Beneficial Ownership Information Reporting Update

The Corporate Transparency Act (CTA), Pub. L. 116-283 § 6401, et seq., requires non-exempted companies to report information about their companies and their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), beginning in 2024. The CTA requires millions of small businesses, including small LLCs, corporations, and limited partnerships, to file beneficial ownership information (BOI) reports in 2024.

Purpose of the Law

Many in Congress had been attempting for years to pass legislation to address the problem of shell corporations contributing to financial crimes: money laundering, tax fraud, human and drug trafficking, foreign corruption, etc. A shell corporation is a legal entity with no (or minimal) employees, customers, business, or assets. Although shell corporations serve many legitimate purposes, it’s also possible to disguise the identity of interested individuals and the flow of money by layering shell companies on top of each other, hiding the identity of the true owners. The House and the Senate both passed the CTA in 2020, but it was vetoed by the President.  The law was enacted January 1, 2021, after two-thirds of the House and Senate voted to override the veto.

Impact and Administration

The impact of the CTA is significant. States are responsible for business registrations. This law introduces new federal requirements. This law impacts small businesses, not large entities. This law requires an estimated 32 million existing businesses and 5 million new entities to file reports to disclose their beneficial owners in 2024.

The CTA requires the Financial Crimes Enforcement Network (FinCEN) to establish and maintain a national registry of beneficial owners of entities that are otherwise not subject to disclosure regulations. FinCEN is a bureau of the U.S. Treasury. Although administered by the Treasury Department, the CTA is not tax legislation. The IRS has no oversight or involvement in the law’s implementation.

Unauthorized use or disclosure of BOI is subject to criminal and civil penalties. The information will not be made public. The CTA authorizes FinCEN to share the collected information with government agencies, financial institutions, and financial regulators, subject to safeguards and protocols. FinCEN has stated that it will take a phased approach to providing access to those authorized to obtain the information.

• The first phase, beginning in the spring of 2024, was a pilot program for a handful of Federal agency users.
• The second phase, expected in the summer of 2024, extends access to Treasury offices and other Federal agencies engaged in law enforcement and national security activities that already have memoranda of understanding for access to Bank Secrecy Act information.
• The third phase, expected in the fall of 2024, will extend access to additional Federal agencies engaged in law enforcement, national security, and intelligence activities, as well as to State, local, and Tribal law enforcement partners.
• The fourth phase, expected in the winter of 2024, will extend access to intermediary Federal agencies in connection with foreign government requests.
• The fifth phase, expected in the spring of 2025, will extend access to financial institutions subject to customer due diligence requirements under applicable law and their supervisors.

FinCEN will provide further guidance on how to request access in the future.

FinCEN Guidance

On September 22, 2022, FinCEN issued final regulations, 31 CFR § 1010.380, which went into effect January 1, 2024.  The regulations supply the details of complying with the law. In addition, FinCEN has issued the Small Entity Compliance Guide, https://www.fincen.gov/boi/small-entity-compliance-guide, and Frequently Asked Questions, https://fincen.gov/boi-faqs to assist entities in their compliance with the law.

Reporting Companies

The rule identifies two types of reporting companies: domestic and foreign. Domestic reporting companies are corporations, limited liability companies (LLCs), or any entities created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe. This generally means that limited liability partnerships, limited liability limited partnerships, some business trusts, and most limited partnerships are also required to file reports if they are not otherwise exempt. Single-member LLCs, disregarded for tax purposes, are not generally exempt from the reporting requirements.The following chart lists the types of domestic entities that are required to report their BOI in 2024.

Domestic Reporting Entities

Entity Type	Reporting Entity (unless exempted)
LLC	Yes
SMLLC	Yes
General Partnership	No
Sole Proprietorship	Not unless corporation or LLC
Limited Partnership	Yes
S Corporation	Yes
C Corporation	Yes
Trust	Not unless required to file with Secretary of State, but trustees or beneficiaries may be beneficial owners of other reporting entities

Foreign reporting companies are corporations, LLCs, or other entities formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office.

