Beneficial ownership reporting will soon take effect. Are you ready?

The new beneficial ownership information (BOI) reporting requirements are set to take effect on Jan. 1, 2024, three years after they were enacted as a part of the Corporate Transparency Act (CTA). Since the enactment date, the Treasury Department and the U.S. Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department, have been hard at work writing regulations, publishing FAQs, issuing a compliance guide, and designing the system to facilitate the filing of BOI reports. As we approach the end of 2023, it’s now time for entities to determine how the new rules apply and what actions need to be taken.

Beneficial ownership reporting: How we got here

Over the past decade, there’s been a worldwide effort to encourage countries to adopt laws providing transparency on entity ownership to deter, detect, and disrupt tax evasion and other financial crimes. Many countries have enacted provisions to accomplish these goals, and the United States joined that effort with the enactment of the CTA. As summarized by FinCEN, the BOI reporting requirements are “ … part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.”

The rules require certain entities to report identifying information about their beneficial owners to FinCEN. This information will be maintained in a nonpublic database that will generally only be accessible to certain law enforcement personnel and only for authorized activities related to national security, intelligence, and law enforcement. The information will not be publicly available.

Beneficial ownership reporting: Requirements

In summary, BOI reporting is required of reporting companies that are not exempt. These companies will be required to disclose identifying information about their beneficial owners and, for entities created after Jan. 1, 2024, company applicants. They will also be required to file updated reports whenever any information on the report changes. The deadlines to file such reports vary throughout 2024. Each of these concepts is explored in further detail below.

Reporting companies

Only a reporting company is required to file a BOI report. A reporting company is defined as any domestic legal entity, regardless of tax treatment, created by the filing of a document with a secretary of state or any similar office. Foreign entities are also considered reporting companies if they’re registered to do business in any state through the filing of a document with the secretary of state or similar office. However, the rules carve out 23 exemptions. The exemptions generally revolve around entities where the government already has information regarding ownership (e.g., public companies, regulated insurance companies, regulated banks, certain investment funds or investment advisors registered with the SEC, subsidiaries of certain entities exempt from reporting, etc.), entities that have a low likelihood of being used for illegal activities (e.g., dormant entities), or those whose beneficial ownership information would provide little value (e.g., tax exempt entities, large operating companies, etc.). See Chapter 1.2 of the FinCEN BOI Small Entity Compliance Guide and Section L of the FinCEN FAQs for definitions, checklists, and other information on the exemptions.

Commentary:

• Most legal entities are required to file with a secretary of state’s office in order to be formed. This means that generally only unincorporated entities such as sole proprietorships, general partnerships, and certain trusts might fall outside the definition of a reporting company.
• These requirements apply to all legal entities, not just entities that are associated with a business. So even a legal entity holding investments, a principal residence or vacation home, or other personal assets are covered by these rules.
• The large operating company exemption applies when an entity (1) has more than 20 full-time employees, (2) has filed a tax return for the previous year, and (3) reports more than $5 million in gross receipts reported on that tax return. For this purpose, employees must be employed directly by that legal entity. However, certain related parties are aggregated for purposes of measuring gross receipts. The requirement for an entity to have filed a tax return may make it difficult for new businesses to qualify for this exemption in their first year of operation and the lack of broad aggregation concepts could make it difficult for more complex business structures with multiple entities to qualify. It’s unclear how the tax return filing requirement applies to disregarded entities that don’t have a requirement to file a tax return.
• While certain subsidiaries of some entities exempt from reporting are themselves exempt from reporting, this exemption has two significant limitations. First, it doesn’t apply to every category of exemption. For example, while certain pooled investment vehicles are exempt from reporting, a subsidiary of a pooled investment vehicle wouldn’t be exempt from reporting unless it meets another exemption. Second, a subsidiary generally must be wholly owned to qualify for the exemption. These limitations could cause many subsidiaries to be reporting companies. This could be most pronounced for subsidiaries of large operating companies or investment funds that may need to each be individually analyzed to determine their status.
• While an exemption can apply to certain subsidiaries, there is no exemption that’s specific to holding companies. It’s possible that a holding company of an exempt entity could still have its own BOI reporting requirements.

