Small Businesses Will be Subject to Beneficial Ownership Reporting Requirements Beginning in 2024

Beginning January 1, 2024, many small businesses will face a new requirement to file a “beneficial ownership information” (BOI) report.

The new reporting requirement is aimed at increasing transparency in unregulated companies and is intended to prevent criminals from hiding behind corporate structures. Failure to report timely could result in fines of up to $10,000 and imprisonment for up to two years.

The Corporate Transparency Act, which was enacted in 2021, requires certain types of domestic and foreign entities (called “reporting companies”) to file a BOI report with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). FinCEN will then use the information contained in the reports to “help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity.”

The new reporting requirement is effective January 1, 2024. Reporting companies created or registered before January 1, 2024, will have one year (until January 1, 2025) to file their initial report, while reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial report. Once the initial report has been filed, both existing and new reporting companies will have to file updates within 30 days of a change of any required information included in their initial report.

The tight deadline for filing BOI reports and the information required to be included in a BOI report will place a significant burden on many reporting companies. Further, many reporting companies are not yet aware of the new reporting requirement and, thus, may be surprised by the requirement.

Entities Required to Report

The reporting requirement applies to both domestic and foreign reporting companies. A domestic reporting company is generally any entity created by the filing of a document with a Secretary of State or any similar office under the law of a state or Indian tribe. Thus, domestic corporations, partnerships, and limited liability companies are generally subject to the reporting requirement.

Similarly, a foreign reporting company is generally any entity formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.

However, 23 types of entities are exempt from the definition of “reporting company” (and, thus, are not required to file a BOI report). Notable exceptions include:

• Banks
• Insurance companies
• Investment advisors
• Large operating companies ^[1]
• Public accounting firms
• Securities brokers and dealers
• Securities reporting issuers
• State-licensed insurance producers
• Tax-exempt entities

Content of Reports

The initial report filed by a reporting company must include the following information:

• The full legal name of the reporting company
• Any trade name or “doing business as” name of the reporting company
• The street address of the reporting company’s principal place of business in the United States^[2]
• The State, Tribal, or foreign jurisdiction where the reporting company was formed
• In the case of a foreign reporting company, the State or Tribal jurisdiction where the company first registers to do business in the United States
• The reporting company’s Taxpayer Identification Number (TIN)^[3]
• For each “beneficial owner” and each “company applicant” of the reporting company, the individual’s:
  • Full legal name
  • Date of birth
  • Street address
  • A unique identifying number^[4]
  • An image of the document from which the unique identifying number was obtained

If there is any change in the information listed above that was previously submitted to FinCEN, then the reporting company is generally required to file an updated report within 30 days after the date on which a change occurs.  Similarly, if a report previously filed with FinCEN contains inaccurate information, the reporting company is required to file a corrected report within 30 days after the date on which the reporting company becomes aware or has reason to know of the inaccuracy.

Definition of Beneficial Owner

A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” over the entity, or who owns or controls at least 25 percent of the “ownership interests” of a reporting company.^[5] An individual exercises substantial control over a reporting company if the individual:

• Serves as a senior officer of the reporting company^[6]
• Has authority over the appointment or removal of any senior officer or a majority of the board of directors
• Directs, determines, or has substantial influence over important decisions made by the reporting company
• Has any other form of substantial control over the reporting company An ownership interest in a reporting company is:

1. Any equity, stock, or similar instrument
2. Any capital or profit interest
3. Any instrument convertible into any share or interest described in 1 or 2
4. Any warrant or right to purchase, sell, or subscribe to a share or interest in 1 or 2
5. Any put, call, straddle, or other option or privilege to buy or sell any share, interest, or instrument described in 1 – 3
6. Any other instrument, contract, arrangement, or mechanism used to establish ownership

Company Applicants

A company applicant is the individual who files the document that creates the domestic reporting company or that registers the foreign reporting company. If more than one individual is involved in the filing of the document, then the individual who is primarily responsible for directing or controlling the filing is also a company applicant.^[7]

For more information about these new requirements, contact us. We are here to help.

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[1] A large operating company is an entity that: (1) employs more than 20 full-time employees in the United States; (2) has an operating presence in the United States; and (3) filed a Federal income tax return for the previous year that reported more than $5 million in gross receipts or sales (net of returns and allowances) from sources within the United States.

[2] If a reporting company does not have a principal place of business in the United States, then the reporting company must provide the street address of the primary location in the United States where the company conducts business.

[3] If a foreign reporting company does not have a TIN, the company must provide a tax identification number issued by a foreign jurisdiction and the name of the issuing jurisdiction.

[4] The unique identifying number must come from a current U.S. passport, a current U.S. government-issued identification document, a current driver’s license, or, if the individual does not possess any of the preceding documents, a current passport issued by a foreign government.

[5] However, the following individuals are not beneficial owners: a minor child (provided the reporting company reports the required information for the child’s parent or legal guardian); a nominee, intermediary, custodian, or agent acting on behalf of another individual; an employee of a reporting company (other than a senior officer) whose control over or economic benefits from the reporting company are derived solely from the employment status of the employee; an individual whose only interest in a reporting company is a future interest through a right of inheritance; and a creditor of a reporting company.

[6] A reporting company’s president, chief financial officer, general counsel, chief executive officer, chief operating officer, and any other officer who performs similar functions, are senior officers.

[7] For example, if a law firm has an attorney who is primarily responsible for overseeing the preparation and filing of incorporation documents and a paralegal who directly files them with a state office, a reporting company created by this law firm would report two company applicants – the attorney and the paralegal.