Exceptions to Reporting

The FinCEN rule lists 23 types of entities that are specifically excepted from reporting requirements. These are generally excluded from the reporting requirements because other laws regulate these entities and separately require disclosure of BOI. Exempted entities include the following:

1. Certain types of securities reporting issuers.
2. A U.S. governmental authority.
3. Certain types of banks.
4. Federal or state credit unions as defined in section 101 of the Federal Credit Union Act.
5. Bank holding company as defined in section 2 of the Bank Holding Company Act of 1956, or any savings and loan holding company as defined in section 10(a) of the Home Owners’ Loan Act.
6. Certain types of money transmitting or money services businesses.
7. Any broker or dealer, as defined in section 3 of the Securities Exchange Act of 1934, that is registered under section 15 of that Act (15 U.S.C. 78o).
8. Securities exchanges or clearing agencies as defined in section 3 of the Securities Exchange Act of 1934, and that is registered under sections 6 or 17A of that Act.
9. Certain other types of entities registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934.
10. Certain types of investment companies as defined in section 3 of the Investment Company Act of 1940, or investment advisers as defined in section 202 of the Investment Advisers Act of 1940.
11. Certain types of venture capital fund advisers.
12. Insurance companies defined in section 2 of the Investment Company Act of 1940.
13. State-licensed insurance producers with an operating presence at a physical office within the United States, and authorized by a State, and subject to supervision by a State’s insurance commissioner or a similar official or agency.
14. Commodity Exchange Act registered entities.
15. Any public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002.
16. Certain types of regulated public utilities.
17. Any financial market utility designated by the Financial Stability Oversight Council under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010.
18. Certain pooled investment vehicles.
19. Certain types of tax-exempt entities.
20. Entities assisting a tax-exempt entity described in 19 above.
21. Large operating companies with at least 20 full-time employees, more than $5,000,000 in gross receipts or sales, and an operating presence at a physical office within the United States.
22. The subsidiaries of certain exempt entities.
23. Certain types of inactive entities that were in existence on or before January 1, 2020, the date the Corporate Transparency Act was enacted.

Common Exemption Issues

Large Operating Companies

Large Operating Companies are exempt if:

• They employ more than 20 full-time employees in the United States.
• They have filed a Federal U.S. income tax return for the previous year that showed more than $5,000,000 in gross receipts or sales.
• They operate from physical premises in the United States.

FinCEN has clarified that the large operating company exemption requires that the entity itself employ more than 20 full-time employees in the United States. It does not permit consolidation of the employee count across multiple entities. Similarly, if an exempt entity controls some but not all of the ownership interests of the subsidiary, the subsidiary does not qualify for the exemption. To qualify, a subsidiary’s ownership interests must be fully, 100 percent owned or controlled by an exempt entity.

Dissolved Companies

According to a July 2024 FAQ, a company is not required to file a BOI report if it ceased to exist as a legal entity before January 1, 2024, meaning that it entirely completed the process of formally and irrevocably dissolving. A company that ceased to exist as a legal entity before the BOI reporting requirements became effective January 1, 2024, was never subject to the reporting requirements and thus is not required to report its BOI to FinCEN.

Conversely, if a reporting company continued to exist as a legal entity for any period on or after January 1, 2024, then it is required to report its BOI to FinCEN, even if the company wound up its affairs and ceased conducting business before January 1, 2024. Similarly, if a reporting company was created or registered on or after January 1, 2024, and subsequently ceased to exist, then it is required to report its BOI to FinCEN—even if it ceased to exist before its initial BOI report was due. There is no requirement for the reporting company to file an additional report with FinCEN noting that the company has ceased to exist.

Example

In 2020, Randy, Georgia, and Karl formed RGK, Inc., to provide custom farming to producers in the region. Randy, Georgia, and Karl are the only employees, directors, and officers of the corporation. They each own 1/3 of the corporate shares.

