Under the Corporate Transparency Act (“CTA”) The federal government has created new paperwork requirements for small business owners effective January 1, 2024 through what is called FinCEN Beneficial Ownership Information Reporting (“BOI”). Penalties for failure to comply with BOI requirements are substantial: up to $500 per day, and criminal penalties of up to two years in prison and a fine of up to $10,000.
This brand-new requirement is now an additional step for forming any new corporation or LLC. Here we'll discuss an overview of the CTA’s reporting requirements for BOI, but we recommend consulting with an experienced business law attorney if you have questions about this important new requirement for small businesses.
What Small Businesses Need to Know About FinCen Beneficial Ownership Information Reporting (BOI)
The first step is determining whether the reporting requirements are applicable to your business, because there are numerous exemptions for larger companies. Thes exemptions to CTA reporting apply to institutions like banks, credit unions, securities dealers, insurance companies, accounting firms, or “large operating companies,” which are defined as having more than 20 full-time employees in the U.S. with gross income of more than $5 million. Unless you own a small business exempt from these requirements, these exemptions will not apply.
All “beneficial owners” must be identified in the BOI Report. A beneficial owner is anyone who either (1) owns 25% of the company, i.e., 25% of the stock of a corporation or membership interest of an LLC, or who (2) exercises “substantial control” over the company, i.e., an officer, manager, or senior decisionmaker who nevertheless does not own any interest in the company. A beneficial owner may even be someone who has the right to buy or sell equity or voting rights.
The definition of “substantial control” is broad and is likely to be the cause of many disputes. Indeed, it may include anyone who has authority over single issues like finances, amending the bylaws or operating agreement, or operation of the business.
Businesses With Multiple Owners
For businesses with a number of owners, CTA compliance requires identification of all individuals who own any amount and the amount they own. BOI Reports must trace and identify individuals who own any direct or indirect interest. This means that if there is another corporation who owns part of the reporting corporation’s stock, the report must identify all individual owners at all levels.
As an example, suppose you are filing a BOI Report for Corporation A, but Corporation B owns 25% of Corporation A’s stock. In turn, Individual B owns 100% of Corporation B’s stock. The BOI Report for Corporation A must therefore identify Individual B rather than Corporation B. This is likely to be a complex process for many businesses that may require creating capitalization tables and demanding information from subsidiary owners.
Trusts and Employee Ownership
For trusts, the BOI Report must include any individuals with authority to dispose of trust assets (such as trustees), as well as beneficiaries of the trust who have a right to demand a distribution of trust assets.
Employees who own at least 25% of the beneficial interest are generally not required to be included in the BOI Report as long as they (1) are subject to the owner’s directions and can be fired, (2) derive income from their ownership passively, and (3) are not senior officers of the company.
Company Applicant
Moreover, the “company applicant” is required to be disclosed. The company applicant is the person who created the company, such as by filing it with the applicable Secretary of State. An owner of a company generally is not required to be the one to file a new company (it is often handled by attorneys), but even though these applicants are not owners, they must nevertheless be disclosed in the BOI Report. The company applicant is equivalent to what is often called the “organizer” by a Secretary of State.
One caveat to the requirement of identifying the company application is this: if the company was formed before January 1, 2024, the company applicant is not required to be disclosed. For all companies formed after January 1, 2024, however, they must be included in the BOI Report.
For companies filed in the U.S., the CTA requires the following information to be gathered in advance for the BOI Report. Be aware that this is more information than is required for the formation of a company with the state. For the company filing, the following information is required:
Legal name of the corporation or LLC,
Address of the company,
Jurisdiction that the company was formed in, and
The EIN or TIN assigned by the IRS.
Then, for each beneficial owner, the following information is required:
Full legal name,
Address,
Assigned number from a U.S. passport, driver’s license, or state identification card, along with the state of issuance, and
Copy of the passport, driver’s license, or other state identification card.
(Yes, you must upload a copy of the identification used to the federal government.)
One other exception is if the ownership interest in a company is owned by a large operating company (see definition above). If, for instance, a 25% ownership interest in a small business is held by a corporation with more than 20 employees and more than $5m in revenue, no individual needs to be reported – rather, only the name of the large operating company must be disclosed.
Deadlines for Filing BOI Reports
Be aware of the deadlines for filing BOI Reports. For companies created prior to January 1, 2024, they have until the end of 2024 to file their reports. However, for companies filed during the year 2024, their reports are due within 90 calendar days of filing. This requirement is tightened on January 1, 2025, which will shorten the filing deadline to 30 days after the company is formed.
BOI Report Update Requirements
FinCEN wants current information on all beneficial owners at all times, so an updated BOI Report must be filed when there is a change in the beneficial owner, or when an error is detected. Thus, if your small business takes on a new partner or new manager, the updated report must be filed within 30 days. Again, this applies to anyone who has “substantial control” over the business, as explained above, as well as when an owner dies and one of their heirs inherits an ownership interest in the business.
Perhaps the only change that is not required to be reported is when the company terminates or dissolves. If your business goes out of business, no additional BOI Reports need to be filed.
Why Knowledge About BOI is Important
In conclusion, the Corporate Transparency Act’s new reports will take a substantial amount of additional time for new and existing small businesses, requiring the gathering and maintenance of current information about all owners at all times. Because of the harsh penalties for violating the federal government’s requirements, business owners should consider getting advice from experienced attorneys before submitting BOI Reports.
Where You Can Find Out More About BOI
Filing of BOI Reports may be done via online forms through FinCEN, available HERE.
For more information, FinCEN has written a Small Entity Compliance Guide that gives more details about the filing and exemption requirements under the Corporate Transparency Act, available HERE.
Dye Culik PC is a North Carolina business law firm experienced in forming business entities of all types and with the Corporate Transparency Act’s BOI Reporting process. If you have questions about this for your business, contact us for more information.
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