Beginning in 2024, the Corporate Transparency Act (CTA) requires many U.S. and foreign LLCs, corporations, and other entities created or registered in any State of the U.S. to file a beneficial ownership information (BOI) report with the Financial Crimes Enforcement Network (FinCEN) – unless such entity qualifies for an exemption. Although the CTA has 23 exemptions, they generally apply to companies already filing reports with the federal government that name beneficial owners, such as publicly traded companies and other entities registered with the Securities and Exchange Commission, or companies in heavily regulated industries such as financial institutions, public utilities, public accounting firms, and insurance companies. A “large operating company” exemption, however, applies to privately held companies that are not necessarily already reporting beneficial ownership information or in a regulated industry. The large operating company exemption is discussed at the end of this Alert.
Impact on Small Businesses
With certain exceptions, the BOI reporting rule applies to small businesses that employ 20 or fewer persons in the U.S. or reported gross receipts and sales of $5 million or less on the previous year’s federal income tax filings. Starting on January 1, 2024, reporting companies created or registered to do business in the U.S. before January 1, 2024, must file their initial BOI reports by January 1, 2025. Reporting companies created or registered on or after January 1, 2024, will have 30 days after receiving notice of their company’s creation or registration to file their initial BOI reports. FinCEN’s electronic filing system is currently under development and will not be available until January 1, 2024.
Information to Be Reported
A. Information about the Company
- Full legal name, including any trade name or “doing business as” (DBA) name
- Complete current U.S. address
- State, Tribal, or foreign jurisdiction of formation or registration; and
- IRS Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN))
B. Information about each Beneficial Owner and the individual(s) filing and directing or controlling the filing of the formation or registration document (“Company Applicant”)
The individual’s full legal name, date of birth, complete current address (in the case of a Company Applicant, a business address may be used; in all other cases a residential address must be used), and a unique identifying number from an acceptable identification document, as well as copies of such documents. In lieu of acceptable identification documentation, an individual or company who is required to provide information to a reporting company may provide a unique identifier assigned by FinCEN.
Who is a Beneficial Owner?
A beneficial owner is an individual who, directly or indirectly, either (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25 percent of its ownership interests. An individual exercises “substantial control” if they satisfy any of the following factors:
- they serve as a senior officer of the company
- they have authority over the senior officers or majority of the board of a company
- they have substantial influence over the company’s important decisions, or
- they have any other type of substantial control over the company.
Individuals indirectly related to the company will also be considered beneficial owners if they satisfy any of the requirements for substantial control. Specifically, individuals may indirectly exercise substantial control over a reporting company by controlling one or more intermediary entities that in turn exercise substantial control over the reporting entity.
The Large Operating Company Exemption
As noted above, there is an exemption from the reporting rules for “large operating companies”. For an entity to be a large operating company, it must meet each of the following three criteria:
- Number of employees. The entity must have at least 20 full time employees in the United States. Consolidated employee headcounts across affiliated entities are not permitted.
- Presence within the United States. The entity must regularly conduct its business at a physical location in the United States that it owns or leases and that is physically distinct from the place of business of any other unaffiliated entity.
- Gross receipts or sales. The entity must have filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales. This excludes gross receipts or sales from sources outside the United States. (For an entity that is part of an affiliated group of corporations that file a consolidated federal income return, the applicable amount is the amount reported on the consolidated return for the group.)
There is also an exemption for subsidiaries of certain exempt entities, including subsidiaries of large operating companies. A subsidiary would qualify for this exemption if its ownership interests are controlled or wholly owned, directly or indirectly, by a large operating company.
Penalties
The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information, may result in a civil penalty of up to $500 for each day that the violation continues and/or criminal penalties, including imprisonment, for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure.
We will continue to monitor developments regarding the CTA.
Golenbock Eiseman Assor Bell & Peskoe LLP
Golenbock Eiseman Assor Bell & Peskoe LLP is a Manhattan-based business law firm with a broad-based practice that offers corporate, complex litigation, real estate, reorganization, intellectual property, tax, and trust & estate expertise. The firm provides high value, sophisticated counsel and representation for its domestic and international clients while maintaining a hands-on, personalized approach to all matters.
The firm represents entrepreneurial, portfolio, and institutional clients, ranging from start-ups to Fortune 500 companies, with a specific focus on the mid-market segment. Among our clients are private corporations, public companies, private equity firms, venture capital firms, individual investors, and entrepreneurs.
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