Under the Corporate Transparency Act (CTA), businesses are now required to report information about their “beneficial owners” to FinCEN (the U.S. Treasury’s Financial Crimes Enforcement Network). The term “beneficial owner” is more than just the owner; it includes anyone who has substantial influence or control over a business. This concept can be complex and difficult to understand. As a result, this new rule has left many small business owners confused about how to comply and avoid fines. This guide is designed to help you meet your reporting obligations in a simple manner.
What is the Corporate Transparency Act (CTA)?
- Overview : The CTA requires certain companies to report to FinCEN the beneficial owners, that is, individuals who directly or indirectly own or control the company. This is a federal measure to combat financial crimes such as money laundering.
- Deadline : All existing companies must submit the report by 1 January 2025. New companies must submit the Beneficial Ownership Information (BOI) report within 30 days of incorporation.
- Fines : Failure to comply with reporting requirements will result in a fine of $591 per day, adjusted for inflation. Continued failure to comply may result in higher fines, criminal penalties, and even imprisonment.
Why CTAs are Bad for Small Businesses
- Complexity and Legal Ambiguity : CTAs are complex and unclear. Many experts believe that business owners may have difficulty meeting the requirements of CTAs, especially small businesses that may not have access to attorneys.
- Potential Constitutional Challenges : Some courts have raised concerns that the CTA could violate constitutional rights, particularly the right to privacy. Some have argued that requiring the government to disclose detailed ownership information in the absence of any suspicion of wrongdoing is an invasion of privacy. However, the final decision has not yet been made, and the law remains in effect. Until the issue is resolved in the courts, businesses must comply with the law to avoid fines.
Do I still need to file a BOI report after the new president is elected?
The Corporate Transparency Act (CTA) was signed into law on January 1, 2021, despite opposition from President Trump. President Trump vetoed the bill, but Congress overrode it. Now that Trump has been re-elected, some believe the law is likely to change, given his administration’s emphasis on deregulating businesses. However, changing or repealing the CTA would require action by Congress or FinCEN, and no formal changes have been announced yet. Until such time, businesses will need to comply with the current regulations.
Key Questions About CTA Beneficial Ownership Information (BOI) Reporting
What should be included in the BOI report?
- Basic company information (including name, Doing Business As (DBA), address, EIN)
- Information for each beneficial owner and company applicant:
- Legal name
- birth date
- address
Instead of manually entering the personal information for each beneficial owner and company applicant on the company BOI report, we strongly recommend that you enter the FinCEN Identifier (or FinCEN ID). This will simplify future information updates and provide greater privacy. We will explain this in more detail below.
Who should submit the BOI report?
Most small businesses, such as corporations (S Corps or C Corps) or limited liability companies (LLCs) that are formed by filing official documents with the government, are subject to reporting requirements ( FinCEN’s BOI FAQ C6 ). However, unregistered sole proprietorships are exempt from reporting requirements. Additionally, FinCEN’s Small Entity Compliance Guide lists 23 exceptions, including those for entities that are already subject to regulation and larger businesses with more than $5 million in annual revenue and 20 or more full-time employees.
How do I submit a report?
To file a BOI report, visit the official FinCEN website at https://www.fincen.gov/boi . This site provides a secure portal to file a BOI report, as well as detailed instructions and resources.
Who is the “Beneficial Owner”?
- A beneficial owner is an individual who owns more than 25% of the company or has substantial control . This may include major shareholders and senior executives who make major decisions.
- FinCEN defines “substantial control” broadly. It includes the power to: 1) serve as a senior executive officer; 2) appoint or remove key officers or directors; 3) make significant business or financial decisions; and 4) significantly influence the operations of the company. This definition is intended to track individuals who influence the company’s activities and prevent financial crimes. ( See FinCEN’s BOI FAQs D2&D3 )
- Ownership is also broadly defined. It includes both direct and indirect ownership, including indirect ownership through trusts, contracts, and other structures. Anyone who owns more than 25% of a company, whether through a complex structure or directly, must report. This is to ensure that all individuals with a significant financial interest are accurately identified.
- Special Note on Trusts : If the company is owned by a trust, the structure of the trust may determine who is the beneficial owner. Depending on the specific terms and structure of the trust, the Trustee, Beneficiary, Grantor or Settlor, or Trust Protector may be considered the beneficial owner. Each case must be considered on its own merits. ( See FinCEN’s BOI FAQ D15 .)
Who is a “Company Applicant”?
- The corporate applicant is the person responsible for filing the documents required to formally establish the corporation. For example, if an accountant files the documents on your behalf, that person would be the corporate applicant.
- Companies incorporated or registered on or after January 1, 2024 must report at least one and no more than two company applicants. Company applicants must be individuals; corporations or other entities are not eligible.
- There are two types of corporate applicants: the person who files the documents and the person who directs or manages the filing. For example, if A prepares a document and instructs B to file it, both A and B are corporate applicants. B, who actually files the document, is the “direct filer,” while A, who manages and directs the filing process, is also considered a corporate applicant. B may be A’s spouse, business partner, attorney, or accountant.
Do I need a lawyer to file my report?
You do not necessarily need an attorney to file a BOI report. However, we strongly recommend that you consult with an attorney. Identifying beneficial owners and corporate applicants often requires reviewing legal documents such as Bylaws, employment contracts, trust documents, etc. An attorney can help you accurately prepare your report and avoid penalties. However, this article will provide some helpful tips for those who wish to file their report on their own without an attorney.
