What To Do If You Have To File A Beneficial Ownership Information Report

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Understanding Beneficial Ownership Information Reports

  1. Overview of the Corporate Transparency Act
  2. The Importance of Beneficial Ownership Information Reporting for Businesses
  3. What Entities Must File Beneficial Ownership Information Reports?
  4. Exemptions to the Beneficial Ownership Information Reporting Requirements
  5. What to Do If You Have to File a Beneficial Ownership Information Report
  6. Who is a Beneficial Owner Under the Corporate Transparency Act?
  7. The Beneficial Owner Exceptions Under the Corporate Transparency Act
  8. Who is a Company Applicant Under the Corporate Transparency Act?
  9. The High Stakes of Transparency: Navigating Beneficial Ownership Information Reporting Penalties
  10. FinCEN Identifier: A Simplified Compliance Tool
  11. Beneficial Ownership Information Reporting: Updates and Corrections

What To Do If You Have To File A Beneficial Ownership Information Report

If your entity is a “reporting company” and does not qualify for one of the 23 exemptions, your entity will be required to file a beneficial ownership information report. All beneficial ownership information reports will be filed through the Financial Crime Enforcement Network’s (FinCEN) beneficial ownership information secure system. To complete a beneficial ownership information report, you will need to gather information about (1) your reporting company and (2) the reporting company’s “beneficial owners.” Reporting companies formed on or after January 1, 2024 will also need to gather information about any “company applicants.”

  1. Identify Your Reporting Company’s Information: Collect (1) the full legal name of your company, (2) any trade name or “doing business as” name, (3) the complete current U.S. address of the reporting company’s principal place of business or, if not based in the U.S., the primary location in the U.S. where the reporting company conducts business, (4) the state or Tribal jurisdiction where the reporting company was formed or registered, and (5) the reporting company’s taxpayer identification number (or a foreign taxpayer identification number and the name of the relevant jurisdiction).
  2. Determine Beneficial Owners: A beneficial owner is any individual who, directly or indirectly, either owns at least 25 percent of the equity interests of a company or exercises substantial control over the company. Beneficial ownership is defined broadly, with many nuances as to what is considered an equity interest and substantial control over a company. The Corporate Transparency Act requires reporting companies to identify and report all beneficial owners.
  3. Collect Required Beneficial Owner Information: You will need to collect each beneficial owner’s full legal name, date of birth, residential address, a unique identifying number from an acceptable identification document, and an image of that identification document. Alternatively, you can provide the beneficial owner’s FinCEN identifier, which individuals may obtain by registering with FinCEN. It will be best practice for reporting companies to require all beneficial owners to obtain a FinCEN identifier, and to then provide that FinCEN identifier to the reporting company.

Reporting Companies Formed on or After January 1, 2024

  1. Determine Company Applicants: A “company applicant” is an individual who plays a key role in the creation or registration of a reporting company. There can be two types of company applicants:
    1. Direct Filer: This is the individual who actually physically or electronically filed the document with the secretary of state or similar office.
    2. The Individual Who Directs or Controls the Filing Action: This is the individual who was primarily responsible for directing or controlling the filing of the creation or first registration document, even if they did not actually file the document themselves.
    3. No More Than Two Company Applicants: No reporting company will have more than two company applicants. Keep in mind that for a domestic reporting company, the company applicant will be the individual who directly files or directs the filing of the document that creates the domestic reporting company. For a foreign reporting company, the company applicant will be the individual(s) who directly files or directs the filing that first registers the foreign reporting company
  1. Collect Required Information About Each Company Applicant: For each company applicant, you will need to collect their (1) full legal name, (2) date of birth, (3) complete current residential or business street address (a business address is required for a company applicant who forms or registers a reporting company in the course of such company applicant’s business), (4) a unique identifying number from an acceptable identification document, and (5) an image of that identification document. Alternatively, you can provide the company applicant’s FinCEN identifier, which individuals may obtain by registering with FinCEN. It will be best practice for those who are in the business of forming or registering entities to obtain a FinCEN identifier, and to provide the FinCEN identifier to clients. When forming or registering an entity in the U.S., you should have all company applicants provide you with a FinCEN identifier.
  2. File the Beneficial Ownership Information Report: After collecting all necessary information, you should then file the beneficial ownership information report using FinCEN’s beneficial ownership secure system. Alternatively, you can hire a qualified legal professional to handle the reporting process for you.
  3. Be Prepared to Update the Form as Necessary: If any required information about the reporting company or a beneficial owner changes, you may need to file an updated beneficial ownership information report. It is imperative to keep track of any changes with respect to the required beneficial ownership reporting information. In addition, if you discover that information that you reported on a prior beneficial ownership information report was incorrect, you must file a corrected beneficial ownership information report. Lastly, if your reporting company becomes exempt from the filing requirement after filing a beneficial ownership information report, the reporting company must file an updated beneficial ownership information report indicating that it is a “new exempt entity.”