In October of 2023, RGK, Inc., ceased conducting business and wound down all business affairs. Its articles of dissolution were filed on January 2, 2024, and the state officially determined the entity ceased to exist in 2024. Under FinCEN guidance, RGK, Inc. is required to file a BOI report by January 1, 2025, because it was not officially dissolved prior to January 1, 2024. It appears the owners of RGK, Inc. will continue to have an obligation to update personal information that changes within 30 days, although this is not clearly specified in FinCEN guidance.

Inactive Entities

FinCEN applies a narrow definition to the inactive entity exemption. The following FinCEN chart lists the six requirements to qualify.

Inactive Entity Exemption

Deadlines for BOI Reports

Reporting companies created or registered before January 1, 2024, must file their BOI report on or before January 1, 2025. Reporting companies created or registered on or after January 1, 2024, but before January 1, 2025, have 90 days after creation to file their BOI reports. Reporting companies created on or after January 1, 2025, will have 30 days after creation or registration to file their BOI reports. Once the initial report is filed, both existing and new reporting companies must file updates within 30 days of a change in their BOI.

FinCEN began accepting reports electronically on January 1, 2024. The person filing the report is required to certify that the report is true, correct, and complete.

Updating BOI Reports

Once a reporting company has filed its first report, it must file a new report any time the reported information changes, making the prior report inaccurate. Reporting companies will have 30 days to report any changes or updates to reported information. The 30 days begins after the company becomes aware of or has reason to know of an inaccuracy in a prior report. Any reporting company that no longer meets the requirements of an exemption from reporting shall file its report within 30 calendar days after it no longer qualifies for the exemption.

Reports and updates must be filed online at https://boiefiling.fincen.gov. Entities may submit information directly into an online portal or download a fillable PDF, complete the information, and submit the completed form. The company can then save the PDF in its own files for future use. FinCEN rules specify that updated BOI reports require all fields to be resubmitted, including information that has not changed. If a company files its initial BOI report using the fillable PDF, it may pull up its saved copy, update the information that has changed and resubmit the form. If it used the online portal, it must resubmit all of the data.

Information That Must Be Reported

A reporting company must disclose:

• full legal name and any trade name or DBA;
• complete address, including the street address of the principal place of business for U.S. companies and primary U.S. location for other businesses;
• State, Tribal, or foreign jurisdiction in which it was formed or first registered, depending on whether it is a U.S. or foreign company; and
• Taxpayer Identification Number (TIN).
  • For domestic entities, this is the IRS TIN, including an employer identification number (EIN). For foreign entities without a TIN, a tax identification number issued by a foreign jurisdiction and the name of that jurisdiction should be entered.

Additionally, for each beneficial owner and each company applicant (if required), the company must provide the individual’s:

• full legal name;
• birthdate;
• complete address; and
  • For company applicants who form or register an entity in the course of the company’s business, this includes the street address of the company applicant. For all individuals, beneficial owners and applicants, the address must be the residential street address of the individual.
• identifying number from a non-expired driver’s license, passport, or other approved document for each individual, as well as an image of the document from which the document was obtained.

Company Applicants

Companies created or registered on or after January 1, 2024, are required to report the company applicants, in addition to beneficial owners. Applicants include (1) the individual who directly files the document that creates, or first registers, the reporting company; and (2) the individual that is primarily responsible for directing or controlling the filing of the relevant document. Companies created or registered before January 1, 2024, are required to report only beneficial owners.

FinCen Identifier

An individual or reporting company may obtain a FinCEN identifier by submitting an application at or after the time that the reporting company submits its initial report. Each identifier is specific to the individual or reporting company. If an individual has obtained a FinCEN identifier, the reporting company may use that identifier in its report instead of listing all of the required information for the individual. A reporting company uses its FinCEN identifier to submit updated reports, as required.

Individuals must report any change to the information they submitted to obtain a FinCEN identifier no later than 30 days after the date on which the change occurred. If there is any inaccuracy in this information, an individual must correct the information no later than 30 days after the date the individual became aware of the inaccuracy or had reason to know of it. Reporting companies with a FinCEN identifier must also update or correct the company’s information by filing an updated or corrected BOI report, as appropriate.

