In the business world, a single client may have ownership interest – either complete or partial – in a variety of entities throughout multiple states. In the world of business transactions, single-asset entities have long-reigned supreme as the choice of clients with multiple holdings, and routinely as a requirement for lenders. The annual requirements range from renewing the entity with each state’s governing body to filing returns with both federal and state tax agencies. The time and expense of registration and accounting for each entity is generally weighed against the benefit of limiting liability between assets of various entities.
However, beginning January 1, 2024, an additional requirement will apply for most entities. Enacted in 2021, the Corporate Transparency Act (CTA) is a new, federal law aiming to reduce illegal activities through business entities. One method of doing so is the requirement to register an entity’s Beneficial Ownership Interest (BOI) with the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of the Treasury. Government agencies will have access to BOI for authorized activities related to national security, law enforcement, and some financial institutions may be granted access by reporting companies. BOI will be retained by FinCEN, and access will be heavily regulated to limited groups.
Most clients will only want to know (1) whether the CTA will require them to do anything, (2) what the client needs to do, and (3) any deadline for the client to comply.
Most clients will be required to register their BOI for their various entities. While there are a variety of exemptions, the majority of entities – including corporations, limited liability companies, and other entities required to report to their respective secretary of state or comparable state agency – will be required to report their BOI to the FinCEN. Since the CTA is a federal law, it will apply to all entities, regardless of their state of registration.
Reporting requirements for both existing and new entities began January 1, 2024. Existing reporting companies will have until January 1, 2025 to comply. Reporting companies created in 2024 must comply within 90 days of registering as a new entity. In 2025, this period of time will reduce to 30 days.
A reporting company may have a beneficial owner if manager-managed, or a single person or entity owns or controls at least 25% of the reporting company. Member-managed entities may also have a beneficial owner if a single individual directly or indirectly exercises substantial control over the reporting company, including a senior officer, a member authorized to solely make major decisions on behalf of the reporting company, or another form of substantial control. Again, there are some narrow exceptions.
Companies will have to report even if they do not have BOI. Even without BOI, a company that does not meet any exemption will have to report its legal name, any trade names, its principal place of business, its TIN, and its governing jurisdiction.
Beneficial owners will have to report the individual’s name, date of birth, residential address, and a form of identification – passport or driver’s license numbers – with an image of the identification document.
The good news is the BOI reporting is a one-time requirement. There will not be an annual reporting requirement. However, any change in BOI will have to be reported during the lifetime of the reporting company.
The penalty for failing to report BOI is high. Both individuals and entities may be penalized $500 per day of noncompliance, as well as criminal penalties for falsifying BOI reports.
For additional information regarding Beneficial Ownership Interest and reporting requirements, contact Hodges, Doughty & Carson, PLLC for assistance in ensuring compliance.