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Corporate Transparency Act — Beneficial Ownership Information Reporting Requirement

RE: Corporate Transparency Act — Beneficial Ownership Information Reporting Requirement

Dear Sir / Madam,  

Starting January 1, 2024, a significant number of businesses will be required to comply with the Corporate Transparency Act (“CTA). The CTA was enacted into law as part of the National Defense Act for Fiscal Year 2021. The CTA requires the disclosure of the beneficial ownership information (otherwise known as “BOI”) of certain entities from people who own or control a company. 

It is anticipated that 32.6 million businesses will be required to comply with this reporting requirement. The intent of the BOI reporting requirement is to help US law enforcement combat money laundering, the financing of terrorism and other illicit activity. 

The CTA is not a part of the tax code. Instead, it is a part of the Bank Secrecy Act, a set of federal laws that require record-keeping and report filing on certain types of financial transactions. Under the CTA, BOI reports will not be filed with the IRS, but with the Financial Crimes Enforcement Network (FinCEN), another agency of the Department of Treasury. 

What entities are required to comply with the CTA’s BOI reporting requirement?

Entities organized both in the U.S. and outside the U.S. may be subject to the CTA’s reporting requirements. Domestic companies required to report include corporations, limited liability companies (LLCs) or any similar entity 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.

Domestic entities that are not created by the filing of a document with a secretary of state or similar office are not required to report under the CTA. 

Foreign companies required to report under the CTA include corporations, LLCs or any similar entity that is formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by filing a document with a secretary of state or any similar office. 

Are there any exemptions from the filing requirements?

There are 23 categories of exemptions. Included in the exemptions list are publicly traded companies, banks and credit unions, securities brokers/dealers, public accounting firms, tax-exempt entities and certain inactive entities, among others. Please note these are not blanket exemptions and many of these entities are already heavily regulated by the government and thus already disclose their BOI to a government authority.

In addition, certain “large operating entities” are exempt from filing. To qualify for this exemption, the company must: 

  1. Employ more than 20 people in the U.S.; 
  2. Have reported gross revenue (or sales) of over $5M on the prior year’s tax return; and 
  3. Be physically present in the U.S.

Who is a beneficial owner?

Any individual who, directly or indirectly, either:

  • Exercises “substantial control” over a reporting company, or
  • Owns or controls at least 25 percent of the ownership interests of a reporting company

An individual has substantial control of a reporting company if they direct, determine or exercise substantial influence over important decisions of the reporting company. This includes any senior officers of the reporting company, regardless of formal title or if they have no ownership interest in the reporting company.

The detailed CTA regulations define the terms “substantial control” and “ownership interest” further. 

When must companies file?

There are different filing timeframes depending on when an entity is registered/formed or if there is a change to the beneficial owner’s information.

  • New entities (created/registered in 2024) — must file within 90 days
  • New entities (created/registered after 12/31/2024) — must file within 30 days
  • Existing entities (created/registered before 1/1/24) — must file by 1/1/25 
  • Reporting companies that have changes to previously reported information or discover inaccuracies in previously filed reports — must file within 30 days

What sort of information is required to be reported?

Companies must report the following information: full name of the reporting company, any trade name or doing business as (DBA) name, business address, state or Tribal jurisdiction of formation, and an IRS taxpayer identification number (TIN).

Additionally, information on the beneficial owners of the entity and for newly created entities, the company applicants of the entity is required. This information includes — name, birthdate, address, and unique identifying number and issuing jurisdiction from an acceptable identification document (e.g., a driver’s license or passport) and an image of such document.

Risk of non-compliance

Penalties for willfully not complying with the BOI reporting requirement can result in criminal and civil penalties of $500 per day and up to $10,000 with up to two years of jail time. For more information about the CTA, visit www.aicpa-cima.com/boi. 

Please let us know if you have any questions. 

