For many businesses, new reporting requirements created under the federal Corporate Transparency Act are, as a recent Forbes headline put it, the “biggest issue you’ve never heard of.” 

The federal government is implementing rules that would require most entities registered to do business in the United States to identify their beneficial owners—in other words, the person or persons who ultimately own or control the business.

The rules take effect on Jan. 1, 2024, and small businesses, partnerships, joint ventures, and many other entities would be well advised to consult their in-house and outside attorneys for a risk assessment and compliance review. Written by the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCen”), the rules apply to any foreign or domestic corporation, LLC, or other business entity that has registered to do business in the United States, usually by filing with a secretary of state or similar state-level office.

The beneficial ownership rule was mandated by the Corporate Transparency Act, a 2020 law that attempts to prevent financial crimes such as money laundering and tax evasion by making it more difficult for individuals to hide behind corporate entities.

Which Businesses Are Covered by the Rule?

Any foreign or domestic corporation, LLC, or other business entity that has registered to do business in any U.S. state or tribal jurisdiction is covered by the rule. 

FinCen anticipates that covered entities will include most limited liability partnerships, business trusts, corporations, and limited liability companies.

Exemptions exist for 23 types of entities, according to FinCen, and apply to more heavily regulated entities like public companies, which already provide information about their owners and top executives. 

What Does FInCen Mean by ‘Beneficial Owner’ and ‘Substantial Control’?

According to FinCen, the new rules have been written to account for the variety of ownership structures companies may adopt. For companies with less complex organizational structures, the process of identifying and reporting beneficial owners should be a simple one, FinCen asserts. The agency says that it “expects the majority of reporting companies will have simple ownership structures.”

FinCen defines a beneficial owner as any person who directly or indirectly exercises substantial control over a company covered by the rules or who owns or controls at least 25 percent of the ownership interests of such a company. 

“Substantial control,” under the government’s definition, means any individuals who are able to make important decisions on behalf of a business entity. Methods for determining whether an individual owns or controls 25 percent of the ownership of an entity are included in the rule.

Individuals are said to exert substantial control if they serve as a senior officer (such as a CEO, COO, or general counsel); can appoint or remove senior officers or a majority of a board of directors; have influence over important company matters such as reorganizations, mergers, or acquisitions; or perform any other activity that might be thought of as exerting substantial control over the affairs of the company.

What Are Companies Required to Report?

Companies covered by the rules will be required to file “beneficial ownership information,” or BOI, reports with FinCen. The reports include: 

• the identity of the reporting company; and

• the name, birthdate, and address of each beneficial owner, as well as a unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of such a document). 

For entities created after Jan. 1, 2024, information about company applicants will also be required. Company applicants are individuals who file documents that create or register a domestic or foreign entity or who direct or control the filing of the relevant document by another person.

Are There Penalties for Failing to Comply? 

Those required to file BOI reports and who fail to do so could face civil penalties of up to $500 for each day the violation continues, a fine of up to $10,000, and two years in jail. Penalties may be assessed against any person who violates the law.

Once the rules take effect next year, existing companies will have one year to file a beneficial ownership report.  Entities created or registered after Jan. 1, 2024, will have 30 days after receiving notice of their creation or registration to file their first reports.

The information collected by FinCen will be collected in a national information repository known as the Beneficial Ownership Secure System. How that system will be accessed and by whom is still being determined, however.

What Should Businesses Do Now?

Entities covered by the new rules now have a little less than a year to prepare for the changes. As a result, businesses should:

1) Determine if they are covered by the law. The company’s legal advisors can assess whether an entity is subject to the new rules or qualifies for an exemption. 

2) Identify beneficial owners. Businesses should work closely with their legal counsel to determine who qualifies as a beneficial owner using the definition created by FinCen.

3) Gather information for BOI reports. The company should gather necessary data about individuals who meet the beneficial ownership criteria. This can be a time-consuming process, especially in situations where foreign ownership is involved.

Guzov LLC’s attorneys have deep experience helping businesses grapple with regulatory issues. To learn more about how they can help gauge the potential impact of Corporate Transparency Act rules on your company, contact us for a consultation or visit the Guzov Solutions page to learn more about how we can assist your company with ongoing regulatory and compliance challenges.