Conclusion

At Kim & Rosado LLP, we understand that navigating new regulatory requirements can be daunting. That’s why we’re here to assist you every step of the way. From identifying beneficial owners to submitting your beneficial ownership information report, our team has the expertise to ensure that your filing is thorough, timely, and compliant.

Exemptions to the Beneficial Ownership Information Reporting Requirements

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Understanding Beneficial Ownership Information Reports

  1. Overview of the Corporate Transparency Act
  2. The Importance of Beneficial Ownership Information Reporting for Businesses
  3. What Entities Must File Beneficial Ownership Information Reports?
  4. Exemptions to the Beneficial Ownership Information Reporting Requirements
  5. What to Do If You Have to File a Beneficial Ownership Information Report
  6. Who is a Beneficial Owner Under the Corporate Transparency Act?
  7. The Beneficial Owner Exceptions Under the Corporate Transparency Act
  8. Who is a Company Applicant Under the Corporate Transparency Act?
  9. The High Stakes of Transparency: Navigating Beneficial Ownership Information Reporting Penalties
  10. FinCEN Identifier: A Simplified Compliance Tool
  11. Beneficial Ownership Information Reporting: Updates and Corrections

Exemptions to the Beneficial Ownership Information Reporting Requirements

If an entity is a reporting company, it may be required to file a beneficial ownership information report. But a reporting company will not have to file a beneficial ownership information report if it falls within one of the 23 exemptions. The Corporate Transparency Act excludes from the beneficial ownership information filing requirement 23 types of entities. To determine if your entity is required to file a beneficial ownership information report, you must first determine if it is a reporting company and then determine if it is excepted from filing.

The Rationale Behind the Exemptions

The Corporate Transparency Act seeks to identify the beneficial owners of entities that are formed or registered in the United States. Realizing the heavy burdens that beneficial ownership information reporting creates for businesses, Congress tried to tailor the law narrowly. Carving out 23 exemptions to the beneficial ownership information filing requirement focuses FinCEN’s beneficial ownership database on entities where the risk of unlawful activities is highest. The exemptions to beneficial ownership information reporting generally apply to entities that are already regulated by federal or state agencies, or that are at lower risk of being used for unlawful activities due to their nature or structure.

For example, entities such as banks, credit unions, and insurance companies are already heavily regulated. Including these entities in the beneficial ownership information reporting requirements would not provide law enforcement with any information not already in its possession. Additionally, certain types of entities, like inactive entities or subsidiaries of exempt entities, are less likely to be used for unlawful purposes due to their lack of activity or ownership structure. Exempting these entities reduces the reporting burden on businesses that pose a lower risk, allowing FinCEN’s database to identify entities that present a higher risk for financial crime.

The exemptions are part of the Corporate Transparency Act’s intent to create greater transparency while minimizing unnecessary regulatory burdens on businesses, particularly those that are less likely to be involved in unlawful activities.

