What You Need to Know About Beneficial Ownership Reporting

By Matthew Dochnal | Published October 3, 2022

Financial Crimes Enforcement Netowrk website homepage.

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 rule requires most corporations, limited liability companies (LLCs) and other entity types to disclose information about their beneficial owners. (A beneficial owner, in case you’re not familiar with the term, is someone who has significant ownership interests in a company.)

 

 

The final rule detailed the following points:

  • The rule will become effective January 1, 2024.
  • Companies incorporated or formed before January 1, 2024 will have until January 1, 2025 to comply.
  • Companies incorporated or formed 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 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 2020, Congress passed H.R. 2513 the Corporate Transparency Act (CTA). The CTA commissioned the Financial Crimes Enforcement Network (FinCEN) to develop a non-public registry tracking beneficial owners of US LLCs and corporations. FinCEN can share the registry with both federal law enforcement and private financial institutions for the purpose of conducting due diligence on potential customers.

The Corporate Transparency Act requires businesses to disclose personal information concerning their beneficial owners to a database operated by FinCEN. Business owners face stiff penalties, including jail time, for willful noncompliance.

How to Comply with the Corporate Transparency Act

FinCEN will require registered entities to file Beneficial Ownership Information (BOI) reports. BOI reports require companies to disclose information about two types of individuals:

  1. 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.
  2. Company Applicants – A company applicant is defined as an individual who directly files the company’s incorporation or formation document. For companies formed in foreign countries, the individual who registers the entity to do business in a US state is considered a company applicant.

Companies will have to disclose four pieces of information about each beneficial owner and company applicant in a BOI report:

  1. The owner’s name;
  2. Date of birth;
  3. Address; and
  4. 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. Beneficial owners can obtain a FinCEN identifier by providing the four pieces of information to FinCEN directly. A FinCEN identifier number can be provided on the BOI report in place of the information.

Deadlines to Comply with Beneficial Ownership Reporting

FinCEN established January 1, 2024 as being the effective date of the ruling. Deadlines for compliance 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 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 change.

What Are the Penalties For Non-Compliance?

Business owners face two years of jail time and upwards of $10,000 in fines for willful non-compliance with beneficial ownership reporting requirements under the Corporate Transparency Act.

Why the Corporate Transparency Act Is Problematic

The Corporate Transparency Act is the United States’ first law to commission the creation of a beneficial ownership registry. It represents a break from an American tradition that resisted any type of asset ownership registry.

Congress passed the Act with the intent of combating the illicit use of shell companies by criminals. In reality, it serves as special interest legislation for the banking industry. The CTA allows banks to cut costs by blindly relying upon self reported data filed with FinCEN. Criminals may complicate enforcement by filing false information to the ownership registry. Bankers are better gate-keepers as a practical matter, vested in the due diligence of their customers and compliance with Know Your Customer laws.

America’s small businesses could serve as the collateral damage of the new reporting requirements. This could potentially hurt economic growth. Busy entrepreneurs are known to struggle with keeping up with timely government filings. The Act not only swamps these honest individuals with additional regulatory burden, they also face substantial penalties and jail time for non-compliance.

The Act does not adequately address inactive companies which have not been formally canceled or dissolved. Many businesses fail quickly and become inactive without having the resources to file a formal cancellation or dissolution. This expense can be upwards of hundreds of thousands of dollars in some instances. Millions of people remain connected to small business entities which no longer operate. It is still unclear whether these past business owners will face penalties for not filing Beneficial Ownership Information reports.

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