Can I work with an accountant or financial advisor when filing my report?
Although consultants other than CPAs or attorneys can assist with filing BOI reports, there are limits to what they can do. Filing BOI reports often involves interpreting legal documents such as trust documents or corporate documents, which constitutes legal work.
Some states, such as New Jersey and Maryland, allow CPAs to provide limited assistance in filing BOI reports. However, even in these states, CPAs must inform their clients that they should consult with an attorney in complex cases. For example, the New Jersey Supreme Court’s Unlicensed Practice of Law Committee has held that filing BOI reports constitutes the practice of law. However, CPAs may file BOIs if they recognize that the case is complex and suggest that the client seek the assistance of an attorney.
Other essential information you should know
Do I also need to report a dissolved company?
If a company is completely dissolved before January 1, 2024, it does not need to file a BOI report. To do so, the company must formally complete the dissolution and complete all procedures, including filing documents, paying taxes and fees, liquidating assets, and closing bank accounts. However, if the company has not completed the dissolution procedures (e.g., leaving bank accounts open or not liquidating assets), it must file a BOI report. ( See FinCEN’s BOI FAQ C13 )
Companies incorporated or registered on or after January 1, 2024 are required to file a BOI report, even if they are dissolved prior to the reporting deadline. Such companies must file the report within 30 or 90 days of incorporation (depending on the year of incorporation). Once the initial report is filed and the company is dissolved, no further updates are required. ( See FinCEN’s BOI FAQ C14 )
When should I update my BOI report?
- If there is a change in the company’s information or the information of its beneficial owner, you must report that change to FinCEN within 30 days. This includes changes in ownership, control, or changes in the beneficial owner’s name, address, or identification (e.g., a new driver’s license).
- Failure to update on time may result in civil penalties of up to $591 per day, adjusted annually for inflation. In the case of willful violations, criminal penalties may include fines of up to $10,000 and imprisonment of up to two years.
What if my business doesn’t have a physical address?
- If your business does not have a physical address in the United States, you must report the principal U.S. location where you operate your business. If you work from home, this is your home address. If your business operates from multiple locations, you can use any U.S. address where you receive important correspondence.
- If your business does not operate from any location within the United States, you must report the address of your Registered Agent or similar representative designated to receive legal documents ( see FinCEN’s BOI FAQ F12 ) .
Who can access the BOI report containing my personal information?
Under the CTA, only a limited number of entities are permitted to access beneficial ownership information. These include federal agencies responsible for national security, intelligence, or law enforcement, and state and local law enforcement with court authorization. Additionally, the Treasury, certain foreign authorities (requested through U.S. federal agencies), and financial institutions may access this information for investigation purposes. Regulatory agencies that oversee financial institutions may also access it to ensure compliance with applicable regulations.
Best Practice Suggestions for Filing BOI Reports
1. Use FinCEN Identifiers (FinCEN IDs) for corporate applicants and beneficial owners
- What is a FinCEN identifier? A FinCEN identifier is a unique number issued by FinCEN that can be used in place of personal information (name, address, date of birth, etc.) on a company’s BOI report.
- Why should I use it? Using a FinCEN ID reduces the burden of repeatedly entering sensitive personal information and simplifies reporting updates when beneficial ownership changes.
- Practice Tip: Encourage all company applicants and beneficial owners to obtain a FinCEN ID. This will make reporting easier and provide greater privacy. Individuals can obtain a FinCEN ID by visiting https://fincenid.fincen.gov/ .
2. Report all persons listed on the company and trust documents.
- Why is over-reporting safer? If you are not sure who the beneficial owners are, it is a good idea to report all the people listed in the bylaws, shareholder agreement, and trust documents. This will help you avoid penalties for omission.
- Examples of documents to review:
- Company Bylaws
- Company Operating Agreement
- Trust Agreement
- Shareholder Agreement
- Meeting minutes and resolutions
- Stock Ledger
- Employment Agreement
- Practice tip: When in doubt, comply with the regulations by reporting all key personnel in the company and trust documents.
3. Update your legal documents
- Why is it important to update? Outdated company and trust documents can cause confusion and inaccuracies in BOI reports. Keeping these documents up to date will help to clarify who the beneficial owners are. This is especially important if the beneficial owners are reluctant to provide personal information or are difficult to contact. Regularly updating documents will help to maintain clarity about the ownership structure and ensure compliance.
- Practice Tip: Review and update your documentation before submitting your BOI report to ensure your records are accurate and compliant with FinCEN requirements.
4. Get advice from a lawyer about your situation.
- Why is legal advice important? Every business is different, and the process of determining beneficial owners can be complex. An attorney can review documents, provide tailored advice, and help you avoid costly mistakes.
- When should I consult a lawyer?
- If trusts or complex ownership structures are involved
- When interpreting CTA requirements is difficult
- If you want to avoid errors when submitting your report
- If you need to update legal documents to reflect a change in ownership or control
- PRACTICAL TIP: Legal fees can be expensive, but consulting with an attorney can help you avoid high fines. If cost is an issue, consider a limited legal consultation where only the most important parts of your filing are reviewed.
Conclusion
CTA’s reporting requirements add another layer of work to already busy small business owners. While complying with this new law can be a hassle, following the requirements is the best way to avoid high fines. We’ve provided information in this article to help you file your report yourself, but if you need additional assistance, we’re here to help.