The Financial Crimes Enforcement Network (FinCEN) has issued a final rule for creating a beneficial ownership registry pursuant to the Corporate Transparency Act (CTA). The law requires corporations, limited liability companies (LLCs), and other entity types to disclose information about individuals connected to these companies. In particular, the ultimate beneficial owners, who are the human beings, will need to file if they own at least 25% or substantially control the business.
According to FinCEN, a beneficial owner is any individual who either:
- Has “substantial control” over a reporting company (either directly or indirectly); or,
- Owns at least 25 percent of the ownership interest.
FinCEN provided the following deadlines by which companies need to comply with beneficial ownership reporting requirements:
- This law goes into effect on effective January 1, 2024.
- Companies incorporated or formed before January 1, 2024 will only have until January 1, 2025 to complete the FinCEN filing.
- Companies incorporated or formed on or after January 1, 2024 will have 30 days after the incorporation date to comply.
- Reporting companies must disclose Information about beneficial owners and company applicants on Beneficial Ownership Information (BOI) reports.
We breakdown the details of FinCEN’s final rule and how business owners can avoid substantial penalties and jail time.
Beneficial Ownership Reporting and the Corporate Transparency Act
In 2021, Congress overrode Trump’s veto to pass H.R. 2513 the Corporate Transparency Act (CTA) as part of the Defense Authorization Act. The CTA empowered the Financial Crimes Enforcement Network (FinCEN) to develop a non-public registry to track beneficial owners of U.S. LLCs and corporations.
The Corporate Transparency Act was enacted to prevent the illicit use of business entities as shell companies to hide the identities of their owners who may be engaged in money-laundering, terrorism financing, or other illegal activity. FinCEN can share the registry with both federal law enforcement and private financial institutions for the purpose of conducting due diligence on customers.
The Corporate Transparency Act requires businesses to disclose personal information concerning their beneficial owners to a database operated by FinCEN. Business executives and owners will face heavy fines and stiff penalties, including jail time, for willful non-compliance.
How to Comply with the Corporate Transparency Act
FinCEN will require registered entities to file Beneficial Ownership Information reports. BOI reports require companies to disclose information about two types of individuals:
- Beneficial Owners – Beneficial owners are defined as either:(A) having “substantial control” over a company and its operations or
(B) owning or controlling at least 25 percent of ownership interests.
- Company Applicants – Two company applicants must be filed. Under the “first mile and last mile” rule of thumb, this includes the individual who requests a company to be formed and the second individual who submits the filing to the Secretary of State.
Companies must disclose four pieces of information about each beneficial owner and company applicant in a BOI report:
- The owner’s name;
- Date of birth;
- Residential address; and
- Unique identifying number.
A unique identifying number must be provided from an acceptable identification document. These include state identification (ID) cards, drivers license and US passports, among others. BOI reports will require images of any identification documents to be submitted.
Companies can streamline the reporting process by using “FinCEN identifier” numbers. Alternatively, beneficial owners can obtain a FinCEN identifier on each beneficial owner, control party, and company applicant by providing the four pieces of information to FinCEN directly. A FinCEN identifier number can be provided on the BOI report in lieu of date of birth, residential address, and copy of driver’s license.
Deadlines to Comply with Beneficial Ownership Reporting
FinCEN established January 1, 2024 as the effective date of the ruling. Deadlines for submitting the Beneficial Ownership Information report depend on when the company was formed or incorporated.
Companies existing before January 1, 2024 will have to file their initial Beneficial Ownership Information report by January 1, 2025.
Companies created on or after January 1, 2024 will be given 30 days after creation to file initial BOI reports.
Additionally, all reporting companies will be required to file updated BOI reports within 30 days of any ownership information change.
What Are the Penalties For Non-Compliance?
Business owners can face civil penalties of $500 per day, and criminal penalties of up to $10,000 in fines and/or two years of jail time for willful non-compliance with beneficial ownership reporting requirements under the Corporate Transparency Act.
Updates to any changes in owners or control parties of addresses, etc., must be filed within 30 days of information change.