CAIN HIBBARD CLIENT ALERT
Publish date: November 11, 2024
Summary
The deadline for entities to make the required filing with the Financial Crimes Enforcement Network (FinCEN) under the Corporate Transparency Act (the “CTA”) is fast approaching. Willful failure to file exposes covered entities to significant civil and criminal penalties. Filing is relatively simple and can be done electronically at www.fincen.gov.
Background
Congress enacted the CTA on January 1, 2021, as part of the National Defense Authorization Act, with the intent to help prevent and combat money laundering, terrorist financing, corruption and tax fraud. The CTA establishes a reporting requirement for corporations, limited liability companies and other entities formed or registered to do business in the United States that requires those entities to report information about their beneficial owners to FinCEN, a bureau within the U.S. Department of the Treasury.
Reporting Requirements
The reporting requirements under the CTA took effect on January 1, 2024. Unless exempt from the reporting requirement, all business entities formed prior to that date have until January 1, 2025, to comply with the CTA’s reporting requirements by filing an initial beneficial ownership information report (a “BOI report”) with FinCEN.
A business entity formed in 2024 must file a BOI report within 90 calendar days of the earlier of (a) the entity’s receipt of actual notice that its formation has become effective or (b) the secretary of state of the state in which the entity was formed first providing public notice of the entity’s formation.
A business entity formed on or after January 1, 2025, will have 30 calendar days to file its initial BOI report after receiving actual or public notice that the entity has been formed, whichever occurs first.
Entities Exempt from Reporting
The CTA lists 23 categories of entities that are exempt from reporting. The list includes tax-exempt entities, large operating companies, banks, insurance companies, accounting firms, public utilities and subsidiaries of certain exempt entities.
Tax-exempt entities include any organization that is described in section 501(c) of the Internal Revenue Code and exempt from tax under section 501(a).
For an entity to qualify as a “large operating company,” it must (a) employ more than 20 full-time employees in the United States, (b) have an operating presence at a physical address within the United States and (c) have filed a federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales (excluding gross receipts or sales from sources outside the United States).
Information to be Provided in BOI Report
When completing a BOI report, an entity must provide the following information:
- The entity’s legal name
- Any trade name (DBA) used by the entity
- The address of the entity’s principal place of business
- The jurisdiction of the entity’s formation
- The entity’s taxpayer identification number
The report also requires the following information regarding each beneficial owner of the entity:
The individual’s legal name, date of birth and residential address
A unique identifying number from an acceptable identification document (U.S. passport, state driver’s license, identification document issued by a state, local government or Indian Tribe or, if none of the foregoing are available, foreign passport)
The name of the state or jurisdiction that issued the acceptable identification document.
An image of the acceptable identification document.
For purposes of the CTA, a beneficial owner is an individual who either directly or indirectly: (1) exercises substantial control over the reporting entity, or (2) owns or controls at least 25% of the reporting entity’s ownership interests. An individual can exercise “substantial control” over an entity if such individual directs, determines or exercises substantial influence over important decisions the entity makes. This includes senior officers (e.g. president, chief executive officer, chief operating officer, chief financial officer, general counsel or other officer who performs similar functions) of the entity and individuals who have authority over the appointment or removal of senior officers or a majority of the entity’s governing board. “Ownership interests” generally refer to arrangements that establish ownership rights in the entity, such as shares of stock and membership interests.
How to Submit a BOI Report; Updates and Corrections to information reported; Filing Frequency
BOI reports are submitted electronically through FinCEN’s Beneficial Ownership Secure System, which can be found at www.fincen.gov. There is no fee for accessing the system or filing the report.
If there is any change to information required to be reported in the BOI report about the entity or its beneficial owners, the entity must file an updated report no later than 30 days after the date of the change.
If an entity determines that any information contained in a BOI report was inaccurate when the report was submitted, the entity must correct the report no later than 30 calendar days after the entity becomes aware of the inaccuracy.
Once an initial BOI report is filed, no additional reports are required until such time as there is a change in the information reported or an inaccuracy discovered that requires the submission of an updated or corrected report, as applicable.
Penalties for Non-Compliance
A person who willfully violates the CTA’s reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues, but that amount is adjusted annually for inflation. As of April 2024, the penalty had increased to $591 per day. The person may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000. Potential violations include willfully failing to file a beneficial ownership information report, willfully filing false beneficial ownership information, or willfully failing to correct or update previously reported beneficial ownership information.
Both individuals and corporate entities may be held liable for willful violations. This may include not only an individual who files (or attempts to file) false information with FinCEN, but also anyone who willfully provides the filer with false information to report. Individuals and corporate entities may also be liable for willfully failing to report complete or update beneficial ownership information; in such circumstances, individuals can be held liable if they either cause the failure or are a senior officer of the entity at the time of the failure.
Additional information
Additional information regarding the CTA and its reporting requirements may be found on the Frequently Asked Questions page of the FinCEN website, which can be found at https://www.fincen.gov/boi-faqs#H_1.