Six Considerations for Companies as FinCEN's Beneficial Ownership Rule Goes Live
White Collar Alert
Pursuant to the Corporate Transparency Act (CTA) enacted in 2021, the beneficial ownership information (BOI) reporting rule (BOI Reporting Rule) went into effect on January 1, 2024. The BOI Reporting Rule requires foreign and domestic, non-exempt "reporting companies" to provide the Financial Crimes Enforcement Network (FinCEN) information regarding their beneficial owners, and, in some cases, their company applicants, via FinCEN's BOI e-filing website. To foster compliance with the BOI Reporting Rule, FinCEN hosted a webinar, issued (and plans to continually update) a Frequently Asked Questions (FAQ) page, and published a Small Entity Compliance Guide. Such resources provide a broad overview of how the BOI Reporting Rule works, to whom it applies, the type of information that must be reported, and other information to facilitate compliance.
In determining whether the BOI Reporting Rule's requirements apply, a company should: (1) assess if it falls within the definition of a "reporting company;" and, if so, (2) determine whether an exemption applies, such that it is not required to report under the Rule (as an "exempt" company). This analysis is a critical initial step, as there may be a short time frame in which reports must be submitted.
Below we discuss six important aspects of the BOI Reporting Rule that companies should keep in mind as they assess their obligations under the new regulations.
1. "Substantial Control" and "Ownership Interest" Are Broadly Defined
The BOI Reporting Rule requires non-exempt reporting companies to provide information regarding their beneficial owners to FinCEN.
A beneficial owner is defined as an individual who, directly or indirectly, "exercises substantial control" over the reporting company, or who owns or controls at least 25 percent of the reporting company's "ownership interests." Both terms are broadly defined and include catch-all provisions, requiring reporting companies to think carefully about who needs to be included in its pool of beneficial owners.
An individual exercises substantial control when they fit into any of the following four categories:
- They are a senior officer
- They have the authority to appoint or remove senior officers or a majority of the board of directors
- They are an "important decision-maker"
- They have any other form of substantial control over the reporting company
An individual's ownership interests can be made up of equity, stock, voting rights, other capital or profit interests, convertible instruments, options, or any other mechanism used to establish ownership. These catch-all provisions seek to capture new and unique business arrangements.
At the same time, there are exceptions within the beneficial owner definition. Minor children, agents, employees, inheritors, and, in certain circumstances, creditors do not need to be reported as beneficial owners, even though they are likely to meet the definition of ownership or control. The Small Entity Compliance Guide includes a step-by-step process to determine who needs to be reported as a beneficial owner and guidelines for exceptions.
2. Small Businesses May Still Be Exempt from Reporting Requirements
There are 23 exemptions under the BOI Reporting Rule, and small businesses should analyze these carefully to determine applicability.
Small businesses should remain particularly vigilant of the BOI Reporting Rule and its requirements given that several of the exemptions are more likely to apply to larger entities. This includes an exemption for "large operating companies." A company is an exempt "large operating company" if it has: (1) a physical operating presence in the U.S.; (2) more than 20 full-time employees employed in the U.S.; and (3) $5,000,000 in gross receipts or sales (based on U.S. tax returns). Other exemptions such as those applicable to banks and securities reporting issuers are also more likely to apply to larger entities.
However, some small businesses still may fall outside the bounds of the definition of "reporting company" or within one of the exemptions. Therefore, small businesses should closely review the requirements of each of them to determine their status under the Rule.
For example, a company only qualifies as a "reporting company" under the Rule if it is required to file a document, with the secretary of state or similar office, to be created or registered to do business in that state. State law often determines this requirement. Take trusts, for example. In many states, trusts do not have to file with the secretary of state. Trusts created or registered in states without that requirement are not considered "reporting companies" under the BOI Reporting Rule.
In addition, several of the 23 exemptions may be applicable to small businesses. For example, the subsidiary exemption provides that an entity whose interests are wholly controlled or owned by another entity that falls under certain exemptions is, itself, exempt. This includes subsidiaries wholly owned or controlled by securities reporting issuers, large operating companies, tax-exempt entities, banks, and investment companies.
Furthermore, and although drafted narrowly, the BOI Reporting Rule exempts "inactive entities," which includes small inactive companies. To qualify for the exemption, the entity must: (1) have been in existence prior to January 1, 2020; (2) be wholly owned by a U.S. person; (2) have no active business; (3) hold no assets (in the U.S. or abroad); (4) have not sent or received more than $1,000 in the last 12 months through any account in which it or its affiliates have an interest; and (5) have not changed ownership in the last 12 months.
3. The Magic Number to Submit Updated Reports Is 30 Days
An internal company mechanism to track corporate changes, whether address changes or larger ownership structure changes, is essential for maintaining compliance with the BOI Reporting Rule.
FinCEN extended the original reporting deadline for companies created between January 1, 2024, and January 1, 2025, from 30 days to 90 days (Already-existing reporting companies have until January 1, 2025 to report, and companies created after January 1, 2025 will need to file within 30 days.). However, the deadline to submit updated reports remains 30 days for all entities.
