Insights and Resources

Beneficial Ownership Essentials: Are You Prepared for the Upcoming Deadlines?

ARTICLE | October 14, 2024


The regulatory landscape for businesses is changing rapidly, and one of the most significant developments is the Corporate Transparency Act (CTA). With key deadlines approaching, it's crucial for business owners to understand their obligations under the CTA's Beneficial Ownership Information (BOI) reporting requirements. This article will guide you through the essentials of the CTA, helping you ensure your company remains compliant and prepared for the upcoming deadlines.

Background on the Corporate Transparency Act (CTA)

The Corporate Transparency Act was enacted into law as part of the National Defense Authorization Act for Fiscal Year 2021. Its primary aim is to combat money laundering, terrorism financing, and other illicit activities by increasing transparency in corporate ownership structures. By requiring certain businesses to disclose their beneficial owners, the CTA seeks to create a federal database that law enforcement can use to track and prevent financial crimes.

Understanding Beneficial Ownership Information (BOI) Reporting

Beneficial Ownership Information reporting refers to the requirement for certain entities to submit detailed information about individuals who own or control a company. This includes those who have substantial control over the company or own at least 25% of its ownership interests. The information collected is maintained by the Financial Crimes Enforcement Network (FinCEN) and is used to prevent the misuse of companies for illegal purposes.

Who Must Comply?

Definition of Reporting Companies

Under the CTA, a "reporting company" includes both domestic and foreign entities:

  • Domestic Reporting Companies: Corporations, limited liability companies (LLCs), or any similar entity created by filing a document with a Secretary of State or any similar office under the laws of a state or Indian tribe.
  • Foreign Reporting Companies: Corporations, LLCs, or any similar entity formed under the laws of a foreign country that is registered to do business in the U.S. by filing a document with a Secretary of State or similar office.

Exemptions

While many entities fall under the CTA's reporting requirements, there are 23 categories of exemptions. These exemptions typically apply to entities that are already subject to substantial federal or state regulation and include:

  • Publicly traded companies
  • Banks and credit unions
  • Securities brokers and dealers
  • Public accounting firms
  • Tax-exempt entities
  • Certain inactive entities
  • Large operating companies that meet specific criteria:
    • Employ more than 20 full-time employees in the U.S.
    • Have gross receipts or sales exceeding $5 million in the previous year's tax return
    • Have an operating presence at a physical office within the United States

It's important to carefully assess whether your entity falls under an exemption. If you're unsure, consulting with a legal professional can provide clarity.

Who Is a Beneficial Owner?

A beneficial owner is any individual who, directly or indirectly:

  • Exercises substantial control over a reporting company
  • Owns or controls at least 25% of the ownership interests of a reporting company

"Substantial control" encompasses individuals who direct or influence important company decisions, including senior officers, regardless of their title or ownership stake. The Small Entity Compliance Guide provided by FinCEN offers further definitions of "substantial control" and "ownership interest."

Key Deadlines

Understanding the filing deadlines is essential to ensure compliance:

  • Existing Entities (formed before January 1, 2024): Must file their initial BOI report by January 1, 2025.
  • New Entities (formed on or after January 1, 2024): Must file within 90 days of formation or registration until December 31, 2024. Starting January 1, 2025, the deadline shortens to 30 days.
  • Changes to Information: Reporting companies must file an updated report within 30 days if there is a change in the information previously reported or if inaccuracies are discovered.

Missing these deadlines can result in significant penalties, so it's important to mark your calendars and begin preparing well in advance.

What Information Must Be Reported?

Reporting companies are required to provide detailed information about the company and its beneficial owners:

  • Company Information: Legal name, any trade or "doing business as" (DBA) names, business address, state or tribal jurisdiction of formation, and IRS Taxpayer Identification Number (TIN).
  • Beneficial Owner Information: Full legal name, date of birth, residential address, unique identifying number from an acceptable identification document (such as a driver's license or passport), and an image of the document.
  • Company Applicant Information: For entities formed after January 1, 2024, information about the individual who filed the formation documents is also required.

Ensuring the accuracy of this information is critical, as incorrect or incomplete filings can lead to compliance issues.

Recent Developments

Legislative Efforts to Extend Deadlines

In late 2023 and early 2024, there were efforts by congressional leaders and professional associations to extend the BOI reporting deadlines. A bipartisan bill (H.R. 5119) aimed at extending the deadline by one year was passed overwhelmingly in the House but stalled in the Senate. As time progresses, the likelihood of an extension diminishes, and businesses should prepare to meet the current deadlines.