Specific Exemptions

Exemption Number Exemption Short Title
1 Securities reporting issuer
2 Governmental authority
3 Bank
4 Credit union
5 Depository institution holding company
6 Money services business
7 Broker or dealer in securities
8 Securities exchange or clearing agency
9 Other Exchange Act registered entity
10 Investment company or investment adviser
11 Venture capital fund adviser
12 Insurance company
13 State-licensed insurance producer
14 Commodity Exchange Act registered entity
15 Accounting firm
16 Public utility
17 Financial market utility
18 Pooled investment vehicle
19 Tax-exempt entity
20 Entity assisting a tax-exempt entity
21 Large operating company
22 Subsidiary of certain exempt entities
23 Inactive entity
  1. Securities reporting issuer: An entity that is either an issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934 or is required to file reports under section 15(d) of that Act. Such entities are generally subject to the reporting requirements set forth by the Securities and Exchange Commission, which includes the obligation to file various forms and reports such as annual reports (Form 10-K), quarterly reports (Form 10-Q), and current reports (Form 8-K) to provide the public with an ongoing picture of their financial status and material business matters.
  2. Governmental authority: An entity that is established under the laws of the United States, an Indian Tribe, a State, or a political subdivision of a State, or under an interstate compact between two or more States, and that exercises governmental authority on behalf of the United States or any such Indian Tribe, State, or political subdivision.
  3. Bank: For the purposes of the exemption to filing Beneficial Ownership Information Reports, a “bank” is defined in several ways under different statutes. An entity that meets any of these definitions may qualify for the exemption:
    1. The entity is a “bank” as defined in section 3 of the Federal Deposit Insurance Act.
    2. The entity is a “bank” as defined in section 2(a) of the Investment Company Act of 1940.
    3. The entity is a “bank” as defined in section 202(a) of the Investment Advisers Act of 1940.
  4. Credit union: An entity meeting the definition of either a “federal credit union” or a “state credit union” as defined in section 101 of the Federal Credit Union Act.
  5. Depository institution holding company: Any entity that meets one of the following two criteria:
    2. The entity is a “bank holding company” as defined in section 2 of the Bank Holding Company Act of 1956.
    3. The entity is a “savings and loan holding company” as defined in section 10(a) of the Home Owners’ Loan Act.
  1. Money services business: An entity that is registered with the Financial Crimes Enforcement Network under 31 CFR 1022.380. This type of business typically includes currency dealers or exchangers, check cashers, issuers of traveler’s checks or money orders, sellers or redeemers of traveler’s checks or money orders, and money transmitters.
  2. Broker or dealer in securities: An entity that meets both of these criteria will be excepted from the beneficial ownership information report filing requirement:
    1. The entity is a “broker” or “dealer,” as those terms are defined in section 3 of the Securities Exchange Act of 1934, and
    2. The entity is registered under section 15 of the Securities Exchange Act of 1934.
  1. Securities exchange or clearing agency: An entity that qualifies if both of the following criteria apply:
    1. The entity is an “exchange” or “clearing agency,” as those terms are defined in section 3 of the Securities Exchange Act of 1934, and
    2. The entity is registered under section 6 or 17A of the Securities Exchange Act of 1934.
  1. Other Exchange Act registered entity: An entity qualifies for this exemption if both of the following criteria apply:
    1. The entity is not a securities reporting issuer (Exemption 1), a broker or dealer in securities (Exemption 7), or securities exchange or clearing agency (Exemption 8), and
    2. The entity is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934.
  1. Investment company or investment adviser: To qualify for this exemption, an entity must be both:
    1. Either an investment company as defined in section 3 of the Investment Company Act of 1940 or an investment adviser as defined in section 202(a) of the Investment Advisers Act of 1940, and
    2. registered with the Securities and Exchange Commission under either of these authorities:
      1. The Investment Company Act of 1940, or
      2. The Investment Advisers Act of 1940.
  1. Venture capital fund adviser: An entity qualifies for this exemption if both of the following criteria apply:
    1. The entity is an investment adviser that is described in section 203(l) of the Investment Advisers Act of 1940, and
    2. The entity has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the Securities and Exchange Commission.
  1. Insurance company: An entity that is an insurance company as defined in section 2 of the Investment Company Act of 1940.
  1. State-licensed insurance producer: To qualify for this exemption, an entity must meet both of the following requirements:
    1. The entity is an insurance producer that is authorized by a State and subject to supervision by the insurance commissioner or a similar official or agency of a State, and
    2. The entity has an operating presence at a physical office within the United States. The term “operating presence at a physical office within the United States” means that an entity regularly conducts its business at a physical location in the United States that the entity owns or leases and that is physically distinct from the place of business of any other unaffiliated entity.
  1. Commodity Exchange Act registered entity: An entity that meets both of the following requirements:
    1. The entity is a “registered entity” as defined in section 1a of the Commodity Exchange Act, and
    2. The entity is registered with the Commodity Futures Trading Commission under the Commodity Exchange Act and is one of the following:
      1. A “futures commission merchant,” “introducing broker,” “swap dealer,” “major swap participant,” “commodity pool operator,” or “commodity trading advisor,” each as defined in section 1a of the Commodity Exchange Act, or
      2. A “retail foreign exchange dealer” as described in section 2(c)(2)(B) of the Commodity Exchange Act.
  1. Accounting firm: The entity is a public accounting firm registered under section 102 of the Sarbanes-Oxley Act of 2002.
  2. Public utility: For this exemption, an entity qualifies if both of the following apply:
    1. The entity is a “regulated public utility” as defined in 26 U.S.C. 7701(a)(33)(A), and
    2. The entity provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States.
  3. Financial market utility: The Financial Stability Oversight Council has designated the entity as a financial market utility under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010.
  4. Pooled investment vehicle: An entity meeting the requirements of both sections (a) or (b) qualifies for this exemption to the beneficial ownership information report filing requirement.
    1. Any investment company, as defined in section 3(a) of the Investment Company Act of 1940 or any company that would be an investment company under that section but for the exclusion provided from that definition by paragraph (1) or (7) of section 3(c) of that Act, and is identified by its legal name by the applicable investment adviser in its Form ADV (or successor form) filed with the Securities and Exchange Commission or will be so identified in the next annual updating amendment to Form ADV required to be filed by the applicable investment adviser pursuant to rule 204–1 under the Investment Advisers Act of 1940, and
    2. Is operated or advised by any of these exempt entities:
      1. Bank (Exemption 3),
      2. Credit union (Exemption 4),
      3. Broker or dealer in securities (Exemption 7),
      4. Investment company or investment adviser (Exemption 10), or
      5. Venture capital fund adviser (Exemption 11).
  1. Tax-exempt entity: An entity is considered a tax-exempt entity for purposes of this filing exemption if any of the following four criteria apply:
    1. The entity is an organization that is described in section 501(c) of the Internal Revenue Code of 1986 and exempt from tax under section 501(a) of the Internal Revenue Code.
    2. The entity is an organization that is described in section 501(c) of the Internal Revenue Code and was exempt from tax under section 501(a) of the Internal Revenue Code but lost its tax-exempt status less than 180 days ago.
    3. The entity is a political organization, as defined in section 527(e)(1) of the Internal Revenue Code, that is exempt from tax under section 527(a) of the Internal Revenue Code.
    4. The entity is a trust described in paragraph (1) or (2) of section 4947(a) of the Internal Revenue Code.
  1. Entity assisting a tax-exempt entity: To fall within this exemption, an entity must meet all of the four following criteria:
    1. The entity operates exclusively to provide financial assistance to, or hold governance rights over, any tax-exempt entity described in Exemption 19,
    2. The entity is a United States person as defined in section 7701(a)(30) of the Internal Revenue Code,
    3. The entity is beneficially owned or controlled exclusively by one or more United States persons that are United States citizens or lawfully admitted for permanent residence, and
    4. The entity derives at least a majority of its funding or revenue from one or more United States persons that are United States citizens or lawfully admitted for permanent residence.
  1. Large operating company: An entity that is exempted from filing a Beneficial Ownership Information report if it is a large operating company, which:
    1. employs more than 20 full-time employees in the United States,
    2. filed a U.S. federal income tax return in the previous year reporting more than $5,000,000 in U.S.-source gross receipts or sales, and
    3. has an operating presence at a physical office within the United States.
  1. Subsidiary of certain exempt entities: An entity qualifies for the subsidiary exemption if its ownership interests are controlled or wholly owned, directly or indirectly, by one or more of the following types of exempt entities: securities reporting issuer (Exemption 1), governmental authority (Exemption 2), bank (Exemption 3), credit union (Exemption 4), depository institution holding company (Exemption 5), broker or dealer in securities (Exemption 7), securities exchange or clearing agency (Exemption 8), Other Exchange Act registered entity (Exemption 9), investment company or investment adviser (Exemption 10), venture capital fund adviser (Exemption 11), insurance company (Exemption 12), state-licensed insurance producer (Exemption 13), Commodity Exchange Act registered entity (Exemption 14), accounting firm (Exemption 15), public utility (Exemption 16), financial market utility (Exemption 17), tax-exempt entity (Exemption 19), or large operating company (Exemption 21).
  2. Inactive entity: An “inactive entity” for purposes of the exemption from filing a beneficial ownership information report is defined by meeting all six of the following criteria:
    1. The entity was in existence on or before January 1, 2020.
    2. The entity is not engaged in active business.
    3. The entity is not owned by a foreign person, whether directly or indirectly, wholly or partially. A “foreign person” is defined as someone who is not a United States person, with a United States person being a citizen or resident of the United States, domestic partnership and corporation, and other estates and trusts as defined in section 7701(a)(30) of the Internal Revenue Code of 1986.
    4. The entity has not experienced any change in ownership in the preceding twelve-month period.
    5. The entity has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding twelve-month period.
    6. The entity does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

