What We Know about Registering Beneficial Ownership Information under the Corporate Transparency Act
Updated: Aug 31
One of the benefits of either a limited liability company or a corporation is that in the vast majority of situations owners are shielded from personal liability resulting from the company’s actions. In rare situations, a civil litigant can “pierce the corporate” veil to hold an owner of either type of entity liable for civil penalties. To pierce the corporate veil a claimant must prove that there has been some type of fraud, misuse of company assets, or similar illegal event.
Another benefit of both limited liability companies and corporations is that ownership of such entities is not public information in most situations. This veil of secrecy makes both limited liability companies and corporations, as well as a few other types of entities, ideal for bad actors to use them for funding terrorism, money laundering and other criminal activities. There is no easy way for police and prosecutors to ascertain ownership of entities.
Therefore, with the rise in financial crimes, the United States Congress enacted the Corporate Transparency Act, effective January 1, 2024, (the “CTA”) to make it easier for police and prosecutors to identify the owners of such companies. The new law requires that most entities which operate in the United States, whether organized in a state or in another country, must report (“Reporting Company”) the identifying information for the beneficial owners of the company to the Financial Crimes Enforcement Network (“FinCEN”) at the Department of Treasury.
While the Department of Treasury has not yet set up the website where Reporting Company’s will need to file, the regulations provide that each Reporting Company will need to provide:
Legal name as well as any trade name or DBA under which the company operates;
The street address for the “principal place of business” of the Reporting Company (or the street address for a primary location in the United States for a company with a principal place of business outside of the United States);
Jurisdiction where the entity was formed (for foreign reporting companies, the Reporting Company will report both the jurisdiction of formation and its place of registration in the US); and
Its tax identification number (generally an EIN but for single member LLC it may just be a Social Security Number).
Additionally, each Reporting Company will have to provide identifying information for each of its beneficial owners. The CTA defines a “Beneficial Owner” as an individual who, directly or indirectly, either:
Exercises “substantial control” over the Reporting Company; or
Owns or controls at least 25% ownership interests (calculated as if all options have been exercised) in the Reporting Company.
Significantly, ownership is not required for a person to have substantial control over a Reporting Company. Additionally, a company may not have any owners who own 25% of the ownership interests. Therefore, it will be necessary to identify Beneficial Owners who exercise substantial control relying on the parameters the CTA provides:
Serves as a senior officer of the Reporting Company;
Has the ability to appoint or remove senior officers or the majority of board members;
Directs, determines, or has substantial influence over important decisions; or
Has any other type of substantial control over the company.
Where the Reporting Company is a single member limited liability company or a loan out corporation with one owner, the beneficial owner should be easy to identify. However, defining who, other than an owner, has substantial control over a Reporting Company may require significant nuance once the CTA takes effect on January 1, 2024.
Once the Beneficial Owners are identified, the Reporting Company will need to include the following information for each Beneficial Owner on the filing:
Address (likely home); and
A government issued identifying number (e.g. Georgia Driver’s License Number, Passport #) as well as an image of the government issued identification.
All Reporting Companies will have to file the Beneficial Ownership Information report with the Financial Crimes Enforcement Network at the Department of Treasury beginning January 1, 2024, as follows:
For entities formed prior to December 31, 2023, the BOI Report will need to be filed by December 31, 2024; and
For entities formed on or after January 1, 2024, the BOI Report must be filed within 30 days of being initially registered with a state.
The BOI Report will need to be updated whenever the beneficial ownership changes, or the information contained therein changes, within thirty (30) days of becoming aware of the changes or any inaccuracy in the report.
As of this writing, there is no fee associated with filing the BOI Report. However, failure to comply can result in both civil and criminal penalties. Willful failure to file the BOI Report, or required update, with FinCEN can result in fines up to $10,000 and imprisonment up to two years.
Though most entities will have to file a BOI Report, the CTA does exempt certain companies from having to comply with the law. Significantly, most of the exemptions apply to companies that operate in heavily regulated industries like banking and insurance. Additionally, existing companies that have 20 or more US based employees with more than $5 Million gross receipts or sale arising in the United States with a physical office in the United States are exempt from filing the BOI Report. However, if anything changes, a previously exempt entity will need to be amended.
Much, if not all, of the information that Reporting Companies are going to share in their BOI Reports is private and confidential. Only authorized “Requestors” may access the information including federal law enforcement and national security agencies, state and local law enforcement agencies with a court order, and the Treasury Department. The CTA requires that FinCEN implement safeguards to secure the information and ensure that only Requestors can access the information. An individual who knowingly discloses BOI, without authorization, is subject to a $500-per-day penalty (up to US $250,000) and up to five years’ imprisonment.
There are now efforts in Congress to delay the implementation of the CTA until such time as FinCEN has finalized the process for filing the BOI Reports, the rules related to access to the information contained therein, and the implementation of safeguards to secure the information. However, at this point such efforts have not been successful. Therefore, Prager Law recommends that companies begin preparing for this new regulation by clarifying who the beneficial owners are and identifying any individual who exercise substantial control over the company. This may require clarifying operating agreements, by laws, and other company paperwork.
Over the next several months, as we get more information about filing the BOI report, Prager Law will begin reaching out to existing clients to confirm their readiness to file this report and then to help with the filing once that begins. In the meantime, if you have any questions, or if you know you’ll need to change your corporate paperwork to reflect current circumstances, please feel free to reach out and set up a consultation with Nancy Prager to discuss next steps.