Legal Challenges and Court Rulings

In March 2024, a federal court ruled that the BOI reporting requirements of the CTA were unconstitutional. However, this ruling is currently under appeal. FinCEN has agreed not to enforce the BOI reporting requirements and related penalties for the plaintiffs involved in the lawsuit, but this does not apply to the general public. Businesses should not assume that the requirements have been lifted and should continue to prepare for compliance.

FinCEN Guidance

To assist businesses, FinCEN has published several resources:

  • Brochure: Provides an overview of BOI reporting requirements.
  • Reference Guide: Offers detailed instructions and FAQs.
  • Compliance Guide: Tailored guidance for small entities.

These resources are available on the FinCEN website and can be invaluable in helping you understand and meet your obligations.

Potential Penalties for Non-Compliance

Non-compliance with the BOI reporting requirements can result in severe civil and criminal penalties, including fines of up to $500 per day until the violation is corrected, and potential imprisonment for willful violations. Given the seriousness of these penalties, it's imperative to prioritize compliance.

Scams and Fraudulent Activities

Common Scams

Unfortunately, the introduction of the CTA has led to an increase in scams targeting business owners. Fraudsters are sending deceptive emails and letters that:

  • Imitate official government correspondence
  • Request the completion of non-existent forms such as "Form 5102" or "Form 4022"
  • Demand payment of fees for BOI filing (Note: Filing with FinCEN is free)
  • Threaten penalties for non-compliance

These scams often use official-looking logos and language to appear legitimate. It's crucial to remember that FinCEN does not send unsolicited communications or payment requests via mail or email.

How to Identify and Report Scams

To protect yourself and your business:

  • Remain Skeptical: Be cautious of unsolicited communications requesting sensitive information or payments.
  • Verify the Source: Check official websites or contact FinCEN directly to confirm the validity of any requests.
  • Look for Red Flags: Poor grammar, misspelled words, or email addresses that don't match official domains can indicate a scam.
  • Do Not Provide Information: Never give out personal or business information unless you are certain of the recipient's legitimacy.
  • Report Scams: If you suspect a scam, report it to the appropriate authorities, such as the IRS using Form 14242, and inform your CPA or legal advisor.

"Scammers are becoming increasingly sophisticated, but by staying informed and vigilant, business owners can protect themselves from fraudulent activities," advises Jamie Miller, CPA and Partner at MBN & Company LLP.

Steps to Ensure Compliance

To prepare for the upcoming deadlines and ensure compliance with the CTA's BOI reporting requirements, consider the following steps:

Assess Whether Your Entity Must Report

Begin by determining if your company qualifies as a reporting company under the CTA or if it falls under any of the exemption categories. This assessment is critical to understanding your obligations.

Gather Necessary Information

If your company is required to report, start collecting the required information about your company and its beneficial owners. Ensure all information is accurate and up-to-date to avoid potential issues.

Consult with Legal Counsel

Given the complexities involved and the legal implications, it's advisable to seek guidance from a qualified attorney. They can help you navigate the requirements and ensure compliance.

Notably, many CPA firms, including MBN & Company LLP, are not preparing or filing BOI reports on behalf of clients due to concerns about the unauthorized practice of law. However, we are available to provide advice and support in understanding your obligations.

File the BOI Report

BOI reports must be filed electronically through the FinCEN filing website. There is no fee associated with filing the report. While anyone can file the report, it's important to ensure that it is done correctly. Some businesses may choose to file themselves, while others may engage legal professionals or third-party services to assist.

Monitor for Changes and Updates

Stay informed about any changes to the CTA requirements, especially given the recent legislative and legal developments. Additionally, be mindful of any changes within your company that may require an updated report.

Conclusion

The Corporate Transparency Act represents a significant shift in compliance requirements for many businesses. With deadlines approaching, it's essential to understand whether your company is subject to BOI reporting and to take the necessary steps to comply. By proactively addressing these requirements, you can avoid potential penalties and contribute to the broader effort to prevent financial crimes.

"Proactive compliance not only protects your business from penalties but also strengthens the integrity of our financial system," says Jamie Miller. "At MBN & Company LLP, we're committed to helping our clients navigate these changes and build a solid foundation for their continued success."


Expert Profile

Jamie Miller, CPA, Partner at MBN & Company LLP

Email: jmiller@marketingbynumbers.io

Jamie Miller brings over 15 years of public accounting experience to MBN & Company LLP, specializing in tax services for the construction, real estate, and not-for-profit sectors. Jamie is passionate about advising clients on tax planning and business growth, assisting them throughout the business lifecycle—from startup and compliance to retirement and succession planning. His commitment to client success and deep expertise make him a trusted advisor in navigating complex regulatory environments.

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