All entities should closely review the exemptions with their legal counsel to determine whether they have an obligation to file beneficial ownership information reports. If an entity is a reporting company and does not fall within any of these exemptions, it will be required to file a beneficial ownership information report.

Conclusion

Determining whether your entity can anchor in the safe harbor of an exemption requires a keen understanding of the Corporate Transparency Act. We encourage you to reach out to us with any questions regarding your beneficial ownership information reporting requirements. Our expertise is your asset in charting a compliant course for your business.

What Entities Must File Beneficial Ownership Information Reports?

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Understanding Beneficial Ownership Information Reports

  1. Overview of the Corporate Transparency Act
  2. The Importance of Beneficial Ownership Information Reporting for Businesses
  3. What Entities Must File Beneficial Ownership Information Reports?
  4. Exemptions to the Beneficial Ownership Information Reporting Requirements
  5. What to Do If You Have to File a Beneficial Ownership Information Report
  6. Who is a Beneficial Owner Under the Corporate Transparency Act?
  7. The Beneficial Owner Exceptions Under the Corporate Transparency Act
  8. Who is a Company Applicant Under the Corporate Transparency Act?
  9. The High Stakes of Transparency: Navigating Beneficial Ownership Information Reporting Penalties
  10. FinCEN Identifier: A Simplified Compliance Tool
  11. Beneficial Ownership Information Reporting: Updates and Corrections

What Entities Must File Beneficial Ownership Information Reports?

