The Beneficial Ownership Information Reporting Rule: Navigating the Essentials

Effective January 1, 2024, companies incorporated or registered to do business in the United States must comply with a new federal reporting requirement which mandates the disclosure of certain beneficial ownership information (BOI). This new reporting requirement was introduced as part of the Corporate Transparency Act (CTA) signed into law in 2021 and will be managed and enforced by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) pursuant to the regulations released by FinCEN.

The Beneficial Ownership Information Reporting Rule (the Rule) aims to combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activities. The Rule mandates that domestic and foreign entities that are considered “reporting companies” disclose information about the companies, personal identifying information of their beneficial owners and company applicants to FinCEN. This article breaks down the Rule’s requirements.

Who is subject to the Rule?

Reporting Company

The reporting requirements under the Rule apply to both domestic and foreign reporting companies. A “reporting company” is defined as a corporation, limited liability company, or other entity that is: (i) 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; or (ii) formed under the law of a foreign county and registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.

Reporting Company Exemptions

Notwithstanding the broad definition of a reporting company, the Rule provides 23 distinct exemptions to the reporting company definition. Many of the exemptions are applicable to large companies, publicly traded companies, financial institutions, and entities that deal with securities, money transfers and deposits, investments, and insurance.

Many startups and small businesses are unlikely to fall within any of these exemptions and will therefore be considered a reporting company subject to the BOI reporting requirements under the Rule. In order to determine whether a company is required to file a report with FinCEN, it is important to determine whether an exemption applies. In order to do that, it is necessary for the company to carefully review the list of exemptions and how each exemption is defined and determine whether it applies to the company. If no exemption applies, a reporting company will be required to file a report with FinCEN.

What information must be reported?

Initial BOI report by a reporting company

The initial BOI report to FinCEN by a reporting company must include the following information about the reporting company:

• The full legal name of the reporting company;
• Any trade name or “doing business as” name of the reporting company;
• A complete current address consisting of:
  • In the case of a reporting company with a principal place of business in the United States, the street address of such principal place of business; and
  • In all other cases, the street address of the primary location in the United States where the reporting company conducts business.
• The State, Tribal, or foreign jurisdiction of formation of the reporting company;
• For a foreign reporting company, the State or Tribal jurisdiction where such company first registered; and
• The Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) of the reporting company, or in instances where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.

The initial BOI report must also include the following information for every individual who is a beneficial owner or a company applicant* with respect to the reporting company:

• The full legal name of the individual;
• The date of birth of the individual;
• A complete current address; and
• A unique identifying number and an image of the document from which the unique identifying number was obtained. The following documents can be used for this purpose: (i) a U.S. passport; (ii) a State, local government, or Indian tribe identification card; (iii) a driver’s license; or (iv) if the individual does not possess the aforementioned documents, a passport issued by a foreign government.

*Note that under a Rule exemption, a reporting company does not need to report information on a company applicant if the reporting company was created or registered before January 1, 2024.

Who is considered a beneficial owner or a company applicant?

Beneficial Owner

A beneficial owner for purposes of this Rule means “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.”

The Rule then defines in detail the term “substantial control” and how an individual may exercise such substantial control. In order to determine the beneficial ownership of a reporting company, it is necessary to analyze whether an individual affiliated with the company has substantial control over the reporting company. As described in the Rule, an individual exercises substantial control over a reporting company if the individual:

• serves as a senior officer of the reporting company;
• has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);
• directs, determines, or has substantial influence over important decisions made by the reporting company (such as the sale of company assets, company reorganization, dissolution or mergers, major expenditures and investments, significant business decisions and compensation schemes, and amendments to substantial governance documents); or
• has any other form of substantial control over the reporting company.

Given the breadth of this definition, a reporting company could be required to report the BOI data of a significant number of individuals who are deemed to be beneficial owners.

