Beneficial Ownership Reporting

The Corporate Transparency Act or CTA was passed in 2021 to revamp regulation and reporting of who benefits from various entities in the United States. As a result, businesses in the United States are now subject to new entity reporting requirements which some may be unaware of. This blog will go into what the Corporate Transparency Act is, what it requires, and how business owners may be affected.

Prefer to watch a video? Check out the YouTube version of this blog.

The Corporate Transparency Act

The Corporate Transparency Act was passed in 2021 to reduce illegal activity by making it easier to determine who is benefitting form various entities doing business in the United States. Before the Corporate Transparency Act, all business registrations were managed by states who each had their own rules and regulations about business registrations and disclosures. After the Corporate Transparency Act, businesses will still need to be registered at the state level; however, the Act institutes a new annual reporting requirement at the federal level. This is an entirely new reporting requirement that did not exist before the Corporate Transparency Act was passed. This is called Beneficial Ownership Interest Reporting or BOI.

How does Beneficial Ownership Reporting work under the Corporate Transparency Act?

Beneficial Ownership Reporting has several reporting parameters. Under the Corporate Transparency Act, both the reporting entity and the reporting entity’s beneficial owners must be identified.

What is a reporting entity?

A reporting entity under the Corporate Transparency Act is defined as all domestic and foreign entities formed to do business in the United States.

A domestic business is defined as a corporation or LLC created by filing organizational documents with a Secretary of State or any similar office under the law of a state or Native American tribe.

A foreign business is a company formed under the laws of a foreign country that is registered to do business in the United States.

If you are in doubt, your business is probably a reporting entity. However, there are 23 exceptions/exemptions to these reporting rules.

Here are a few of the larger exceptions:

1. A large operating company defined as an entity employing 20 or more full time employees, $5,000,000 in gross receipts, and a physical presence in the US.
2. Publicly traded companies registered under Sec.102 of the Sarbanes-Oxley Act.
3. Entities already federally regulated such as banks, insurance companies, and investment advisers.

This is not a complete list of exemptions under the Corporate Transparency Act. A full list can be found on the FinCEN website. The act was designed to make reporting a requirement, so the exemptions are fairly limited.

Who is a Beneficial Owner under the Corporate Transparency Act?

If you are a reporting company, you must also disclose the identities of the beneficial owners of your company.

A beneficial owner is defined as an individual who directly or indirectly:

1.      Exercises substantial control over a reporting company.

OR

2.      Owns or controls at least 25% of the ownership interests of a reporting company.

Substantial control can mean a variety of different individuals qualify. An individual is defined as having substantial control if they meet any of the following 4 criteria:

1. Individual is a senior officer.
2. They have the authority to appoint or remove certain officers or a majority of directors of the company.
3. They are an important decision-maker.
4. They have any other form of substantial control.

As you can see, those definitions are both vague and expansive. A few examples of people who would probably qualify would be the President, CFO, General Counsel, CEO, any other officers plus those who can remove them.

The second test is ownership of the company itself. The important part to understand is that the Corporate Transparency Act also includes ownership through indirect methods.

The following types of ownership will qualify someone as a beneficial owner:

1. Equity
2. Interest in a joint venture
3. Interest in a business trust
4. Capital or Profit interests
5. Convertible instruments
6. Options or privileges to buy or sell stock
7. Any other instrument or arrangement used to establish ownership

Once again, you can see that point 7 leads to a broad understanding of what constitutes ownership.

When does the Corporate Transparency Act’s reporting requirement go into effect?

The Corporate Transparency Act goes into effect on 1/1/2024. The Corporate Transparency Act’s reporting requirements are divided into two segments: new businesses formed and existing businesses.

• For new businesses started after 1/1/2024, all new entities must report their beneficial owners within 30 days. For 2024, there is an extension to 90 days.
• For existing businesses, you must register by 1/1/2025.
• For changes in ownership, the changes must also be reported within 30 days.

What do I need to do?

Beneficial Ownership Reporting is done through FinCEN. The portal to complete the registration will not be live until 1/1/2024. However, there are several helpful guides and FAQs already live on their website.

The filing will include items like names, taxpayer numbers, addresses, and your state of formation for your reporting entity. It will also require similar identifying information for the beneficial owners.

Right now, guidance indicates that assisting someone with filing is a practice of law. That means that you will need to do this on your own or with the assistance of an attorney.

What if I don’t file in time?

If you fail to report your beneficial owners, the Corporate Transparency Act provides for both civil and criminal penalties.

1. Civil – up to $500 per day.
2. Criminal – up to $10,000 in fines and 2 years in prison.

As you can see the Act is not playing around so make sure to report on time!

Summary

The Corporate Transparency Act is a significant change in how business reporting has been done in the United States. It adds an additional legal requirement to an expansive list of companies with few exceptions. It also limits the amount of help traditional business advisors like financial planners and CPAs can provide. However, it does not seem like the burden to report is too high. The hardest part of this will most likely be remembering a new filing date that isn’t related to your taxes.

I hope you found this blog helpful. Ironclad Wealth Management is a financial planning firm focusing on taxes, protection, and investments for business owners with 1-25 employees. Although we can’t assist with beneficial ownership reporting, we help our clients stay on top of the various items that come their way.

If you're a business owner with 1-25 employees and looking for a help, click here for a no-cost, no-obligation introductory call to see how we can help!

‍

MGO One Seven LLC ("MGO One Seven") is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). Registration with the SEC does not imply a certain level of skill or training. All titles listed for individuals associated with Ironclad Wealth Management represent the individual's role with Ironclad Wealth Management, and not their role with MGO One Seven. Services are provided under the name Ironclad Wealth Management, a DBA of MGO One Seven. Investment products are not FDIC insured, offer no bank guarantee, and may lose value. Please visit our website www.WeAreOneSeven.com for important disclosures.

Please note, the information provided in this presentation is for informational purposes only and investors should determine for themselves whether a particular service or product is suitable for their investment needs. Please refer to the disclosure and offering documents for further information concerning specific products or services.

Nothing provided in this presentation constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

‍