The Corporate Transparency Act requires “reporting companies” to file beneficial ownership information reports. Reporting companies can be “domestic reporting companies” or “foreign reporting companies.”

Domestic Reporting Companies: A domestic reporting company is an entity that is created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe. Essentially, any entity established under U.S. state law would typically qualify as a domestic reporting company. In addition to corporations or limited liability companies, reporting companies will generally include limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships because such entities are generally created by a filing with a secretary of state or similar office. Legal entities, including certain trusts, are not domestic reporting companies if they are not created by the filing of a document with a secretary of state or similar office.

Foreign Reporting Companies: A foreign reporting company is a (1) a corporation, limited liability company, or any other entity that is (2) created under the laws of a foreign country and (3) registered to do business in the United States. The key distinction is that these entities are not originally formed in the United States. Instead, they are originally formed in a foreign jurisdiction. But these foreign entities are subject to beneficial ownership information reporting requirements because their business operations extend into U.S. jurisdictions through formal registration. For entities formed overseas, they will be considered a foreign reporting company if they are registered to do business in the United States by the filing of a document with a secretary of state or a similar office.

Have an Interest in a Domestic Reporting Company or a Foreign Reporting Company?

If an entity is either a domestic reporting company or foreign reporting company, it may have to file a beneficial ownership information report. Again, the relevant consideration is whether an entity is created or registered to do business in the United States through the filing of a document with a secretary of state or similar office. The law is drafted and interpreted broadly to capture all entities registered with a state.

Secretary of State or Similar Office

For purposes of the beneficial ownership information reporting requirements, the term “secretary of state or similar office” generally refers to the state-level governmental authority that is responsible for the registration and administration of business entities within that state. Each state and territory in the United States has an office, often but not always called the secretary of state, that handles entity registrations, whether they be corporations, limited liability companies, limited partnerships, or other legal business entities.

Examples of offices that are similar to a secretary of state include:

  • Division of Corporations: In some states, the office responsible for entity registration may be called the Division of Corporations.
  • Department of Commerce: In certain states, the Department of Commerce may oversee entity registrations and filings.
  • Corporations Commission: Some states have a dedicated Corporations Commission that handles the formation and registration of entities.
  • Business Services Division: In other states, the office might be known as the Business Services Division.
  • Office of the Registrar: In some jurisdictions, the office might be referred to as the Office of the Registrar, which is responsible for the registration of entities.

While these offices serve a similar function to the secretary of state in terms of entity registration, the specific name and organizational structure can differ from state to state. Although the name may be different, registration of an entity with these offices, which are similar to a secretary of state, may create a requirement to file a beneficial ownership information report.

The Importance of State Law in Identifying Domestic Reporting Companies

What constitutes a domestic reporting company is nuanced and varies according to state law. For instance, in states that have adopted the Uniform Limited Partnership Act, limited partnerships are formed upon filing of a document with the secretary of state, and will meet the criteria of a domestic reporting company.

On the other hand, general partnerships usually do not require such a filing and, in most states, are not considered domestic reporting companies under the Corporate Transparency Act. Delaware is an exception, where a general partnership must file specific documents to be legally formed, bringing it under the umbrella of domestic reporting companies.

Trusts present another complexity; while most can be established without any state filing, a Delaware statutory trust must file a certificate with the secretary of state, categorizing it as a domestic reporting company. State and, where relevant, Tribal laws must be diligently reviewed to accurately identify entities that fall within the definition of a domestic reporting company. The nuances of state law can significantly impact the classification of various entities, including limited liability partnerships (LLPs), business trusts, and certain types of partnerships.

FinCEN’s efforts to clarify the scope of the definition have made it clear that while corporations and LLCs are categorically included, other legal forms require a case-by-case analysis based on state law. In its estimation, FinCEN has projected that there are over 30 million domestic reporting companies in the United States, with an annual increase of approximately 3.7 million. This highlights the vast scale of the reporting obligations.

The Importance of State Law in Identifying Foreign Reporting Companies

If a foreign entity is is a foreign reporting company if it registers to do business in the U.S. through the filing of a document with a secretary of state or similar office. The breadth of this definition means that many foreign entities could be classified as foreign reporting companies. U.S. jurisdictions generally require any legal entity formed outside their borders to register if it engages in certain types of business activities within their territory.

