NEW COMPLIANCE REQUIREMENT FOR SMALL BUSINESS OWNERS WHAT YOU NEED TO KNOW STARTING JANUARY 1, 2024

Introduction

Effective January 1, 2024, the Corporate Transparency Act (“CTA”) now imposes reporting requirements on most small business entities (corporations, limited liability companies, certain partnerships, etc.), which will require an electronic filing providing information on certain “beneficial owners” and other associated persons with the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury.

For all “reporting companies” in existence prior to January 1, 2024, the filing deadline is January 1, 2025. For entities formed in 2024, the filing deadline is 90 days from the formation of the entity.

There is no filing fee associated with this filing requirement, but there is an ongoing obligation to file updates with FinCEN to report any changes to information previously filed.

What is the Corporate Transparency Act?

The CTA is part of the 2021 National Defense Authorization Act. In relevant part, the CTA mandated the creation of a national database that tracks beneficial ownership information (“BOI”) for most companies in the United States. Beneficial owners are the individuals who either own or have substantial control over an entity.  As a policy matter, the collection of BOI is encouraged to reduce the threats posed by anonymous ownership of entities in connection with acts of terrorism, money laundering, trafficking, and other illegal activities. European nations have imposed similar reporting requirements for some time, so this is a bit of a “catch up” effort by the United States.

Who must report?

As of January 1, 2024, all “reporting companies” must submit a BOI report to FinCEN. Not every entity is a reporting company. Reporting companies include:

• Corporations;

• LLCs;

• Any other entity created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe; and

• Any foreign entity registered to do business in any state or Indian tribe.

Under the catch-all provision of the regulation, entities such as business trusts or certain partnerships might also meet the definition of a reporting company.

One bit of good news is that there are nearly two dozen exceptions to the definition of a “reporting company,” including, among others:

• Large operating companies (more than 20 full-time employees and more than $5 million in revenue per year);

• 501(c) exempt organizations and certain political organizations;

• Certain subsidiaries;

• Securities issuers, securities brokers, and entities registered with the SEC;

• Banks and domestic credit unions;

• Domestic governmental authorities and public utilities; and

• State-licensed insurance providers.

What information needs to be reported?

In a reporting company’s initial report, the entity will need to provide the following information:

• full legal name of the entity,

• any trade names or “doing business as” names,

• current U.S. address,

• jurisdiction of formation, and

• IRS taxpayer identification number (TIN or EIN).

In addition, a reporting company’s initial report must provide information about its beneficial owners. “Beneficial owners” include every individual who, either directly or indirectly:

1. exercises “substantial control” over the company, or

2. owns or controls at least 25% of the ownership interests of the company.

An individual is deemed to exercise “substantial control” over a reporting company when the individual meets ANY of the following criteria:

1. the individual is a senior officer;

2. the individual has the authority to appoint or remove certain officers or a majority of directors of the reporting company;

3. the individual is an important decision-maker; or

4. the individual has any other form of substantial control over the reporting company.

For many small businesses, only one person (the sole owner and officer of the company) may need to be included in the BOI report.  For other companies, BOI for a large number of people may need to be reported.  Business owners need to carefully consider what information should be reported on an entity-by-entity basis.

A reporting company’s BOI report must include information for every individual who meets either of these criteria. For each beneficial owner, a reporting company must provide the following information:

• Full legal name;

• Date of birth;

• Current street address;

• Driver’s license number with issuing jurisdiction or U.S. passport number; and

• Photocopies of the identifying documents.

When do you need to report?

For reporting companies in existence prior to January 1, 2024, the filing deadline is January 1, 2025. For entities created in 2024, the filing deadline is ninety (90) days from the formation of the entity. For entities created in 2025 or later, the filing deadline is thirty (30) days from the formation of the entity.  The official date of formation of a business entity typically appears on the entity’s certificate of formation issued by the applicable state agency (e.g., the State Corporation Commission for Virginia business entities).

It is also important to understand that these reporting obligations impose a substantial ongoing requirement. This means that if a beneficial owner changes his/her address or gets a new passport or driver’s license, the reporting company is responsible for updating FinCEN.

This also means that if your entity has a change in ownership structure that results in new or additional beneficial owners, your entity is legally obligated to update FinCEN. To avoid penalties, updated reports must be filed within thirty (30) days of the date of the change.

Violations can be costly!

The penalties for not complying with the BOI reporting requirements are significant, including civil penalties of $500 per day, and fines of up to $10,000 or potentially up to two years in jail.

Where can I go for more information?

FinCEN has published several helpful resources to explain these new reporting requirements. At www.fincen.gov/boi , you will find several resources, including  FAQs and a compliance guide.  You may also contact FinCEN directly with questions at www.fincen.gov/contact.

Where do I go to file a BOI Report?

Visit https://boiefiling.fincen.gov/ to electronically file a BOI report.

Contact Perkins Law, PLLC at [email protected] or (804) 205-5162 with any questions or if we can be of assistance.