by the foreign country, where there’s an applicable treaty or similar international agreement. The foreign requestor must use the BOI in accordance with the treaty or agreement under which the request was made.

Summary Points

Starting in 2024, most small businesses in the U.S. will be required to disclose identifying information about those who form and ultimately own or control the entity. The Reporting Rule aims to deter money laundering, corruption, tax evasion, and other financial crimes. 

Navigating the BOI reporting requirements can be overwhelming for business owners, especially given that a thorough understanding of the process entails reading over 100 pages of detailed FinCEN rules and documentation across separate documents. 

Just as you would rely on an accountant for complex tax filings, it’s crucial to engage an attorney’s expertise to avoid the penalties associated with non-compliance. The risks are too high to ignore, with daily civil penalties of $500 for ongoing violations, fines up to $10,000, and imprisonment for up to two years – or even a combination of these penalties that can impact your business’s future. 

By hiring an affordable specialized attorney, you can minimize the risk of costly mistakes and safeguard your company, finances, and time. The complexity of the law and the sheer volume of information required for compliance necessitates professional guidance, and the peace of mind you’ll gain is invaluable. You can find cost-effective CTA attorneys in your state here.

Charles Wismer

Charles Wismer

Charles is a fund manager and finance industry specialist with ten years of experience managing complex corporate structures in finance and fintech. His expertise concentrates on deploying and scaling novel solutions for new technologies and regulations.

Charles Wismer

Charles Wismer

Charles is a fund manager and finance industry specialist with ten years of experience managing complex corporate structures in finance and fintech. His expertise concentrates on deploying and scaling novel solutions for new technologies and regulations.

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