In the latest Weekly Wright Report:
New Beneficial Ownership Reporting Rule: A Mandatory Requirement for Small Closely Held Businesses
Tax evasion, money laundering, terrorist financing and various other illicit activities are constant targets of the Department of the Treasury. It needs data to ferret out the cheats. This requires knowing the players who control companies. While large companies file that information under other laws such as the Bank Secrecy Act and SEC requirements, there is a gap for the smaller closely held businesses.
The identity of beneficial owners and those with substantial control must now be reported to the Financial Crimes Enforcement Network (“FinCen”) of the Department of the Treasury. They must file a Beneficial Ownership Information Report. The requirements are found in The Corporate Transparency Act, 31 U.S.C § 5301 and 31 CFR § 1010.380 (Reports of beneficial ownership information). With certain exceptions, the new law imposes reporting requirements on companies registered with a state or tribal lands and also on certain foreign companies. FinCen will now have ready access to the inner workings of these small privately held business entities. This adds another layer of red tape on small companies. Businesses will be required to disgorge information traditionally considered private so that it can be combined with other information collected from other public or governmental sources and lead FinCen to the players involved in nefarious deeds.
Maryland corporations, limited liability companies, limited partnerships and limited liability partnerships are formed by filing Articles or notices with the Maryland Department of Assessments and Taxation. The same is true for registering a trade name or for an out-of-state entity doing business in Maryland. In most other states, these documents are filed with the Secretary of State. They do not generally disclose the identity of individuals in control. Bylaws, Minutes, and Operating or Partnership agreements containing that information are not public documents readily available to the government. Now, FinCen has a tool to acquire the information, and the penalties for non-compliance are severe — civil penalties of up to $500 per day of violation, possible imprisonment and criminal fines of up to $10,000. Attention to these requirements is imperative. They cannot be ignored.
Beneficial Ownership Information (“BOI”) reports are due by January 1, 2025 for covered companies officially formed or registered prior to January 1, 2024; within 90 days of formation for those companies formed between January 1, 2024 and December 31, 2024; and within 30 days of formation for those registered after January 1, 2025.
Not all companies are required to file the Report. Reporting companies include those created or recognized by filing with the Secretary of State in most states with the Maryland State Department of Assessments and Taxation. Out-of-state companies that register to do business in a state are considered reporting companies. However, there are twenty-three exceptions. Most are justified because the identities of their beneficial owners are already accessible to FinCen from other sources or the entity is inactive or tax exempt. Examples include large operating companies, banks, financial advisors, security trading firms, insurance companies and non-profits exempt under 501(c) of the Internal Revenue Code. The list of exemptions can be found in the Code of Federal Regulations cited earlier.
The report must contain the identity of all beneficial owners. A beneficial owner is an individual who owns 25% or more of the entity and an individual who exercises substantial control. This can be tricky. For instance, an individual owning 25% of a subsidiary where the parent owns the remaining 75% does not own 25% of the parent. Ownership can be through equity, voting rights, share of profits, options, convertible instruments or any other arrangement, agreement or understanding that could establish or generate ownership. Trusts that have the requisite ownership or control might be included. The grantor of the trust, beneficiaries with certain discretionary powers as well as a trustee might be considered beneficial owners. Those exercising substantial control are senior officers and senior management. The latter category may include persons who have control over the hiring, firing, appointment or supervision of directors, officers, or other senior management. It can include an individual who is an important decision maker. Does the individual have substantial influence over the nature, scope or purpose of the business, finances, budget, compensation of senior officers, or the governing structure? These are somewhat subjective measurements, and the entity should probably opt for inclusion in the BOI Report rather than risk a claim of non-compliance.
The law exempts five categories of individuals from being classified as beneficial owners: namely, minors (although a parent or guardian would qualify); a beneficial owner’s nominee; custodian, agent or intermediary such as the tax preparer or counsel; an employee that is not a senior officer; a person entitled to ownership only in the future such as by inheritance; and a creditor so long as the creditor does not hold any other interest in the entity such as a right to convert to equity. If a company loses its exemption status, then it must notify FinCen within 30 days.
The Company Applicant must also be identified. The law defines a Company Applicant as the person who actually files the BOI report or the individual that directs or controls the filing if such a person exists, or both. A domestic company must report information about its Company Applicant if it was created after January 1, 2024. A foreign reporting company must do so if it registered to do business in the United States within 30 days after the date of registration.
Once a company has determined that it must file a BOI Report, it needs to identify beneficial owners and collect required information. The report must include the full name and any trade name, the principal place of business, the state, tribal nation, or foreign jurisdiction of formation, and its TIN or EIN. Each beneficial owner must be identified, including name, date of birth, address, and a unique identifying number from a passport, driver’s license, or any other identification document issued by a state, local government, tribe, or a foreign country. A beneficial owner can request FinCen to assign a special identifier number which may be used in place of the personal information when filing supplemental reports.
Certain special reporting rules apply to beneficial owners who are minor children, foreign pooled investment vehicles, and companies formed prior to January 1, 2024. In the latter case, those companies do not need to report on the Company Applicant.
The business cannot forget FinCen after the first report is filed. The report must be updated if there are changes in the company or beneficial ownership. Typical changes or corrections include a new trade name, purpose of the business, new senior officers or other beneficial owners, death of a beneficial owner and changes in a beneficial owner’s personal information.
A supplement must be filed within 30 days of the change.
This law is not without its critics. It has been labelled “Mark of the Beast” and declared by some opponents as a violation of the 4th and 5th amendments of the U.S. Constitution and a violation of the U.S. Paper Reduction Act for failure to submit a request for information to the Office of Management and Budget. See the Complaint in Gargasz, et al v. Janet Yellen, et al, Case 1:23-cv-0248-CEF, filed in the District Court for the Northern District of Ohio, Eastern Division. In fact, just this month, in National Small Business United, et al v. Janet Yellen, et al, Case 5:22-cv-01448-LCB (USDC Northern District, Alabama), it was declared unconstitutional for a variety of reasons. However, the only entities to benefit from that ruling are the members of National Small Business United. An appeal is expected.
This article is a brief summary of the new law and is not intended to be a substitute for reading the regulations. FinCen has issued a very comprehensive Small Entity Compliance Guide that contains far more detail and a step-by-step road map to determine coverage and filing the report. It can be found here. A sample BOI Reporting form is also available at www.FinCen.gov.