As mentioned in last months’ edition of the Tax Focus, The Corporate Transparency Act (CTA) goes into effect January 1, 2024. The CTA mandates the filing of ownership information for corporations, limited liability companies and other entities that are registered to do business in the United States. These filings have the intention to identify illegal activities like drug trafficking, terrorism and money laundering via these filings which will report on the ownership and beneficial ownership of the entities.

The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has published a guide to help small businesses with the new rules for reporting the beneficial ownership information, which goes into effect January 1, 2024. FinCEN published the Small Entity Compliance Guide, early in September. This guide helps walk entities through the reporting requirements regarding ownership and beneficial ownership as outlined in the CTA.

This guide includes six questions that will help entities determine if they meet the reporting requirements set forth in the CTA:

1. Does my company have to report its beneficial owners?
2. Who is the beneficial owner of my company?
3. Does my company have to report its company applicants?
4. What specific information does my company need to report?
5. When and how should my company file its initial report?
6. What if there are changes too, or inaccuracies in reported information?

The first question to determine if your company is a “reporting company” can be answered by looking under which laws the company was created under. If created under U.S. Law and the company is a corporation, limited liability company, or created by filing a document with its respective Secretary of State, then you may be a domestic reporting company. If your company was formed under the laws of a foreign country and is registered to do business in an U.S. State or Tribal jurisdiction by filing a document with the Secretary of State, then your company may be a foreign reporting company.

After determining if your company is a domestic or foreign reporting company, next you would need to look and see if you fall under one of the 23 Exempt entities that are not required to comply with the CTA.

The next step in this process is to determine the beneficial owner of your company. According to the Small Entity Compliance Guide, a beneficial owner is any individual who:

• Exercises substantial control over the reporting company, OR
• Owns or controls at least 25 percent of the ownership interest in the reporting company.

The guide further goes into explaining what substantial control is. Substantial control by an individual is someone who can exercise substantial control such as a senior officer, i.e., President, CFO, CEO, COO or general counsel to the company, or any person who has the ability to appoint or remove any of the above positions. The last piece to determine if someone can exercise substantial control is if they have substantial influence of the nature and scope of the business activity, finances related to that business and the structure of the business.

According to the guide, someone who owns at least 25 percent of the ownership in the reporting company can own it in various ways.

• Has 25 percent or more ownership in equity, stock or voting rights,
• Has 25 percent or more ownership in capital or profit interest
• Has 25 percent or more ownership in convertible interests to equity, stock, voting rights, capital, or profit interest.

The next item the Small Entity Compliance Guide discusses is determining if your company is required to report its company applicants.

• A reporting company is required to report its company applicants if it’s either:
  • A Domestic reporting company created on or after January 1,2024 or
  • A foreign reporting company registered to do business on or after January 1,2024
• A reporting company is not required to report its company applicants if it’s either:
  • A Domestic company created before January 1,2024 or
  • A foreign reporting company registered to do business before January 1,2024

A reporting company that is required to report its company applicants will have to identify to FinCEN at least one applicant and at most two. These applicants must be individuals and not companies or legal entities. There are two categories of a company applicant, which are direct filer and the person who controls the filing action. A direct filer is the person who directly filed the document that created the domestic reporting company or the foreign reporting company. The person who controls the filing action was the individual primarily responsible for directing the filing but did not actually file the document.

The next item the guide addresses is what specific information your company needs to report.

A reporting company needs to report the following items:

• Full Legal Name
• Any trade name or DBA name
• Complete Current U.S. Address
• State, Tribal, or foreign jurisdiction information
• IRS Taxpayer Identification Number or an Employer Identification Number

For each Beneficial Owner and Company Applicant, the following items must be reported.

• Full Legal Name
• Date of Birth
• Complete Current Address
• Unique Identity Number and issuing jurisdiction form, and image of one of the following non-expired documents.
  • U.S. Passport
  • State Driver’s License
  • Identification documents used by a state, local government, or trade.

The BOI report will be filed electronically through the FinCEN website. BOI reports will not be accepted prior to January 1,2024. If your company exists as of January 1, 2024, you must file its initial BOI report by January 1, 2025. IF your company is created after January 1, 2024, you have 30 days after receiving actual notice that its creation is effect to file your BOI report.

The last item the guide explains is what happens if there are changes or inaccuracies in the reported information. If there is any change to the required information that was reported about your company or its beneficial owners, you have 30 days after the date on which the change has occurred to file an updated report.  If you discover an inaccuracy in the initial report that was filed, you will need to correct it no later than 30 days after the date your company became aware of the inaccuracy. If after you file your BOI report your company becomes exempt from the reporting requirements, your company should file an updated BOI to indicate that it is newly exempt from the reporting requirements. Each of these updates should be filed electronically through the system on FinCENs website. The full version of the Small Compliance Guide can be accessed at: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf

This new filing requirement will affect millions of small business entities. Please contact your tax professional at Dermody, Burke & Brown so we can help you navigate the complexities of these new filing requirements.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.