The CTA mandates that certain businesses disclose detailed information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). The businesses that need to file are corporations, limited liability companies (LLC), and other entities with less than $5 million of assets and 20 employees. This law primarily applies to smaller private entities, with its goal being to identify the individuals who control or own such companies.
ACTEC Fellows explain what business owners need to know about the Corporate Transparency ACT (CTA), including Beneficial Ownership Information (BOI) and filing requirements.
What is the Corporate Transparency Act?
The CTA, which requires certain businesses to disclose information about their beneficial owners to FinCEN, which is the Financial Crimes Enforcement Network, has generated many questions from business owners.
And I’ll start off with asking Raj probably one of the top questions, which is, who is required to report under the CTA?
Raj Malviya: Thanks, Glenn. And just to answer that, it’s important to recognize that the CTA was designed to disclose to FinCEN “beneficial owners” of smaller private entities. The government wants to look under the hood of these entities to see who is in charge, who has ownership, and what types of activities are going on.
What is a CTA Reporting Company and Who Needs to Report?
So, when this law was designed, it created defined terms. And the term we have to focus on is reporting company. A reporting company is required to disclose information about its owners to FinCEN. And the CTA has cast a broad net with a very fine mesh.
So, there are only a few exceptions to the types of entities that are covered under the CTA. But you have to think smaller private entities and the key definition that we start with for a reporting company is it’s an entity formed with the filing of a document, typically articles, bylaws, and organizational documents with the applicable jurisdiction to form the entity. And if you have that, then you’re within the CTA regime. And then it’s peeling another layer off the onion to see if an exception applies to a reporting company.
Glenn, maybe tell us some of the most common exceptions that would apply to a taxpayer or business owner.
Filing Exceptions for the Corporate Transparency Act
Glenn Fox: I mean, typically, if you have more than $5 million of assets and more than 20 employees, you would not have to file. Anybody below those thresholds should check and determine if they need to file. And I would not do that on your own. You should definitely consult a business lawyer or an accountant to determine whether you fall within the exceptions. And if you don’t, to determine who needs to report and what information must be reported.
So, in that regard, Raj, what information must somebody report if they do determine that they are a reporting company?
Raj Malviya: Right. So, you’ve gone through the analysis, hopefully with the help of a professional experience with CTA work and you’ve determined that this entity that was formed is a reporting company because it doesn’t follow within one of the exceptions, 23 of them actually, but only a couple we will see regularly.
Reporting Requirements for CTA Beneficial Owners
Well, again, FinCEN wants to know who is in charge, who is in control, who is an owner in this reporting company. And so, the term of art we have to use is beneficial owner and beneficial owners are people. FinCEN is trying to get to the people behind the entity.
So we look under the hood of this entity, and we’re looking for individuals who have at least a 25% economic ownership stake in the entity, or they have a voting interest, voting control, or there’s this term used in the law that still is subject to interpretation and further guidance, but it’s “substantial control.” Who is exercising substantial control over this entity? And this could be through title, scope of work, job duties, or a typical LLC that’s formed to own investment real estate. We see that case all the time.
The owner, sure, would be the beneficial owner, but also if a manager was appointed to manage the LLC and be in charge of this LLC; the manager has control, enough control to be listed as a beneficial owner. So that’s part of the analysis we do to determine who’s behind the entity.
So, Glenn, you know, we’ve identified our reporting company, we have to identify our individuals in control of the entity or who have ownership. Where does all this information go? What information do we need from the reporting company and the beneficial owners and then where is it put into work product and then submitted to the government?
Filing the Beneficial Ownership Information (BOI)
Glenn Fox: Actually, it’s relatively straightforward for the beneficial owners themselves or the people who have substantial control who also are considered beneficial owners. You would report:
their legal name,
their date of birth,
their residential address,
their identifying document would have to be filed on the FinCEN website with this information like a passport, copy of a passport, copy of a driver’s license, and the ID number from that document.
If your beneficial owners are a bit skittish about having that information given to a reporting company, they themselves can go onto the FinCEN website and obtain what’s called a FinCEN Identification Number and just give that number to the various companies of which they are beneficial owners. This way, they control the input of the information. And all of this is reported, the beneficial owner information by the reporting company or the individual owners getting their FinCEN ID on the FinCEN website. It’s all done electronically. There are no paper reports. And it’s a relatively straightforward website. You could Google FinCEN beneficial owner information and the website will immediately come up: fincen.gov/boi.
I guess, Raj, once we know that we have this obligation report, what penalties will we face if we fail to comply?
Deadlines for Filing Beneficial Ownership Information (BOI)
Raj Malviya: Yeah, thank you. Let me cover that kind of in a two-phase answer. I think the first is we got to know what our deadlines are, right? And our deadlines to report are going to be, there’s two different, two sets of deadlines.
One deadline to report this information to FinCEN is going to apply to existing companies, companies that existed before January 1, 2024. And for those entities, there’s essentially a one-year filing deadline. So, the end of this year, where this is being recorded September 12, 2024, so at the end of this year, 2024, is when the initial phase of reports for all these existing entities is due.
The second deadline applies to entities created on or after January 1, 2024. So again, this year, in real-time, 2024, and for those entities, the filing deadline is 90 days from the creation of the entity. And that 90 days is going to change and get scaled back to 30 days, 30 calendar days after 2024.
So, we figured out the reporting company, who the owners are, the information, we gathered the information needed to complete the report electronically. We know what our filing deadlines are, but what happens if you don’t file?
Penalties for Not Filing Beneficial Ownership Information (BOI)
Well, if you don’t file based on a willful disposition because you knew about it but didn’t want to, or you didn’t think you should, or maybe you just arguably ignored the law and thought you would fly under the radar. Those are examples of what I think are willful failure to file. And if you have a willful failure to file, the penalties are steep.
It’s a $500 per-day civil penalty for each day that the reporting doesn’t happen. And there’s no maximum amount on that.
And then there’s a criminal penalty, and there’s a monetary part to that. It’s a $10,000 maximum criminal penalty with potential jail time.
Very similar to what we see with FBAR reports for reporting foreign bank accounts. So that said, if a filing is done in good faith and the information is gathered that you believe is correct, and you have the advice of even an advisor helping, and there’s information later discovered that should be included in the report, well, that’s different. That’s not willful. That’s more of a reasonable type of discovery. And there are rules that allow for reports to be updated so that the violation is not willful.
Glenn, we’ve covered a lot here, but I think we need to briefly touch on the information itself. Where does it go? How is it stored, and is it protected?
Protection of Beneficial Ownership and the CTA Information
Glenn Fox: We said, all information is on the FinCEN website. It is not accessible by the general public. Only law enforcement can get the information, and they would have to make a request of FinCEN. FinCEN can deny the request in many circumstances. Other cases you would have to go to court as a law enforcement official to get the information. So, it is relatively protected once it is on the website.
