Initially published on May 31, 2023, most recently updated on December 11, 2023. 

Hinckley Allen has assembled a multi-disciplinary team to help companies navigate the new Corporate Transparency Act (“CTA”) reporting requirements, having closely followed the CTA since its enactment. Our team is familiar with the CTA’s requirements and ramifications, and are ready to assist clients as they comply with this new law, as well as help them understand the impact this may have on their companies and transactions.

Beginning on January 1, 2024, many companies (including corporations and limited liability companies) will be required to report beneficial ownership information (“BOI”) to the Financial Crimes Enforcement Network bureau (“FinCEN”) of the U.S. Department of the Treasury.^[1]  The BOI includes personal identifying information for each individual who exercises substantial control over the company, owns 25% or more of the company’s interests, or filed the paperwork to create the company. Companies required to make BOI reports (“Reporting Companies”) must file an initial report and then file updates whenever the BOI changes. A late filing may result in penalties of $500 per day after the filing’s deadline.

The federal government established the BOI reporting regime to aid in fighting money laundering and other financial crimes by revealing the owners and controllers of Reporting Companies. Accordingly, BOI will be available to government agencies for national security, intelligence, and law enforcement, but will not be shared with the public and is not accessible via Freedom of Information Act requests.

The BOI reporting requirements were detailed in a final rule published on September 30, 2022^[2] (the “Rule”). This article will provide a high-level review of the Rule’s requirements for who must file, the required BOI, and when filings must be made, concluding with suggestions of steps taxpayers and advisors can take to prepare to file the new reports. Additional information is available at FinCEN’s Beneficial Ownership Information website, including a Compliance Guide.

Who Will File

Reporting Companies include U.S. corporations, limited liability companies, and other entities which are created by filing a document with the Secretary of State or similar office in a U.S. State or tribal nation (a “U.S. Jurisdiction”).^[3]

The Rule provides significant exceptions to the definition of Reporting Companies, including large operating companies (which must employ more than 20 U.S. full-time employees, have a physical office in the U.S., and have revenue of more than $5 million for the prior tax year), governmental authorities, tax-exempt entities, banks, credit unions, insurance companies, accounting firms, public utilities, and other entities which are already regulated. Please note that the large operating company exception will not be initially available to companies created on or after January 1, 2024, because new companies will not have sales for the prior tax year.

BOI Information

A Reporting Company’s BOI consists of (a) its own legal name, trade name (if any), address, U.S. Jurisdiction, and Tax Identification Number; and (b) the name, date of birth, address, and government-provided identification document (e.g., passport, driver’s license, or other identification document issued by a U.S. state or local government or tribal nation) of individuals who own, control, or created the Reporting Company. No other companies or entities must be reported on – only the individual people who meet the criteria.

Reports will be made through an online portal which will be rolled out on January 3, 2024.

Individuals who must be included in the BOI are split into two groups, beneficial owners and company applicants.

Beneficial Owners

A beneficial owner is “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.”^[4] An individual exercises substantial control over a Reporting Company if she serves as a senior officer (e.g., President, CEO, CFO, COO, General Counsel), has authority over the appointment or removal of any senior officer or of a majority of the Board, or has substantial influence over important decisions of the Reporting Company.^[5] The Rule considers the actual powers and roles of the individual, rather than being limited to specific titles, including a catch-all for individuals having “any other form of substantial control over the reporting company.”^[6] The control can be exercised directly or indirectly through Board representation, rights associated with financing arrangements, intermediate entities, or any other pertinent arrangements.

There will always be at least one beneficial owner, and there is no limit on how many individuals might be included in this category.

For the 25% ownership test, individuals are assigned all of the Reporting Company’s interests that they hold directly or indirectly through any arrangement. Options and put or call rights are generally deemed to be exercised in this analysis, but may be left out of the calculation to the extent they are held by third parties without the Reporting Company’s knowledge or involvement. For trusts that hold any ownership interests, their trustees, beneficiaries, grantors and settlors may be deemed to hold those interests indirectly. Once each individual’s ownership has been resolved, it will be divided by the total outstanding ownership interests to determine if the individual owns 25% or more of the interests (for corporations, the greater ownership percentage of the individual’s voting power or value will be used).

