New reporting conditions may soon be a requirement for your company. These rules, coming from 2021’s Corporate Transparency Act (CTA), will go into effect on January 1, 2024. A few corporations must now give the Financial Crimes Enforcement Network (FinCEN) information about their “beneficial owners,” or those who own or manage the business. Penalties, whether criminal, civil, or both, could follow failure to comply.

On November 29, FinCEN announced that rules on reporting beneficial ownership information (BOI) would change.

Understanding the Corporate Transparency Act

The goal of the CTA is to lessen exposure to significant crimes, such as money laundering, terrorist financing, and other illicit activity. However, it might also pave the way for examining private individuals who have historically escaped scrutiny. Some examples of that would be investment angels and family offices. A corporation under the “reporting company” category has 30 days or a year to abide by the new regulations.

Generally, both domestic and international privately held reporting corporations are subject to the CTA’s regulations. Any corporation, limited liability company, or other legal entity formed by documents submitted to the relevant state authorities is considered a reporting company. Any commercial company registered lawfully in another nation and authorized to conduct business in the United States is considered a foreign entity.

The entire list of businesses excluded from the reporting requirements is too long to include here; it includes government agencies, insurance companies, and not-for-profit organizations, among others. An exemption was established for “large operating companies,” defined as:

1. Those with more than 20 full-time workers
2. Gross receipts or sales of more than $5 million (excluding receipts and sales from overseas sources)
3. Physical operations within the United States

However, many businesses must comply with other reporting standards and provide equivalent data.

An entity must file a BOI report if it first meets the primary operating company exemption requirements but later loses out. Conversely, an entity that may not be eligible at this time can apply for an exemption and amend its status with FinCEN if it becomes eligible in the future.

Determining who is and isn’t a beneficial owner

The CTA requires a nonexempt entity to give identifying information about its beneficial owners. A person who owns or controls at least 25% of the ownership interests in a reporting firm or who, through direct or indirect means, exercises significant control over the business is a beneficial owner. To have considerable control over a reporting firm, the person must:

• Be a senior officer of the company
• Have authority over the senior officers or a majority of the company’s board
• Have substantial influence over the company’s essential decisions
• Have any other type of significant control over the company

Generally, this refers to people with a direct stake in the business. However, indirect control may also qualify someone as a beneficial owner.

Under the CTA, the following people are not beneficial proprietors of a reporting company:

• Someone acting as a nominee, intermediary, custodian, or agent on behalf of a beneficial owner
• An employee of the reporting company who has substantial control over the entity’s economic benefits because of their employment status (but only if the individual isn’t a senior officer of the entity)
• An individual whose only interest in a reporting company is a future interest through a right of inheritance
• Any creditor of the reporting company (unless the creditor exercises substantial control or has a 25% ownership interest in the reporting company)
• A minor child

The reporting business must disclose details on each child’s parent or legal guardian, albeit if the child is a minor. For defining company applicants and addressing other CTA reporting requirements, check out part two of this blog series. In the meantime, please feel free to contact our RRBB advisors for more information or if you have any questions about the Corporate Transparency Act.

© 2023