Sincerely, 

HTJ.Tax

Step 1: Determine if Entity Is a Reporting Company

Entities Subject to Reporting

Reporting companies can be either domestic or foreign.
A domestic reporting company is a corporation, limited liability company (LLC), or entity created by the filing of a document with a secretary of state or any similar office under the laws of a state or American Indian tribe (including U.S. territories and possessions).
A foreign reporting company is a corporation, LLC, or entity formed under the laws of a foreign country that has registered to do business in the United States by filing a document with a secretary of state or equivalent office under the laws of a state or American Indian tribe.
The term “state” is broadly defined to include any U.S. state, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, the U.S. Virgin Islands, and any other commonwealth, territory, or possession of the United States.
Comments
  1. As an initial matter, each entity must be separately evaluated from the parent entity down to ascertain whether it is a reporting company, out of scope of the legislation or exempt from reporting.
  2. We recommend preparing a chart to diagram the ownership structure and the individuals that own or substantially control the various entities, either directly or indirectly.
  3. As mentioned, reporting companies can include entities created or registered at any time (both before and after the CTA enactment date) and include entities formed under U.S. and foreign law, provided those formed under foreign law have registered to do business in the United States.
Also, if reporting is required, each entity must file its own report, depending on when the entity, if domestic, was created or, if foreign, registered. See the discussion of filing deadlines below.
Do not overlook that entities created or registered to do business in areas that are under the authority of the United States may be reporting companies, because the term “United States” encompasses areas other than the 50 states and the District of Columbia.
Entities Out of Scope
Five categories of entities are out of scope. They are:
  • general partnerships;
  • sole proprietorships;
  • unincorporated associations;
  • common-law trusts; and
  • foreign entities that do not register to do business in a state or with an American Indian tribe.

Comment

A statutory trust is not out of scope because it is formed by the filing of a document with a secretary of state.
Entities Exempt From Reporting
There are 23 entity exemptions. They cover entities that are subject to federal and state regulatory reporting obligations that require essentially the same (or more) information as sought under the CTA. Table 1 identifies the exemptions.

Step 2: Beneficial Owners, Beneficial Owner Exceptions, and Company Applicants

Who Is a Beneficial Owner?

A beneficial owner of a reporting company can only be an individual. An individual can be a beneficial owner of a reporting company if he or she, directly or indirectly (i) exercises “substantial control” over a reporting company (substantial control test) or owns or controls at least 25 percent of the ownership interests of a reporting company (25 percent ownership interest test). An individual can be a beneficial owner through the substantial control test, the 25 percent ownership interest test, or both. A reporting company may have multiple beneficial owners, and it is not necessary to identify the test under which an individual is a beneficial owner.

Substantial Control Test

We first address the four criteria for an individual to be a beneficial owner under the substantial control test:

  • Criteria 1. The individual is a senior officer. A senior officer is a president, CEO, chief operating officer, chief financial officer, general counsel, or any other officer, regardless of official title, who performs similar functions.
  • Criteria 2. Appointment or removal authority. Any individual with the ability to appoint or remove any senior officer or a majority of the board of directors or similar body.
  • Criteria 3. Important decision-maker. Any individual who directs, determines, or has substantial influence over important decisions made by the reporting company, such as business, finance, or structure decisions.
  • Criteria 4. Any other form of substantial control.
Comments
FinCEN’s expectation is that a reporting company will have at least one beneficial owner under the substantial control test and that all persons with substantial control be identified.
An individual may exercise substantial control over a reporting company directly or indirectly through a contract, arrangement, understanding, relationship, or otherwise.
Examples of indirect control include (i) an individual controlling one or more intermediate entities that separately or collectively exercise substantial control over a reporting company, (ii) arrangements that establish financial or business relationships with other individuals acting as nominees, and (iii) through a trust.
It is important to emphasize that the substantial control test does not require that the individual have an ownership interest in the entity since it relates solely to the authority to direct, determine, or have substantial influence (either through a power or otherwise) over substantial business decisions. Day-to-day operations generally are not important decisions.