Examples of when updated reports are required include:
- To reflect changes regarding the reporting company (e.g., registering a new "doing business as" name; updating the company's U.S. address) or its beneficial owners (e.g., death of a beneficial owner, sale of ownership interest that meets the 25 percent threshold, changes to names, addresses, or identifying numbers of beneficial owners)
- To correct inaccuracies in prior reports
- To report beneficial ownership information of an entity that was previously exempted (e.g., ownership of an entity shifted from being wholly owned by an exempt entity to partially owned by such an entity)
Given the tight timeframe and that companies often have many beneficial owners, it is important for companies to establish measures to track changes in beneficial ownership information, including educating relevant company personnel on scenarios that trigger the need to submit updated reports consistent with the BOI Reporting Rule. Some reporting companies may also consider leveraging existing systems to automatically notify relevant company personnel when a change must be reported to FinCEN. Even exempt companies must continually assess their status to ensure that they continue to meet the requirements of one of the BOI Reporting Rule's exemptions.
4. FinCEN Identifiers Can Provide an Important Streamlining Mechanism for Tracking Ownership Changes
Companies should assess the benefits of obtaining and reporting beneficial owners' FinCEN identifiers in place of their required information.
FinCEN recently clarified when and how reporting companies may use FinCEN identifiers in place of required personal or other identifying information of their beneficial owners. A FinCEN identifier is a unique number that FinCEN can issue to individuals or entities upon request. FinCEN identifiers are not required to remain compliant with the BOI Reporting Rule, but they are useful. A reporting company may always use their beneficial owners' individual FinCEN identifiers in lieu of required information (as obtaining an individual identifier requires the individual to submit the same personal information that reporting companies must submit about beneficial owners and company applicants under the BOI Reporting Rule).
A reporting company may also use the FinCEN identifier of another entity instead of reporting beneficial ownership information where three conditions are met: (1) the other entity has a FinCEN identifier; (2) the beneficial owners' interests in the reporting company exist due to their ownership interests in the other entity; and (3) the beneficial owners of the reporting company and the other entity are the same individuals.
One benefit of using FinCEN identifiers for BOI reports is that the individual or entity holding the identifier is responsible for reporting changes to FinCEN, not the reporting company. Use of FinCEN identifiers, therefore, may relieve reporting companies from some of the burden of closely tracking changes to the reporting company's beneficial owner information.
5. Third Party Service Providers May Need to Be Recorded as Company Applicants
"New" domestic companies and foreign companies also must report company applicants, but this will depend on when the company was created (in the case of domestic companies), or when the company registered to do business in the U.S. (in the case of foreign companies).
In addition to information about the reporting company and its beneficial owners, domestic reporting companies created on or after January 1, 2024, and foreign reporting companies first registered to do business in the U.S. on or after January 1, 2024, must report information about their "company applicants." "Applicants" must be individuals; they cannot be legal entities. A company has at most two company applicants — the individual who directly files the document that creates the company and the person who is primarily responsible for directing or controlling the filing, if not the same person as the direct filer.
The exceptions to beneficial owners do not apply to company applicants, meaning that a lawyer or accountant may be — and is likely to be — a company applicant. FinCEN has recently updated its guidelines on this point, emphasizing that the company applicant(s) are the person or persons who manage the filing of the relevant document registering the company, including the content of the document and how and when it is filed. For example, the company applicant may be the lawyer who completes or directs the completion of the registration documentation. If the lawyer does not file the document themselves, the person who actually files the document is also a company applicant. However, FinCEN excludes courier services and automated incorporation services from being company applicants, as their connection to the filing is too attenuated.
6. There Are Significant Penalties for Willful Failure to Comply
Willful violations of the BOI Reporting Rule come with consequences, including potential criminal penalties, or fines. However, FinCEN recognizes a safe harbor for individuals and reporting companies who report inaccuracies in their reports and voluntarily correct them within 90 days of their original reporting deadline.
The penalties for willful non-compliance with the BOI Reporting Rule may be severe, including civil penalties of up to $500 per day that the violation continues and criminal penalties of up to two years imprisonment and/or up to $10,000 for individuals who willfully submit false information in connection with a BOI report or who otherwise willfully fail to comply with the reporting requirements. For example, senior officers of a reporting company may face penalties if the company does not file a required BOI report. Additionally, an individual who qualifies as a beneficial owner may face penalties for willfully causing a company to fail to file a BOI report or to file an inaccurate BOI report. Therefore, if a beneficial owner refuses to provide personal information or provides false or incomplete information knowing that such information is intended to be reported to FinCEN, such conduct may result in penalties.
In the Rule, FinCEN stated that it does not expect that good faith efforts to comply with the regulations will constitute willful misconduct, warranting penalties under the CTA. In addition, there is a safe harbor provision in the statute that protects individuals and reporting companies who have reason to believe there is an inaccuracy in the BOI report and voluntarily correct the report within 90 days of the original deadline. These provisions underscore the importance of developing a robust compliance protocol for handling and documenting decisions related to a company's beneficial ownership information.
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