FinCEN is “assessing options” to allow individuals to deactivate a FinCEN identifier so that they do not need to update the information on an ongoing basis. FinCEN will provide additional guidance on this topic in the future.

Identifying Beneficial Owners

In general, beneficial owners are individuals who:

1. directly or indirectly exercise “substantial control” over the reporting company, or
2. directly or indirectly own or control 25% or more of the “ownership interests” of the reporting company.

Substantial Control

Individuals have substantial control of a reporting company if they direct, determine, or exercise substantial influence over important decisions of the reporting company. [31 CFR §1010.380(d)(1)]. Those deemed to exercise substantial control over a reporting company include:

• Senior officers such as chief financial officers, chief executive officers, general counsel, chief operating officers, or any other similar positions, regardless of title
• An individual with authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body)
• An individual who directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding:
  • The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;
  • The reorganization, dissolution, or merger of the reporting company;
  • Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;
  • The selection or termination of business lines or ventures, or geographic focus, of the reporting company
  • Compensation schemes and incentive programs for senior officers;
  • The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;
  • Amendments of any substantial governance documents of the reporting company
• An individual with any other form of substantial control over the reporting company

An individual may directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a reporting company through:

• Board representation;
• Ownership or control of a majority of the voting power or voting rights of the reporting company;
• Rights associated with any financing arrangement or interest in a company;
• Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company;
• Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or
• Any other contract, arrangement, understanding, relationship, or otherwise.

Based on the breadth of the substantial control definition, FinCEN has stated that it expects a reporting company will identify at least one beneficial owner under that definition, regardless of whether (1) any individual satisfies the ownership definition, or (2) exclusions to the definition of beneficial owner apply.

Ownership Interests

Ownership interest (for purposes of determining whether an individual directly or indirectly owns or controls 25% or more of the “ownership interests” of the reporting company) is defined as follows:

• Any equity, stock, or similar instrument; preorganization certificate or subscription; or transferable share of, or voting trust certificate or certificate of deposit for, an equity security, interest in a joint venture, or certificate of interest in a business trust; in each such case, without regard to whether any such instrument is transferable, is classified as stock or anything similar, or confers voting power or voting rights;
• Any capital or profit interest in an entity;
• Any instrument convertible, with or without consideration, into any share or instrument described in above, any future on any such instrument, or any warrant or right to purchase, sell, or subscribe to a share or interest described above, regardless of whether characterized as debt;
• Any put, call, straddle, or other option or privilege of buying or selling any of the items described above  without being bound to do so, except to the extent that such option or privilege is created and held by a third party or third parties without the knowledge or involvement of the reporting company; or
• Any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.

An individual may also directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding, relationship, or otherwise, including:

• Joint ownership with one or more other persons of an undivided interest in such ownership interest;
• Through another individual acting as a nominee, intermediary, custodian, or agent on behalf of such individual;
• With regard to a trust or similar arrangement that holds such ownership interest:
  • As a trustee of the trust or other individual (if any) with the authority to dispose of trust assets;
  • As a beneficiary who:
    • Is the sole permissible recipient of income and principal from the trust; or
    • Has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or
    • As a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust; or
    • Through ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities, that separately or collectively own or control ownership interests of the reporting company.

Exclusions from Definition of Beneficial Owner

The rules provide that beneficial owners do not include:

• A minor child, provided the reporting company reports the required information of a parent or legal guardian of the minor child and states that the individual is the parent or legal guardian of a minor (once the minor child reaches the age of majority, the report must be updated)
• An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual
• An employee of a reporting company, acting solely as an employee, provided that such person is not a senior officer
• An individual whose only interest in a reporting company is a future interest through a right of inheritance
• A creditor of a reporting company

Penalties for Noncompliance

It is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent BOI, including a false or fraudulent identifying photograph or document, to FinCEN in accordance with this section, or to willfully fail to report complete or updated BOI to FinCEN in accordance with the new law.