Certain individuals are excluded from being a beneficial owner, including minors (although a parent/guardian’s information must be reported), nominees or other agents acting on behalf of an individual, non-senior officer employees whose substantial control is derived exclusively from their employment, and many creditors.

Company Applicant

A Reporting Company may have one or two company applicants. The individual who directly files the document creating the Reporting Company is always a company applicant. If a different individual is primarily responsible for directing or controlling the filing, that person is a second company applicant. Company applicants may be external advisors such as lawyers or paralegals.

There are two important exceptions for company applicant BOI data. First, Reporting Companies that already exist prior to January 1, 2024, do not need to include their company applicants in their BOI reports. Second, changes to company applicant data do not trigger an obligation to file an updated report.

FinCEN Identifier

Individuals will be able to apply for a FinCEN identifier on the portal by providing the BOI data that a Reporting Company would otherwise provide in its report. The individual can then provide only its FinCEN identifier to Reporting Companies, who in turn only have to provide the individual’s FinCEN identifier in their BOI reports. If there are any changes or inaccuracies in the reported information, the individual will have 30 days to report them.

When to File

Reporting Companies that exist prior to January 1, 2024, must file their initial report with FinCEN no later than January 1, 2025. Reporting Companies that are created on or after January 1, 2024, but before January 1, 2025, must file their initial report with FinCEN within 90 days of creation. Reporting Companies that are created on or after January 1, 2025, must file their initial report with FinCEN within 30 days of creation.

Whenever a Reporting Company’s BOI changes, it must file an updated report within 30 days of the change. BOI changes that require an update include changes in the Reporting Company’s data, changes in the beneficial owners’ data (unless the beneficial owner has a FinCEN identifier, in which case the beneficial owner must file an update), changes in who is a beneficial owner, and the Reporting Company becoming eligible or ineligible for an exception to the definition of Reporting Companies (e.g., it now qualifies or no longer qualifies for the large operating company exception).

If there is an error in a Reporting Company’s prior BOI report, it must file a corrected report within 30 days of the date on which it either becomes aware of or has reason to know of the error.

There is no regular filing obligation once a Reporting Company files its initial BOI report, but it must monitor for any changes that require it to file an updated or corrected report.

Please note that, due to the security requirements for BOI data, you may not be able to see the information you previously entered into the portal. You should keep your own records of what has been reported in order to identify any later changes that must be reported.

If a Reporting Company does not file its BOI report by the above deadlines, it can face civil penalties of $500 per day, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000.

What to Do Now

• Existing Reporting Companies should start to identify their beneficial owners and gather the required data for each beneficial owner.
• Individuals who are likely to be beneficial owners or company applicants of multiple entities may want to apply for a FinCEN identifier once the portal is available. The identifier simplifies the Reporting Companies’ reporting process and allows the individual not to provide their data (including the scanned passport or driver’s license) to Reporting Companies.
• Companies should consider including provisions in their governing documents to ensure they can gather the information to identify and report on any beneficial owners and be indemnified by any noncompliant individuals. They could also require beneficial owners to apply for a FinCEN identifier to minimize the Reporting Companies’ BOI reporting obligations.

The Hinckley Allen team is available to answer your questions and assist with the CTA requirements that may affect your business.

[1] Section 6403 of the Corporate Transparency Act of 2020, which was passed as Title LXIV of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Public Law 116-283 (January 1, 2021).

[2] 31 C.F.R. § 1010.380 (2022). An additional rule was published on November 29, 2023, that allows Reporting Companies created in 2024 to take 90 days to make their initial report rather than 30 days.

[3] Foreign entities which must register with a Secretary of State or similar office to do business in a U.S. Jurisdiction are also Reporting Companies. The same rules apply as to domestic Reporting Companies, except that the filing of creation documents is replaced by the filing of the Reporting Company’s first registration with a U.S. Jurisdiction.

[4] 31 C.F.R. § 1010.380(d).

[5] Examples of important decisions include those related to the management of the business and principal assets, major expenditures, reorganizations, dissolutions, mergers, compensation of senior officers, significant contracts, and amendments of substantial governance documents.

[6] 31 C.F.R. § 1010.380(d)(1)(i)(D).