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New FinCEN Reporting Obligation Starts Jan. 1, 2024

December 8, 2023

KSM

In a landmark move to enhance transparency and combat financial crimes, the Corporate Transparency Act introduced a new reporting requirement for Beneficial Ownership Information (BOI) to be filed with the Financial Crimes Enforcement Network, or FinCEN. Pursuant to this new requirement, reporting companies must disclose detailed information about their Beneficial Owners and Company Applicants.

There are many aspects of this new BOI reporting requirement that are legal in nature and outside the scope of traditional tax and accounting services. Thus, consultation with legal counsel is recommended for additional assistance.

When Does the BOI Reporting Requirement Take Effect?

Reporting Companies that were created or registered to do business prior to Jan. 1, 2024, must file their initial BOI report by Jan. 1, 2025.

Reporting Companies created or registered to do business in 2024 must file their initial BOI report within 90 days of the effective date of their creation or registration. However, Reporting Companies created or registered to do business on or after Jan. 1, 2025, will only have 30 days to file their initial BOI report.

How Does a Reporting Company File Its BOI Report?

Reporting Companies will provide their BOI information through an online filing system that will be available via FinCEN’s website. FinCEN’s online filing system is not available for review at this time and FinCEN cannot accept reports before Jan. 1, 2024.

What Entities Are Considered Reporting Companies for Purposes of BOI Reporting?

There are two broad types of entities that will be considered Reporting Companies:

  1. Domestic Reporting Companies: Corporations, limited liability companies, and any other entity created by the filing of a document with a secretary of state or any similar office in the United States. Generally, you should expect every domestically created legal entity to be a Reporting Company for this purpose.
  2. Foreign Reporting Companies: Entities formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.

This is an entity-by-entity determination. There is no aggregation concept to allow consolidated reporting of related entities. However, there is a list of exemptions that will exempt many entities from the BOI reporting requirement.

What Types of Entities Are Exempt from the BOI Reporting Requirements?

There are 23 types of entities exempt from the BOI reporting requirement, including:

  • Large Operating Company: Entities that have a physical presence within the United States that employ more than 20 full-time employees and reported more than $5,000,000 in gross receipts on the previous year’s federal income tax return. These determinations are made without regard to foreign employees and foreign sourced gross receipts.
  • Tax-Exempt Entity: Entities that are described in Section 501(c) of the Internal Revenue Code and exempt from income tax under Section 501(a) of the code. This exemption also includes certain political organizations exempt under Section 527(a) of the code and certain charitable trusts.
  • Subsidiary Entity: Entities that are controlled or wholly owned by certain exempt entities.
  • Entities that are already regulated by another government agency like the SEC or the CFTC are likely to be exempt.

Who Is a Beneficial Owner of a Reporting Company?

A Beneficial Owner is an individual who either directly or indirectly:

  • Exercises substantial control over the Reporting Company; or
  • Owns or controls at least 25% of the Reporting Company’s ownership interest.

Determining who is deemed to exercise substantial control over a Reporting Company will require a detailed analysis of the facts and circumstances unique to each entity and each potential individual. Generally, the definition includes anyone who directs, determines, or has substantial influence over important decisions made by the entity without regard to whether or not they hold an ownership interest in the entity. All senior officers of an entity are deemed to exercise substantial control, and thus are considered Beneficial Owners. Similarly, any individual who can appoint or remove any senior officer and/or a majority of an entity’s board of directors is a Beneficial Owner. However, the definition excludes anyone other than a senior officer whose substantial control over the entity is derived solely from their status as an employee of the entity.

The definition of “ownership interest” is expansive, so it will be up to each individual entity to identify all applicable ownership interests. This will require consideration of convertible instruments, profits interest, options, and any other instrument or arrangement that could be considered to establish ownership.

The nuance involved with identifying all Beneficial Owners of a company is generally considered a legal matter that requires consultation with legal counsel regarding any uncertain areas of the law.

Who Is a Company Applicant?

A Reporting Company can have up to two Company Applicants. The first is the individual who physically registered the entity. The second is the individual who directed the first individual to complete the registration.

Company Applicant information is not required for entities created or registered before Jan. 1, 2024.

What Personal Information Needs To Be Reported for Each Beneficial Owner and Company Applicant (if Applicable)?

The Reporting Company will need to provide the following with respect to each individual that constitutes a Beneficial Owner or Company Applicant:

  • Full legal name
  • Date of birth
  • Residential address
  • Unique identifying number from an acceptable identification document such as a passport or U.S. driver’s license
  • A digital copy of the non-expired passport, driver’s license, or other acceptable identification document showing the unique identifying number

For individuals who have a FinCEN identifier, the reporting company may report the FinCEN identifier in lieu of the other required information.

What Happens if the Identity or Personal Information of a Reporting Company’s Beneficial Owners Change?

If there are any changes to a Reporting Company’s BOI information after the company has already filed its initial report, the Reporting Company has 30 days to file an updated report. This requirement is triggered by the addition or removal of Beneficial Owners as well as changes to a Beneficial Owner’s personal information. This additional reporting burden can be eased by reporting FinCEN identifiers for all Beneficial Owners rather than their detailed personal information.

How Does an Individual Obtain a FinCEN Identifier?

Individuals will be able to apply for FinCEN identifiers electronically sometime after Jan. 1, 2024. FinCEN has not released details on this process yet.

For more information on the new reporting requirement, FinCEN offers detailed and helpful guidance on BOI reporting, including:

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