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Owners of existing businesses, including LLCs, must disclose their ownership to FinCEN by January 1st.
Many small business customers have recently been surprised to learn that they are subject to federal information reporting requirements.
Under the Corporate Transparency Act passed in January 2021, nearly all companies formed or registered to do business in the United States must report beneficial ownership information to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). There is a need to. This law created a federal database to store information about corporate ownership structures.
The law aims to limit taxpayers’ ability to use shell companies and ownership structures that enable money laundering and other criminal activities. The rule is now in effect, and with limited exemptions, nearly all small business customers should be prepared to report basic ownership information in the coming months.
Beneficial Interest Reporting Obligations: Basics
FinCEN’s beneficial ownership reporting requirements apply to all domestic “reporting companies,” including corporations, LLCs, limited partnerships, and other entities formed by filing documents with the U.S. Secretary of State. Certain foreign companies registered to do business in the United States must also be reported.
Both foreign and domestic reporting companies must identify and provide information about beneficial owners to a federal database.
“Beneficial Person” means any natural person who is:
- exercise substantial control over the company; or
- Own or control (directly or indirectly) 25% or more of the ownership of the company.
In determining whether an individual owns or controls 25% of a business, an individual’s options, convertible instruments, and other similar stock rights are treated as if they had been exercised.
An individual is considered to exercise “effective control” over a company if:
- work as a manager or senior executive
- have the right to appoint a majority of the board of directors or governing body; or
- Otherwise, it could have a material impact on the reporting company’s decision.
If you are a new business entity, you will also need to provide information about your “applicant company.” Information on up to two applicants will be required if the entity was established after his January 1st date. The company applicants are:
- individuals who directly submit documents to form or register a company, or
- The individual who has primary responsibility for directing or managing an application when more than one person is involved.
The company applicant is often a company formation agent or attorney who is responsible for filing the formation documents with the Secretary of State (or similar agency). FinCEN provides examples outlining various scenarios to help companies determine who is primarily responsible for filing.
What needs to be reported
Reporting companies must report the entity’s legal name, trade name or DBA name, principal place of business, incorporation status, and unique taxpayer identification number.
For each beneficiary, the company must disclose the legal name, date of birth, address, identification number from the individual’s ID (driver’s license or passport), and a copy of the ID used.
Each business applicant requires information from the individual’s name, date of birth, address, and personal ID, including document number and jurisdiction.
Entities established before January 1st must file their reports by January 1st, 2025. Entities registered after January 1 must report the required information within 90 days from the date their registration became effective. The registration portal opens on January 1st and is available below. https://boiefiling.fincen.gov/.
However, these are not annual reporting requirements. Companies only need to update their filings if there are changes to information that has already been submitted. You must also update your report to correct any inaccuracies within 30 days of learning of the error.
Waiver of requirements
Most small business customers do not qualify for the exemptions established by FinCEN. The law provides exemptions for tax-exempt entities, certain political organizations, and inactive organizations that do not conduct business.
Other exempt entities include banks, credit unions, money services businesses, stock brokers, stock exchanges, accounting firms, co-investment vehicles, public utilities, financial market entities, state-chartered insurance companies, and venture businesses. Includes Capital Fund Advisors, Securities and Exchange Act registered entities. Subsidiaries of certain exempt entities may also be exempt.
Broadly speaking, most exempt companies are classified as exempt simply because they are already subject to regulatory reporting obligations under another regime.
conclusion
Most entities are classified as reporting companies under the FinCEN reporting structure if they have filed formal paperwork with the state to create the entity. Sole traders are not subject to reporting rules. However, advisors should check early whether their business clients qualify for the exemption.
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