In determining if your entity is a foreign reporting company, it is vital to be aware of the varying state laws that dictate when registration is necessary. For example, while a foreign corporation must register in Alaska to engage in legal proceedings, Arizona does not impose such a requirement for litigation purposes. However, most states do mandate registration for foreign corporations to handle payroll processes such as employee income tax withholding, making hiring an employee a common trigger for registration. The implications of this registration are significant: once a foreign entity registers in a state, it becomes subject to the reporting requirements of the Corporate Transparency Act.

Conclusion

The Corporate Transparency Act’s requirements represent a significant shift in the corporate compliance arena, and staying ahead of these changes is critical. At Kim & Rosado LLP, we are committed to guiding you through the beneficial ownership information reporting process and ensuring that your business is aligned with the new standards of corporate transparency.

Whether you are a new or established entity, we are here to provide the expertise and support you need. Reach out to us to ensure that your entity is in full compliance with the Corporate Transparency Act and to leverage our insights for your strategic advantage.

The Importance of Beneficial Ownership Information Reporting for Businesses

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Understanding Beneficial Ownership Information Reports 

  1. Overview of the Corporate Transparency Act
  2. The Importance of Beneficial Ownership Information Reporting for Businesses
  3. What Entities Must File Beneficial Ownership Information Reports?
  4. Exemptions to the Beneficial Ownership Information Reporting Requirements
  5. What to Do If You Have to File a Beneficial Ownership Information Report
  6. Who is a Beneficial Owner Under the Corporate Transparency Act?
  7. The Beneficial Owner Exceptions Under the Corporate Transparency Act
  8. Who is a Company Applicant Under the Corporate Transparency Act?
  9. The High Stakes of Transparency: Navigating Beneficial Ownership Information Reporting Penalties
  10. FinCEN Identifier: A Simplified Compliance Tool
  11. Beneficial Ownership Information Reporting: Updates and Corrections

The Importance of Beneficial Ownership Information Reporting for Businesses

The Corporate Transparency Act is a new compliance issue for most U.S. entities. Here are a couple key points:

The new Beneficial Ownership Information Reporting regime will impose costs on businesses. These costs include:

  • Administrative Costs: Businesses may incur administrative costs associated with collecting and maintaining accurate information about their beneficial owners and company applicants. This includes the time and resources needed to understand the reporting requirements, gather necessary documentation, and ensure that the information is kept up-to-date
  • Reporting Costs: Businesses may need to invest in systems or software to manage the beneficial ownership information reporting process, especially if they have multiple beneficial owners or complex ownership structures. Additionally, companies may choose to seek professional advice from attorneys to assist with compliance and reporting.
  • Training Costs: Beneficial ownership information reports are an entirely new company reporting requirement. Businesses may need to train their staff on these new requirements to ensure that everyone involved in the reporting process understands their responsibilities and how to properly collect and report the information.
  • Penalty Costs: There can be significant penalty costs for failing to comply with all beneficial ownership information reporting requirements. Civil penalties can amount to up to $500 for each day that the violation continues. Criminal penalties can include 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 a correct Beneficial Ownership Information Report may also be held accountable for that failure.

The New Beneficial Ownership Compliance Regime for U.S. Businesses

To adhere to the Corporate Transparency Act’s requirements, reporting companies must now embed new provisions within their governance documents. These provisions should be designed to mandate the disclosure of identifying information by all beneficial owners, including those with indirect ownership stakes. The obligation to furnish such data should be made an active duty that is codified within the company’s foundational agreements.

The responsibility for collecting and safeguarding this sensitive data—classified as “personally identifiable information” (PII)—falls squarely on the company. It should therefore designate an officer or senior manager to oversee the initial beneficial ownership information report and ensure its timely submission. Moreover, the Corporate Transparency Act demands that companies update their reports following any change in beneficial ownership, necessitating a system that enables the continuous collection of up-to-date PII from beneficial owners.

Businesses’ governance documents must therefore be crafted to not only require the submission of accurate information but also to establish accountability. Beneficial owners should be held responsible to the company and their peers for any inaccuracies or omissions in the data provided. Conversely, the company bears the responsibility of protecting the confidentiality of its beneficial owners’ PII, except when disclosure to FinCEN is mandated by law.

This new framework of information collection and accountability represents a significant shift for private businesses. It requires a reevaluation of internal processes and a renewed commitment to regulatory compliance. As companies adapt to these changes, they will inevitably develop a deeper understanding of their ownership structures and the critical role that transparency plays in the modern business environment.

