By Madison B. Oberg, Esq. and David L. Oberg, Esq.

Some businesses must register with the Financial Crimes Enforcement Network. Failure to do so will be costly.

new federal law called the Corporate Transparency Act (“CTA”) aims to compile a nationwide database of all entities—corporations, limited liability companies, etc.—that are doing business in any US state. The intention is to establish a single, central database that the US Government may use to determine who really owns and controls each organization. By enabling the government to truly know who owns and controls each tier of a corporate structure, it will be easier for it to fight financial crimes such as tax evasion, terrorism, and money laundering.

All business entities, unless they are exempt, are now required to submit a Beneficial Ownership Report (the “Report”) to the Department of Treasury’s Financial Crimes Enforcement Network (the “FinCEN”) in accordance with the CTA.

The portal to create a FinCEN registration number and file the Report is available via this link (www.fincen.gov/boi).

Who Has to File an Initial Report?

A “reporting company” is any organization that is established by submitting paperwork to the appropriate Secretary of State or other government agency. This includes companies formed in the United States, and foreign entities that are registered to do business in the United States. There are currently 23 exceptions to this rule for some organizations such as charities, publicly traded companies, big businesses with 20 or more employees and annual sales of $5 million or more, banks and financial institutions, and other organizations that are already heavily regulated. Further detail on these exemptions can be found on page 4 of the FinCEN’s Small Entity Compliance Guide (www.fincen.gov). Therefore, single-member LLCs, professional corporations, family-owned enterprises, and LLCs formed specifically for the purpose of holding real estate may all be considered “reporting companies.”

When is the Report Due?

Organizations established prior to January 1, 2024, have until January 1, 2025, to finalize their Report. Organizations created between January 1, 2024, and December 31, 2024, have 90 days from the date of entity establishment to finish their report. Entities created on or after January 1, 2025, shall have 30 days from the date of entity formation to file their report. Importantly, if there are any changes to the Report, those changes must be reported within 30 days. 

What Goes Into the Report?

The Report’s contents are all intended to be kept private. The following details about the entity and the people who own and manage it will be included in the report. Business information will include:

• Legal name and any DBA’s or trade names.
• Street address for entity’s principal place of business (where the actual business is operated, not the address you list for mail. So, if you operate your business from your house but have mail go to a third-party mailbox, you must list your home address).
• State of formation.
• EIN—if your entity does not have an EIN, the entity will need to get one.

The beneficial owner must report the following:

• Full legal name.
• Date of birth.
• Home address (actual address where they live).
• A PDF copy of the individual’s passport or driver’s license.

In addition, entities formed on and after January 1, 2024 will be required to disclose information about the “company applicant.” The company applicant includes the organizer of the business—i.e., the person that actually filed the paperwork with the relevant government organization to form the entity, and the person who directed the organizer to form the business. At a minimum, each company will have one company applicant (the direct filer). At most, the company will have two (the direct filer and the person who directed the filing). The same data will be reported for the company applicant(s) and the beneficial owners. 

The aforementioned personal data about the beneficial owners and company applicants must be included in each entity’s report. Instead of having to repopulate the personal data each time, an entity that the individual beneficial owner is affiliated with just needs to list the owner’s FinCEN ID number if they have one. Using the URL above, you can apply for a FinCEN ID number.

The intention is to establish a single, central database that the US Government may use to determine who really owns and controls each organization.

Who is a Beneficial Owner?

A beneficial owner is a person who: (1) has “substantial control” over the entity; or (2) possesses 25% or more of the entity’s equity. Therefore, you can be considered a beneficial owner even if you do not possess any stock or other ownership interest. A trust will be listed as the beneficial owner if it owns the organization. However, unless a trust is established in a state where filing a state form is necessary for the creation of the trust, it should not be necessary for the trust to register as a reporting company.

A person will be deemed to possess “substantial control” if they fulfill any of the following four requirements: (1) they hold a senior officer position; (2) they have the power to appoint or remove senior officers, a majority of the board of directors, or a comparable body; (3) they direct, determine, or have a significant influence over significant decisions made by the entity; or (4) they possess any other type of substantial control.

Any person who holds the title of president, chief financial officer, general counsel, chief executive officer, chief operational officer, or any other officer (regardless of official title and who performs a similar duty) is considered a senior officer.

Actual equity, stock, or other comparable interests are examples of ownership interests, as are convertible instruments, calls, straddles, options, and other contracts, agreements, or arrangements that establish ownership in the future.

On the other hand, the following are not considered beneficial owners: (a) minor children; (b) people acting as an agent on behalf of another person; (c) employees of a reporting company whose employment status alone provides them with substantial control, as long as they are not senior officers; (d) reporting company creditors; and (e) people who only have an inheritance-based future interest in a reporting company.

If in doubt, it is better to obtain a FinCEN ID number and complete the registration process since, as you will see below, there is a danger of serious fines for noncompliance with the CTA.

What Are the Penalties for Failing to File?

The CTA imposes civil penalties of up to $500 per day, criminal penalties of up to $10,000, and jail time of up to two years for noncompliance. If you file a revised report within 30 days of filing erroneous information, you are supposed to be protected from penalties under safe harbor. However, this is a new law, and there are still lots of unanswered questions. 

There is just a single registration form to fill out, no filing fee, and no continuous reporting is needed, unless there are changes to any part of the Report, such as if there is a change in owners or control personnel. Any change must be disclosed within 30 days after the change.