Many small business entity owners have a new compliance requirement to adhere to beginning next year. In an effort to better prevent money laundering, tax evasion, and other illicit financial crimes, new legislation and reporting obligations will require certain business entities to step up their transparency and disclose ownership information to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
This new reporting requirement is expected to take effect as of January 1, 2024, and is anticipated to apply to millions of businesses. Continue reading to find out who is required to submit a Beneficial Ownership Information (BOI) report, when the reports need to be filed, and why this new obligation is being implemented.
Enacted on January 1, 2021 as part of the Anti-Money Laundering Act of 2020, the Corporate Transparency Act (CTA) authorizes FinCEN to collect uniform ownership information from corporations, limited liability corporations (LLCs), and other entities registered to do business in the United States.
The disclosed information will be stored in a secure database, accessible only to national security agencies and law enforcement to aid in investigations to uncover and prevent criminals, terrorists, and corrupt individuals from hiding illicit money or property in the U.S. The purpose of increasing the visibility of entity ownership is that money launderers, criminals, and those participating in illicit financial activities take advantage of anonymity and hide behind LLCs and closely-held small businesses, misusing them as a “shell” to carry out illegal activities, transactions, and crimes.
Beneficial ownership information refers to identifying information about the individuals who directly or indirectly own or control at least 25% of the company’s ownership interests. Prior to the CTA, the disclosure of entity ownership was a state by state decision and that information remained with state authorities. Enacting this broad requirement will enhance openness in the U.S. financial system as reporting companies will now have to submit detailed statements on their domestic and foreign beneficial owners’ names, addresses, and other identifying details. Eligible companies will have to disclose individuals who have direct or indirect substantial control over the reporting company.
FinCEN has published an FAQ page at fincen.gov/boi-faqs with detailed information on the new reporting requirements. Following is an overview of the most common questions.
The “reporting companies” will be required to report their beneficial ownership information. There are two types of reporting companies — domestic reporting companies and foreign reporting companies.
A domestic reporting company is defined as:
A foreign reporting company is any entity that is:
The CTA exempts 23 types of entities from the beneficial ownership information reporting requirement. This list includes:
Company information on the report should contain:
Individual information for beneficial owner or company applicants should contain:
A beneficial owner is any individual who, directly or indirectly, either exercises “substantial control” over the company or owns or controls at least 25% of the company’s ownership interests.
Indirect ownership or control of a company or its ownership interests may include the following:
The following are not considered beneficial owners of a reporting company:
The CTA provides civil penalties of $500 per day, up to $10,000 , and/or imprisonment for up to two years for report violations. This includes failure to file, inaccurate reports, and willingly providing false information. The penalties increase for unauthorized disclosure, especially if found in conjunction with illegal activities involving in excess of $100,000 in a 12-month period.
As of this date of publication, there is nothing you have to do. The U.S. Treasury and FinCEN are currently developing a new system to securely accept and store the reports. BOI reports can be submitted no earlier than January 1, 2024, when FinCEN expects to have their system up and running. If you are already an established business, you will have until January 1, 2025 to file, so there will be time to comply. In the meantime, monitor FinCEN’s communications for any program updates to prepare for this looming deadline.
Alloy Silverstein is here to help you be compliant. The AICPA and other nationwide groups are currently trying to get the word out about this new requirement, so by reading this post today, you are already ahead of the game. Turn to your CPA or attorney for specific guidance on your exact situation.
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