Twenty-Five Percent Ownership Interest Test

We next address the three-step process to determine whether an individual has a 25 percent or more ownership interest in a reporting company:
  • First Step. Identify the ownership interests in the reporting company. The term “ownership interest” includes (i) equity, stock, voting rights; (ii) capital or profits interest; (iii) convertible instrument; ((iv) options; and (v) any other ownership mechanisms.
  • Second Step. Identify the individuals holding ownership interests in the reporting company. An individual may directly or indirectly own or control an ownership interest in the reporting company through contracts, arrangements, understandings, relationships, or otherwise.
  • Direct ownership of ownership interests in a reporting company includes (i) direct ownership in the reporting company, or (ii) joint ownership interests with one or more other persons of an undivided interest in an ownership interest in the reporting company. In the latter case of joint interest, each joint owner is deemed to own or control the full amount of the undivided interest.
  • Indirect ownership interests in a reporting company include (i) an individual owning or controlling one or more intermediate entities that separately or collectively own or control ownership interests in the reporting company; (ii) an individual owning or controlling an ownership interest through another individual acting as a nominee, intermediary, custodian, or agent; or (iii) an individual owning or controlling an ownership interest through a trust, which includes an individual associated with the trust in the following capacities: (a) a trustee (or any other individual) who has the authority to dispose of trust assets; (b) an individual who is the sole permissible recipient of income and principal from the trust, or an individual who has the right to demand a distribution or withdraw substantially all of the trust assets; (c) an individual who is a grantor or settlor with a right to revoke or withdraw trust assets; and (d) other individuals who may be reportable through trust ownership, depending on the facts and circumstances.
  • Third Step. Calculate whether an individual owns or controls 25 percent or more of the ownership interest in a reporting company. There are several rules that must be followed in making this determination. First, if the reporting company has issued options, privileges, or convertible instruments, assume the foregoing instruments have been exercised or converted in the following calculations. Second, for stock in a reporting company that is a corporation (or is treated as a corporation for federal income tax purposes, calculate each individual’s ownership interest as a percentage of the total shares of stock issued. In situations involving shares with more voting power or value than other shares, a more complex calculation must be made, based on the larger of two percentages: the greater of the individual’s (a) voting power or (b) value of ownership interests to the outstanding voting power or value of all classes of ownership interests. Third, the ownership interest calculation for capital and profits interests in a partnership is made by reference to the comparison of the individual’s capital and profit interests to total outstanding capital and profits interests. Fourth, a special rule provides that if the foregoing calculations for corporations or partnerships cannot be performed with certainty, an individual is deemed to hold 25 percent or more of the total ownership interests of a reporting company, provided the individual owns or controls 25 percent or more of any class of ownership interests.
Comments
Ownership interests are broader than equity and include, for corporations, vote and value considerations and for partnerships, capital and profits interests, as well as a “catchall” category of any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership. How easy will it be for determinations to be made in these circumstances?
Further, in situations involving complex capital structures, the computations to determine whether an individual owns 25 percent or more of the ownership interests in a reporting company may become complex, particularly in a situation where there are options, privileges, and convertible instruments, which will be deemed to be exercised or converted.

Beneficial Owner Exceptions

Individuals excluded from beneficial ownership status include:
  • minor children (provided the reporting company reports required information of a parent/guardian);
  • nominees, intermediaries, custodians, or agents (provided, in these relationships, reporting of the principal required);
  • employee of a reporting company, acting solely as an employee (provided the individual is not a senior officer, and the individual’s substantial control and economic benefits from the reporting company are derived solely from his or her employment status;
  • inheritor, an individual whose only interest in a reporting company is a future interest through a right of inheritance; and
  • creditor of a reporting company that only has a right to payment of a predetermined sum of money and meets the definition of a beneficial owner solely through a loan covenant (or similar right) intended to secure the right to receive repayment.

Who Is a Company Applicant?

Company applicant reporting applies only if the reporting company was formed in 2024 or thereafter.
Reporting companies created or registered before January 1, 2024, are not required to report company applicant information.

There can be, at most, two individuals who are company applicants:

  • company applicant one — the person who directly files the document with a secretary of state or similar office; and
  • company applicant two — if more than one person is involved in the filing of the document, the individual primarily responsible for directing or controlling the filing.
Comments
For purposes of determining who is a company applicant, the individual who signs the creation or registration document is not relevant, for example, an incorporator.
Company applicant two is determined by reference to the individual primarily responsible for directing or controlling the filing of the document. This is the individual responsible for making the decisions about filing, such as how it is managed, what content the document includes, and when and where the filing occurs.