FINCEN has clarified that an initial BOI report should only include the beneficial owners as of the time of the filing, not historical beneficial owners. If the beneficial owners of the reporting company change, the reporting company needs to notify FinCEN of the change through an updated report.

Company Applicant

A company applicant for purposes of this Rule means (i) the individual who directly files the document to create or register the reporting company, and (ii) the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing.

When must a reporting company file a BOI report?

The deadlines for filing the initial BOI report depend on when a domestic reporting company was created or a foreign reporting company was registered to do business in any State or tribal jurisdiction. The following reporting deadlines apply to reporting companies:

• Reporting companies created or registered before January 1, 2024: Any domestic reporting company created before January 1, 2024 and any entity that became a foreign reporting company before January 1, 2024 shall file a report not later than January 1, 2025.
• Reporting companies created or registered on or after January 1, 2024 and before January 1, 2025: A reporting company created or registered on or after January 1, 2024 and before January 1, 2025 must file a report within 90 calendar days from the earlier of (i) the date on which it receives actual notice; or (ii) or the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the reporting company has been created or registered to do business.
• Reporting companies created or registered on or after January 1, 2025: A Reporting company created or registered on or after January 1, 2025 must file a report within 30 calendar days from the earlier of the date on which it receives actual notice or public notice that it has been created or registered.
• Updated and corrected reports: A reporting company is required to file an updated report if there is any change concerning the reporting company or its beneficial owners and correct any inaccuracies in the initial report within 30 days from the date of such change or from when the reporting company becomes aware or has reason to know of the inaccuracy.

How should reporting companies file a BOI report with FinCEN?

Starting January 1, 2024, FinCEN will allow reporting companies to file their BOI reports here.

What are the penalties for failure to file?

A person who willfully violates the BOI reporting requirements may be subject to civil penalties of up to $500 per day, and may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000. Such violations include willfully failing to file a beneficial ownership information report, willfully filing false beneficial ownership information, or willfully failing to correct or update previously reported beneficial ownership information.

Both individuals (including beneficial owners) and corporate entities can face liability for willful violations, extending beyond those who file false information with FinCEN to encompass individuals who provide willfully false information to the filer for reporting purposes.

Ultimately, the reporting company bears the responsibility of identifying its beneficial owners and company applicants, reporting such individuals to FinCEN, and certifying the accuracy, truthfulness, and completeness of its report.

Who may have access to BOI reported to FinCEN?

On December 22, 2023, FinCEN published a Final Rule on Beneficial Ownership Information Access and Safeguards which is scheduled to take effect on February 20, 2024 (the Access Rule). Under the Access Rule, FinCEN is authorized to disclose and grant access to BOI to certain authorized recipients who are required to adhere to certain security and confidentiality requirements and are generally prohibited from re-disclosing the BOI. As summarized in FinCEN’s fact sheet about the Access Rule, FinCEN may provide access to BOI to the following entities:

• Federal agencies engaged in national security, intelligence, or law enforcement activity;
• State, local, and Tribal law enforcement agencies with court authorization;
• foreign law enforcement agencies, judges, prosecutors, and other authorities that meet specific criteria;
• financial institutions with customer due diligence requirements and regulators supervising them for compliance with such requirements; and
• S. Department of the Treasury officers and employees.

The Corporate Transparency Act’s Beneficial Ownership Information Reporting Rule signifies a major paradigm shift with respect to corporate transparency in the United States. While many states, including Delaware where a vast number of companies are incorporated and registered, continue to allow companies to register with minimum disclosure requirements, at the federal level, many companies will no longer be able to shield their beneficial owners from disclosure.

 

For additional information about this new rule and how it may apply to you and your company, please do not hesitate to contact us:

Oded Kadosh, Partner, Chair of the US Corporate Practice Group, at okadosh@pearlcohen.com

Guy Milhalter, Partner at the US Corporate Practice Group, at gmilhalter@pearlcohen.com

Austin Ochoa, Associate at the US Corporate Practice Group, at aochoa@pearlcohen.com