Our Recommendations for Complying with The Corporate Transparency Act

Kim & Rosado LLP recommends that all businesses take the following steps:

  1. Determine if your entity is a reporting company that is required to file a Beneficial Ownership Information Report.
  2. Determine whether your entity is one of the 23 types of entities excepted from beneficial ownership information reporting.
  3. Determine who the beneficial owners of the business are.
  4. Consider amending your business’ governance documents to require all beneficial owners to comply with the beneficial ownership information reporting process (and provide remedies for noncompliance).
  5. Ensure that each beneficial owner has an acceptable, non-expired identification document.
  6. Encourage each beneficial owner to apply for a FinCEN identifier as soon possible.
  7. Develop an internal beneficial ownership information reporting program to ensure that the company stays in compliance and files timely updated beneficial ownership information reports.
  8. Dissolve any inactive entities to avoid the ongoing costs of beneficial ownership information reporting.

Conclusion

For firms navigating this complex landscape, the expertise of seasoned legal professionals can be invaluable. At Kim & Rosado, our partners leverage their unparalleled experience with the Department of Treasury and deep understanding of government regulations to guide clients through the intricacies of beneficial ownership information reporting. We stand ready to assist you in developing robust compliance procedures that not only meet the letter of the law but also protect the interests of your company and its owners.

Overview of the Corporate Transparency Act

by

Understanding Beneficial Ownership Information Reports

  1. Overview of the Corporate Transparency Act
  2. The Importance of Beneficial Ownership Information Reporting for Businesses
  3. What Entities Must File Beneficial Ownership Information Reports?
  4. Exemptions to the Beneficial Ownership Information Reporting Requirements
  5. What to Do If You Have to File a Beneficial Ownership Information Report
  6. Who is a Beneficial Owner Under the Corporate Transparency Act?
  7. The Beneficial Owner Exceptions Under the Corporate Transparency Act
  8. Who is a Company Applicant Under the Corporate Transparency Act?
  9. The High Stakes of Transparency: Navigating Beneficial Ownership Information Reporting Penalties
  10. FinCEN Identifier: A Simplified Compliance Tool
  11. Beneficial Ownership Information Reporting: Updates and Corrections

Overview of the Corporate Transparency Act

The Corporate Transparency Act was a major piece of legislation. It will affect tens of millions of business entities and those who own and control those entities. In this article we will provide an overview of the Corporate Transparency Act.

The Corporate Transparency Act requires reporting companies to report beneficial ownership information to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Beneficial ownership information is reported on a beneficial ownership information report.

Reporting Companies:

  • Most corporations, limited liability companies, and other similar entities created in the United States or registered to do business in the United States are considered reporting companies under the Corporate Transparency Act.
  • Certain entities are exempt from these requirements, such as financial institutions, investment companies, insurance companies, public utilities, and tax-exempt entities.
  • FinCEN anticipates that most entities organized or registered to do business in the United States will have to file a Beneficial Ownership Information Report.

Beneficial Ownership Information:

  • Reporting companies must identify each beneficial owner.
  • Companies must also report information about company applicants, which includes the individuals who file the application to form or register the entity.

Reporting Process:

  • Every reporting company must file an initial beneficial ownership information report.
  • Beneficial Ownership Information reports must be filed with FinCEN electronically through a secure filing system on FinCEN’s website called the Beneficial Ownership Secure System.
  • Reporting companies must file updated reports within 30 days of any changes to the reported information.
  • Reporting companies must file corrected reports within 30 days of discovering an error on a previously-filed beneficial ownership information report.
  • There is no annual reporting requirement, but initial reports must be filed by specific deadlines.
  • Presently, initial reports must be filed:
    • By January 1, 2025 for reporting companies established before January 1, 2024.
    • Within 90 days of formation or registration for reporting companies created or registered on or after January 1, 2024 but before January 1, 2025.
    • Within 30 days after formation or registration for reporting companies created or registered on or after January 1, 2025.
  • Updated or corrected Beneficial Ownership Information Reports must be filed within 30 days of the event triggering the update or of learning of the need to correct.
  • To simplify the reporting process, FinCEN will allow reporting companies, beneficial owners, and company applicants to obtain FinCEN identifiers.

Penalties for Non-Compliance

  • Reporting companies that fail to file correct or updated beneficial ownership information can be subjected to monetary or criminal penalties.
  • Penalties can be up to $500 per day or imprisonment for up to two years and/or a fine of $10,000.

What Is the Corporate Transparency Act?

The Corporate Transparency Act is an act by the federal government to standardize entity formation. This standardization is accomplished by requiring most entities to file a beneficial ownership information report with FinCEN.

Why Did Congress Create the Corporate Transparency Act?

