Your business may soon have to meet new reporting requirements that take effect on January 1, 2024. Under the Corporate Transparency Act (CTA), enacted in 2021, certain companies will be required to provide information related to their “beneficial owners” — the individuals who ultimately own or control the company — to the Financial Crimes Enforcement Network (FinCEN). Failure to do so may result in civil or criminal penalties, or both. Our friends at Councillor, Buchanan & Mitchell (CBM) have provided the following helpful guide for WANADA members.
Understanding the CTA
The CTA is intended to reduce exposure to serious crimes, including terrorist financing, money laundering and other nefarious activities. But it could also open the door to the inspection of family offices, investment angels and other private individuals who’ve generally been shielded from scrutiny in the past. A business that’s characterized as a “reporting company” has either 30 days or one year to comply with the new rules.
The CTA’s rules generally apply to both domestic and foreign privately held reporting companies. For these purposes, a reporting company includes any corporation, limited liability company or other legal entity created through documents filed with the appropriate state authorities. A foreign entity includes any private entity formed in a foreign country that’s properly registered to do business in the United States.
The complete list of entities that are exempt from the reporting rules is too lengthy to include here — ranging from government units to not-for-profit organizations to insurance companies and more. (Read: “Tax Exempt Organizations and the Corporate Transparency Act”). Notably, an exemption was created for a “large operating company” that employs more than 20 employees on a full-time basis, has more than $5 million in gross receipts or sales (not including receipts and sales from foreign sources), and physically operates in the United States. However, many of these companies already must meet other reporting requirements providing comparable information.
If an entity initially qualifies for the large operating company exemption but subsequently falls short, it must then file a BOI report. On the other hand, an entity that might not currently qualify can update its status with FinCEN if it later does and obtain an exemption.
Determining Who Is and Isn’t a Beneficial Owner
Under the CTA, a nonexempt entity must provide identifying information about its beneficial owners. A beneficial owner is defined as someone who, directly or indirectly, exercises substantial control over a reporting company, or owns or controls at least 25% of its ownership interests. An individual has substantial control of a reporting company if he or she:
- Is a senior officer of the company,
- Has authority over the senior officers or a majority of the company’s board,
- Has substantial influence over the company’s important decisions, or
- Has any other type of substantial control over the company.
This generally includes individuals who are directly related to ownership interests in the company, but indirect control may also result in classification as a beneficial owner. Individuals who aren’t treated as beneficial owners of a reporting company under the CTA include:
- Someone acting as a nominee, intermediary, custodian or agent on behalf of a beneficial owner,
- An employee of the reporting company who has substantial control over the entity’s economic benefits because of his or her employment status (but only if the individual isn’t a senior officer of the entity),
- An individual whose only interest in a reporting company is a future interest through a right of inheritance,
- Any creditor of the reporting company (unless the creditor exercises substantial control or has a 25% ownership interest in the reporting company), or
- A minor child.
However, for minor children, the reporting company must report information about each child’s parent or legal guardian.
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