Navigating the Corporate Transparency Act and FinCEN’s Requirement for Beneficial Owner Information

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The Corporate Transparency Act (the “CTA”) requires Limited Liability Companies doing business in the United States to report information about the individuals who ultimately own or control these companies. Effective as of January 1, 2024, the U.S. Treasury Department’s Financial Crimes Enforcement Network (known as “FinCEN”) accepts electronic reports through its website. Information is not made public and is available to law enforcement upon request.

Reporting Requirements:

  • Entities created prior to 2024 must file their reports by January 1, 2025.
  • For entities filing in 2024 for the first time to do business in the United States, they have 90 days to file a report after formation.
  • Reports for entities created in 2025 must be filed within 30 days of formation.
  • Companies have 30 days to correct mistakes or update changed information.

Penalties. Penalties can be significant and they apply for failing to report, providing false information, failing to update information, and for providing the reporting company with false information. The willful failure to report complete or updated BOI or for providing false information carries civil penalties of up to $500 a day until corrected, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of the company are liable for the accuracy and compliance of the BOI Report.

Companies Required to Report to FinCEN include:

  1. Entities that are created by the filing of a document with the Secretary of State are required “Reporting Companies.” This includes LLCs, LLPs, LLLPs, corporations, etc., and foreign legal entities who also file.
  2. The CTA does not apply to general partnerships, sole proprietorships, or trusts. However, if these entities are considered a beneficial owner of a reporting company, the CTA will apply.
  3. Clients often own an LLC through their trust, or a trust may inherit business interests.
  4. If your Trust owns your LLC, see below for reporting requirements for the trust.
  5. A company must provide the business name and alternative DBAs, the principal U.S. location, the state of formation, and its taxpayer ID.

Companies Exempt from Filing: Highly regulated entities (including banks, certain private trust companies, tax-exempt entities and public companies) are exempt from FinCEN because they are already reporting most of the FinCEN required information to the government.

Beneficial Owner Information (or BOI):  A Beneficiary Owner must be a human being who owns or controls 25% or more of the ownership interests of a reporting company, or a non-owner who exercises substantial control over the reporting company. See https://www.fincen.gov/boi-faqs; and  https://www.fincen.gov/sites/default/files/shared/BOI_FAQs_QA_12.12.23.pdf

  1. Regardless of percentage, each entity must have one substantial owner.
  2. If a trust or general partnership holds 25% or more of ownership interests in a company required to report, a trustee, a sole beneficiary, and the grantor may be considered to have substantial control, depending on the facts.
  3. A parent or legal guardian of a minor would report as the Beneficial Owner.
  4. Individuals must provide their full legal name, physical residence address (however those with safety concerns can ask for a waiver), and a state or government identification that has the individual’s picture.
  5. A FinCEN identification number can be obtained and used rather than supplying the required personal BOI each time.

The concept of substantial control is based on who is able to direct or substantially influence important decisionsThat includes the following positions:

  1. A general partner, senior officers, including the president, CEO, CFO, CEO, and general counsel.
  2. Manager of an LLC or Member (which could be a trust) who controls business decisions.
  3. If there are multiple Beneficial Owners, meaning more than one individual exercises control over the Reporting Company, each is required to report.

Identifying a beneficial owner when a trust owns an interest in a reporting company: There is a bright line list in the CTA of individuals who would be considered beneficial owners if a trust owns or controls at least 25% of the ownership interest in the reporting company, primarily based on the owning, controlling, or directing voting powers and company decisions. See 31 CFR § 1010.380(d). The checklist is not exhaustive. Other individuals who are Beneficial Owners include: The Grantor and Trustee of a Revocable Trust, or anyone having the right to revoke or amend (a trust or LLC).

When in Doubt – Report. It is always better to report if you believe someone has control over the reporting company. Willful failure is noted in the penalties so making decisions on a reasonable basis is important.

 

Key Takeaways:

    1. Companies are responsible for reporting and leadership of these companies are most likely to face penalties if there is a failure to report.
    2. Getting a FinCEN number will help simplify reporting, but there is currently no way to relinquish the number. This means you will always need to update FinCEN of information changes within 30 days.
    3. If you have multiple entities and/or plan to create more, create a process that incorporates who and how beneficial owner analysis will be reported as part of your company policy. This analysis and process should also be documented in the administration records if you have a trust or more than one trust that has ownership interest in a company. This will help you avoid penalties for the willful failure to report.
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