The purpose of the Corporate Transparency Act is to provide law enforcement with information about the true owners of entities operating in the U.S. In passing the Corporate Transparency Act, Congress stated:

  • that few if any states required the reporting of beneficial ownership when forming or registering an entity,
  • this lack of beneficial ownership information created the opportunity for criminals to use U.S. entities for illicit activities, such as money laundering, financing terrorism, tax fraud, and other crimes, and
  • criminal investigations were often hampered by the lack of information about the beneficial owners of entities that were engaged in or facilitating criminal conduct.

What Will FinCEN Do with All of This Information?

To accomplish the Corporate Transparency Act’s purpose, FinCEN is required to create a centralized, secure repository of beneficial ownership information. Rather than requiring FinCEN to gather all such information itself, the Corporate Transparency Act instead imposes a legal obligation on entities and their owners to file Beneficial Ownership Information Reports. To compel compliance, the Corporate Transparency Act imposes penalties for failure to file or failure to correctly report required information on those Beneficial Ownership Information Reports. Those reports will then create a vast database that certain federal, state, and foreign agencies can review to determine an entity’s beneficial owners and company applicants.

The Beneficial Ownership Information Report regime is a vast new information filing requirement. It will affect most entities already formed or registered in the U.S. And it will affect any entity formed or registered in the U.S. in the future.

Conclusion

Navigating the requirements of the Corporate Transparency Act can be complex, but you do not have to do it alone. Experienced counsel can guide you through the intricacies of the Act, ensuring that your business remains compliant with these new federal standards.

NIL Collectives: Is there cause for panic?

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Last summer, the issue of college athletes and the three elements of their rights of publicity, those being name, image, and likeness (NIL), came to the attention of those deep thinkers at 1111 Constitution Avenue. After the Supreme Court ruled that the National Collegiate Athletic Association had violated antitrust law in restricting compensation for student-athletes, NCAA v. Alston, 594 U.S. 2147 (2021), an interim policy was adopted allowing student-athletes, under certain conditions, to profit from their publicity rights without otherwise affecting their amateur eligibility.

Cue the land-rush business by exuberant boosters to pool donations and thereby lend a helping hand to the student-athletes in exploiting their hard-won NIL opportunities. And so were created what are commonly called “NIL collectives” (an intriguing name choice in view of the likely ideology of many of the boosters). These collectives typically use their funds to compensate student-athletes for charity appearances, speaking engagements, autograph signings, social-media marketing, product endorsements, and more. According to some reports, over 200 such collectives exist, a quarter of which claim nonprofit status.

In response to this development, on June 9, 2023, the IRS released a general legal advice memorandum (GLAM), AM 2023-004, https://www.irs.gov/pub/lanoa/am-2023-004-508v.pdf, that generally surveys the current state of play in this area and concludes that “in most cases,” such NIL collectives are operating for a substantial nonexempt purpose that is more than incidental, both qualitatively and quantitatively, to any exempt purpose that may be pursued by these entities.

The GLAM reaches an eminently sensible result as most NIL collectives do inherently appear (and were initially designed) as blatant devices to simply transfer funds to those big people on campus whom everyone looks up to. It is the nature of the beast that most NIL collectives will serve the private interests of those favored student-athletes possessing appreciable NIL attributes. The GLAM is forthright in affirming that student-athletes are not themselves a recognized charitable class. Further hammering in the nail, the act of NIL collectives paying student-athletes for the use of a valuable property right “does not further educational purposes under I.R.C. § 501(c)(3).”

The initial reporting on the GLAM was pretty bleak from the perspective of the NIL collectives, but we must keep in mind that the document addresses a broad subject. For example, the GLAM notes that some collectives promise to pay out 80 to 100 percent of all contributions to student-athletes, which may not always be the case. So, all may not be lost for NIL collectives, but a drastic restructuring may be called for. The focus must be upon plainly tax-exempt purposes. A worthy cause must receive the lion’s share of munificence flowing through from those amazing boosters. And the student-athletes may have to settle for more of that warm, fuzzy feeling for helping out charities and less of that cash.

And indeed, according to the website businessofcollegesports.com, thirty-one of the listed collectives purport to serve charitable purposes, including All Good Dawgs at Butler University, Hoosiers for Good at Indiana University, and Horns with Heart at the University of Texas-Austin. It may be possible to salvage some collectives with enhanced guidelines. The GLAM does concede that if the student-athletes are selected based on need, the purpose may be considered for the relief of the poor or distressed.

But for other collectives, ones more brazen in their aims, it may even be necessary to dissolve and start anew with starkly different articles of incorporation and bylaws and with new Form 1023 applications. And this is a matter to take seriously as the GLAM indicates the IRS may reconsider the exempt status of collectives that have already received determination letters, although relief may also be granted under I.R.C. § 7805(b) to limit the retroactive effect of any revocations of tax-exempt status. And of course, donors to NIL collectives must be concerned over potential challenges to any claimed deductions under I.R.C. § 170.