In 2021, Congress enacted the Corporate Transparency Act (“CTA”), creating a new beneficial ownership reporting requirement. The purpose of the CTA was to make it more difficult for bad actors to hide ill-gotten gains through shell companies and opaque corporate structures. The Financial Crimes Enforcement Network (“FinCEN”), a bureau within the Department of Treasury, has implemented rules requiring certain entities to disclose their beneficial ownership information. Compliance is mandatory to avoid penalties, both civil and potentially criminal, as discussed below.
Reporting companies (defined herein) must report information about the individuals who, directly or indirectly, own or control at least 25% of the company, or exercise substantial control over the company. Individuals with “substantial control” over a company are those individuals who hold influence over essential decisions within the company (e.g., structural or financial decisions). There are exceptions for minor children (where the parent or guardian is reported as a beneficial owner); nominees; employees (excluding senior executive officers); future inheritors; and creditors. There is no maximum number of beneficial owners that an organization might need to report. If there is no one individual who directly or indirectly owns or controls 25% or more of the company, the company should report all individuals who exercise substantial control as beneficial owners. All companies required to report under the CTA, need to report at least one beneficial owner.
Unless updated or corrected information needs to be provided, this is a one-time rather than an annual filling.
What Needs to Be Done
The CTA requires the collection of all beneficial owners’ full legal names, birth dates, addresses, and unique identification numbers (i.e., passport, driver’s license number, or a unique identifier provided by federal, state, or local government). Submit the required information through FinCEN’s e-filing portal at https://boiefiling.fincen.gov/. A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial beneficial ownership information (BOI) report. A reporting company created or registered during 2024 will have 90 calendar days after receiving notice of the company’s creation or registration to file its initial report. This 90-day deadline runs from the earlier of the date on which the company receives actual notice that its creation or registration is effective or the date on which a secretary of state or similar official first provides public notice of its creation or registration. A reporting company created or registered on or after January 1, 2025, will have 30 calendar days from actual or public notice of its creation or registration to file its initial BOI reports with FinCEN. There is an extended filing deadline, for persons affected by Hurricanes Beryl, Debby, Frances, Helene, or Milton.
What Entities Subject to the Requirement?
The CTA reporting requirements apply only to “reporting companies” defined to include certain domestic and foreign entities. On the domestic side: corporations, limited liability companies (LLCs), business trusts in certain jurisdictions, and other entities created by filing a document with a secretary of state or similar office are subject to the requirement. On the foreign side, any non-domestic company registered to do business in the United States must file.
Which Entities are Exempt?
FinCEN has listed 23 exemptions to the BOI reporting requirements. Generally, entities exempt from filing beneficial ownership with FinCEN file similar information with other federal agencies, such as the Securities and Exchange Commission or the Internal Revenue Service. These exempt entities include, but are not limited to:
- Publicly traded companies
- Governmental authorities
- Banks and credit unions
- Investment companies and advisors
- Subsidiaries of exempt entities: if a parent entity qualifies for a BOI reporting exemption, its wholly owned subsidiaries are typically exempt as well.
- Tax-exempt entities
- Large operating companies – companies with 20 or more full-time employees in the United States, an operating presence at a physical address within the United States, that filed federal tax or information returns for a prior year with $5 million or more in gross receipts or sales, excluding gross receipts or sales outside the United States – are exempt
- Inactive businesses
- Pooled investment vehicles managed by SEC-reporting entities, such as banks, credit unions, broker dealers in securities, investment companies, registered investment advisors, and venture capital fund advisers, are exempt. A pooled investment vehicle that is operated or managed by an advisor that is not registered with the SEC is not an exempt entity would not qualify the entity for the pooled investment vehicle exemption.
The full list of exempt entities can be found at https://www.fincen.gov/boi-faqs#C_2%20a.
Potential Penalties for Non-Compliance
FinCEN’s present focus is on educating the public, particularly small businesses, about the new BOI reporting requirements. Nonetheless, an entity that willfully fails to file (or files late), can be fined $500 a day for each day the violation continues or a one-time fine of $10,000, and/or the individuals responsible for complying with the FinCEN requirements could face imprisonment for up to two years.
Impact on IRAs and Checkbook IRAs
Standard IRAs generally do not have to comply with the new filing requirements, because IRAs are not required to inform states of their existence.
Self-directed IRAs with check-writing privileges through an entity established by the IRA for administrative convenience – commonly known as “checkbook IRAs” – are subject to reporting. Checkbook IRAs are often established via a special purpose LLC. This allows the owners to invest directly into alternative assets without the need for custodian approval of each transaction. That being the case, an IRA-owned LLC (i.e., a checkbook IRA) is considered a business entity and will be required to report beneficial ownership.
Establishing a checkbook IRA will now introduce additional government involvement. If you prefer minimal federal interaction, this may influence your decision to set up such an arrangement.
Legal Challenges
Although there have been various legal challenges to the CTA and the BOI reporting requirements none of these actions are expected to prevent the BOI reporting requirements from going into effect by the January 1, 2025, deadline.
Please consult with the attorney with whom you work at The Wagner Law Group if you have any questions about the need to file or need assistance with filing.