Step 3: Information Required in Initial Report

Reporting Company

The reporting company must report specific information, including:
  • complete legal name;
  • any tradename or “doing business as (DBA)” name;
  • complete and current U.S. address;
  • state, tribal, or foreign jurisdiction of formation;
  • for a foreign company only: state or tribal jurisdiction of first registration; and
  • IRS taxpayer identification number (including an employer identification number).
If a foreign reporting company does not have a TIN, report the foreign jurisdiction tax ID and provide the name of the foreign jurisdiction.
For addresses, report the address of the principal place of business in the United States. If the reporting company’s principal place of business is not in the United States, report the primary location in the United States where the company conducts business.
If a reporting company has no principal place of business in the United States and conducts business at more than one location within the United States, the reporting company may report as its primary location the address of any of those locations at which it receives important correspondence.
If a reporting company has no principal place of business in the United States and does not conduct business functions at any U.S. location, its primary location is the address in the United States of the person who the reporting company, under state or other applicable law, has designated to accept service of legal process on its behalf.

Beneficial Owner

A beneficial owner must provide either a FinCEN identifier (explained below) or the following personal identifiable information:
  • full legal name;
  • date of birth;
  • current residential address; and
  • an identifying number from an acceptable, unexpired identification document and an image of the document.
The document can be a U.S. passport, state or local U.S. ID document, U.S. driver’s license, or foreign passport, but only if the individual has none of the previously listed documents. FinCEN has provided that no other form of ID document is acceptable.

Company Applicant (Post-January 1, 2024)

A company applicant must provide the same information as a beneficial owner. However, if the company applicant is in the business of corporate formation (for example, an attorney), the company applicant’s business address should be used rather than a residential address. Company applicant information is only required to be disclosed for reporting companies that are created or registered on or after January 1, 2024.
If there are any changes to the personal identifiable information reported for a company applicant, the reporting company will not be required to file an updated beneficial ownership information report to disclose the changes. Contrast that with the situation where there are changes to personal identifiable information for a beneficial owner, which would require an updated report to be filed.

Step 4: Updates and Corrections

General

The CTA reporting regime is not a one-and-done regime. It requires that information initially reported be updated or corrected as needed. It is important for a reporting company to adopt policies and procedures to monitor changes, particularly with respect to its beneficial owners and to check for inaccuracies.
In that regard, it is also important for a reporting company to review and modify its existing organizational and transactional documentation to include provisions to ensure that the reporting company will obtain the requisite information (current and updated) to comply with CTA requirements. The reporting company must have access to relevant information to submit reports in a proper, correct, and timely manner.

Updated Reports

Updated reports are required when there is a change to previously reported information about the reporting company itself or its beneficial owners — but not about its company applicants. Updated reports are due within 30 calendar days after a change occurs. Examples of changes that would require an updated report include (but are not limited to):
  • any change to the information reported for the reporting company;
  • any change to a beneficial owner’s name, address, or unique identifying number provided in a beneficial ownership information report, unless the beneficial owner obtained a FinCEN Identifier, in which case, as mentioned, the personal identifiable information of the individual must be updated by the individual and not by the company;
  • a change in beneficial owners, such as a new senior officer (e.g., CEO);
  • a sale or transfer (e.g., gift) that changes the individuals who meet the ownership interest threshold of 25 percent or more;
  • when an individual is a beneficial owner of a reporting company by virtue of property interests or other rights subject to transfer upon death, an updated report is required when estate of decedent is settled; also, to the extent appropriate, any new beneficial owners must be identified;
  • when a minor child reaches the age of majority, the child’s information would replace that of the parent’s or legal guardian’s; and
  • if a reporting company becomes exempt or an exempt company becomes a reporting company, an updated report must be filed with FinCEN.

Corrected Report

A corrected report is required when previously reported information was inaccurate when filed and remains so. Corrected reports are due within 30 calendar days after the reporting company becomes aware of, or has reason to know of, an inaccuracy.

There are no penalties for filing an inaccurate beneficial ownership information report provided it is corrected within 90 calendar days of when it was filed.

Step 5: How to File the Report

General

The reporting company is responsible for filing an initial beneficial ownership information report, corrected reports, and updated reports as applicable. Note that there may be certain circumstances in which a reporting company is unable to electronically file a BOI report through FinCEN’s secure filing system. In those cases, the reporting company should contact FinCEN.

Table of Contents: Corporate Transparency Act — Beneficial Ownership Information Reporting Requirement

Derren works with International Entrepreneurs, Expats and Investors who are exposed to multiple jurisdictions. Tax optimization. Asset Protection. Compliance Obligations. Strategies include second citizenships, second residencies, trusts, foundations, insurance wrappers and other offshore structures.

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