Preparing Small Businesses for the New Corporate Transparency Act Reporting

Introduction

The U.S. Treasury Department is introducing a pivotal regulation under the Corporate Transparency Act (CTA), effective January 1, 2024. This regulation mandates small businesses to submit a Beneficial Ownership Information (BOI) report to the Financial Crimes Enforcement Network (FinCEN). This initiative targets enhancing financial transparency and curbing illegal activities like money laundering.

FinCEN estimates that approximately 32.6 million business entities, including corporations, LLCs, and limited partnerships, are expected to be affected in 2024. This section will guide you through understanding if your business falls under this mandate and the importance of consulting a Certified Tax Planner for compliance.

Who Has to Submit a BOI Report?

A recent survey of U.S.-based companies and law and accounting firms revealed that half of the companies polled would have to submit a BOI report, but almost three out of four had never heard about this requirement before taking the survey.

So which companies must comply with this new regulation? The rule applies to both domestic and foreign entities formed or registered to do business in the U.S.:

• Domestic entities are created by filing with a secretary of state or similar office under the laws of a U.S. state or Indian tribe;
• Foreign entities are formed under the laws of a country outside the U.S. and registered to do business in any U.S. state or tribal jurisdiction.

However, several entities are exempt from submitting BOI reports – Twenty-three (current) types to be exact! Unfortunately for small business owners, most of these exemptions are for large companies and highly regulated businesses.

Notable exemptions include:

• Large operating companies with:
  • more than 20 full-time employees in the U.S.; and
  • more than $5 million in gross receipts or sales within the U.S.; and
  • an operating presence at a physical office in the U.S.
• Certain types of banks and credit unions;
• Some securities brokers and other companies registered with the SEC;
• Some companies associated with insurance;
• Public accounting firms;
• Some utility companies.
  
  

Who Is a Beneficial Owner?

As its name suggests, the BOI report mostly concerns information about “beneficial owners.” A beneficial owner is any person who has substantial control over a company, either directly or indirectly, or owns or controls at least 25 percent of the ownership interests of the company.

Here are some examples:

First, a person has substantial control if they meet at least one of these four criteria:

• Is a senior officer;
• Has authority to appoint or remove certain officers or a majority of directors of the company;
• Is an important decision maker;
• Has any other form of substantial control over the company.

There are direct and indirect ways to express substantial control. Direct control could include board representation, control of a majority of voting power or voting rights, or control of a majority of rights associated with financing or interest. Indirect control is likely through financial or business relationships.

Second, a person has ownership interest in a company if they hold any of the following:

• Equity, stock, or voting rights;
• A capital or profit interest;
• Convertible instruments;
• Options or other non-binding privileges to buy or sell any of the foregoing;
• Any other instrument, contract, or other mechanism used to establish ownership.
  
  

What Information Needs to Be Reported?

Once you have determined that you have to submit a BOI report and you have identified your company’s beneficial owners, you will need to collect the following information:

For the company itself:

• Full legal name;
• Any trade name or d/b/a name;
• Current U.S. address of the principal place of business;
• State, tribal, or foreign jurisdiction of formation;
• IRS Taxpayer Identification Number (TIN).
  
  

For each beneficial owner:

• Full legal name;
• Date of birth;
• Current residential street address;
• Unique identifying number from an acceptable identification document;
• Image of the acceptable identification document.
  
  

What Special Reporting Rules Should Companies Know?

As is par for the course with a new regulation, there are several special reporting rules to take note of before preparing your BOI report.

What Are the Filing Deadlines?

• If created or registered before Jan. 1, 2024: Deadline is Jan. 1, 2025;
• If created or registered after Jan. 1, 2024: Deadline is 30 days after the date of registration;
  
  

Will This BOI Information Be Safe?

As the start date for this regulation draws near, some have raised privacy concerns.

Be on the lookout for Scams!

Unfortunately, bad actors are already at work to undermine this new regulation.

Summary

FinCEN’s BOI initiative promises to expose “bad actors” in international business dealings and fight money laundering.

David Levinson
Snap Advisory Inc