The CTA authorizes reporting failure penalties of not more than $500 ($591 in 2024, indexed for inflation) for each day that the violation continues or has not been remedied. The statute also calls for criminal penalties of up to two years’ imprisonment and a $10,000 fine. In the preamble to the rule, FinCEN states that it “intends to prioritize education and outreach to ensure that all reporting companies and individuals are aware of and on notice regarding their reporting obligations.” The final rule clarifies that a person is considered to have failed to report complete or updated BOI if the person causes the failure or is a senior officer of the entity at the time of the failure. A penalty safe harbor applies to companies that discover an inaccuracy and file a corrected report within 90 days of the filing of an initial report.

Court Challenges

On March 1, 2024, in the case of National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), a federal district court in the Northern District of Alabama, Northeastern Division, entered a final declaratory judgment, concluding that the CTA exceeds the Constitution’s limits on Congress’ power. The court enjoined the Department of the Treasury and FinCEN from enforcing the CTA against the plaintiffs. Specifically, the court found that Congress did not possess the power to pass this law through its foreign affairs power, pursuant to the Commerce Clause, or through its taxing power.

On March 11, 2024, The Justice Department, on behalf of the Department of the Treasury, filed a Notice of Appeal with the U.S. Court of Appeals for the 11^th Circuit, urging that the CTA is within Congress’ broad powers to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations. While this litigation is ongoing, FinCEN continues to implement the CTA as required by Congress. It will not enforce the CTA against the specific plaintiffs, including Isaac Winkles and the reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association as of March 1, 2024 (approximately 65,000 members). FinCEN will enforce the CTA against all other individuals and entities, pending further developments.

Some additional challenges pending at the time of the writing of this article include the following:

• Boyle v. Yellen, No. 2:24-cv-00081 (D. Maine) (Maine business owner seeking injunctive relief against the CTA, asserting his LLCs conduct only intrastate business and that the CTA violates federalism and the 9th and 10th Amendments of the U.S. Constitution).
• Gargasz v. Yellen, No. 23-cv-02468 (N.D. Ohio) (Licensed attorney and legal association seeking a nationwide injunction, arguing the CTA exceeds Congress’ constitutional power; case is stayed pending results of NSBU v. Yellen appeal).
• Small Business Association of Michigan v. Yellen, No. 1:24-cv-00314, (W.D. Mich.) (Arguing the law is unconstitutionally vague: the definition of beneficial owner includes anyone who “exercises substantial control over the entity,” whether “directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise”).
• NFIB v. Garland, No. 4:24-cv-00478 (E.D. Texas) (Alleging the CTA unconstitutionally compels speech and violates the Commerce Clause).

Professional Considerations

FinCEN has stated that anyone whom the reporting company authorizes to act on its behalf—such as an employee, owner, or third-party service provider—may file a BOI report on the reporting company’s behalf. Third-party service providers, however, must consider the risks. Attorneys and other professionals who form entities for clients must remain knowledgeable about CTA requirements and advise clients with respect to their obligations. Failure to do so may constitute a failure to advise. Most of these professionals will have multiple staff members who are company applicants. When professionals assist clients, they must be clear about communicating that the client is responsible for providing updates in sufficient time to meet the 30-day update requirements. Engagement letters should clearly set forth the responsibilities and obligations of the clients and the advisors. Professionals must work with professional liability insurers to ensure coverage of their CTA work.

Non-attorney tax professionals must stay abreast of their states’ unauthorized practice of law rules with respect to BOI reporting. If tax advisors do not help clients with their CTA reports, those who advise business entities should provide general education about the BOI requirements and inform the client they should seek other counsel to assist with those reports. Engagement letters should specifically exclude BOI reporting from the client engagement or provide the parameters under which the professional is advising. Tax practitioners should also work with insurance providers to understand any limits to their coverage of BOI matters.