Beneficial owner

A beneficial owner includes two categories of individuals: (1) those holding or controlling 25% of more of the entity’s ownership interests and (2) those in substantial control of the entity. An ownership interest is defined very broadly and, depending on the circumstances, can include equity, voting rights, profits/capital, convertible instruments, options/warrants, or any other arrangement that provides indicia of ownership.

Substantial control has a similarly broad definition to include an individual who, directly or indirectly, exercises substantial control of the company. This includes (1) senior officers, (2) individuals with authority to appoint or remove certain officers or a majority of directors, (3) an individual who’s an important decision-maker, or (4) an individual with any other form of substantial control over the reporting company. Minor children, agents, individuals acting solely as an employee, individuals who only hold a future interest through a right of inheritance, and creditors are exempt from the definition of a beneficial owner.

Commentary:

• Senior officers are treated as having substantial control of an entity, so most C-suite executives of an entity will always be reported.
• Ownership for this purpose appears to have no linkage with income tax or other more developed concepts from other areas of law, so it may be difficult to apply these new rules to even moderately complex ownership arrangements. This is likely particularly true for entities taxed as a partnership where it’s common to have economic arrangements where profits, losses, and capital can shift dramatically over time.
• A beneficial owner may not necessarily be the direct owner and an individual in substantial control can obtain that control through any mechanism, including contractual arrangements that the entity is not a party to. These concepts could mean that an entity won’t always have direct visibility into its beneficial owners and business processes or governance changes may be needed to ensure that the entity and those charged with addressing BOI reporting will have access to the necessary information.
• Given the broad definitions and lack of bright-line rules, entities may have to grapple with interpretational decisions about whether to include or exclude individuals from the beneficial owner definition. Some companies may gravitate toward an interpretation that risks overreporting while others may have a stronger desire to analyze the rules more deeply to justify an interpretation that may report fewer individuals. Risks may exist in either approach.

Company applicant

If an entity is created after Jan. 1, 2024, company applicants are also required to be included in the report. The company applicant is the individual who directly filed the document to create the entity, or, in the case of a foreign company, the document to register to do business in the United States, as well as the person supervising the direct filer. Furthermore, entities don’t need to update company applicant information even if it changes after the original BOI filing.

Commentary:

• In many cases, the company applicants will be the person at a law firm who physically files/transits company formation documents (e.g., a paralegal) and the attorney who supervises that person.

Information reported

The report must include several pieces of information for each beneficial owner or company applicant: full legal name, date of birth, home address, a unique ID number (typically from a driver’s license or passport), and a copy of the document where the unique ID number originated. Company applicants can use their business address instead of their home address. 

Individuals may apply for FinCEN Identifiers whereby they supply all of the identifying information described above to FinCEN to obtain a unique identification number. The individual can then provide the FinCEN Identifier to any reporting company rather than supplying the underlying identification information and the reporting company can simply report the FinCEN Identifier. This alleviates the need for the reporting company to maintain and update the information of the individual. This has the potential to significantly streamline certain entity filings.

Commentary:

• Many entities may not have access to all of the information that they would be required to report, so additional information gathering will be necessary in most situations.
• The governance structure of many entities may not permit them to easily obtain the information necessary to complete BOI reporting obligations. Governance documents and policies may need to be updated to ensure that necessary information is provided timely to the entity.
• FinCEN Identifiers have the potential to significantly streamline an entity’s reporting while also preventing an entity from having to maintain the personal information of beneficial owners. This could be a very attractive path for many entities, but those entities may still need to communicate with their beneficial owners far enough in advance of any filing to ensure that the individuals have time to obtain a FinCEN Identifier. It’s likely that most company applicants who regularly form entities will already have FinCEN Identifiers.

Timing

Due dates for these filings are being phased in over the course of 2024. Entities in existence before 2024 will have until Jan. 1, 2025, to file their initial reports. Entities formed during 2024 will have 90 days after their formation to file, while entities formed after 2024 will have 30 days.

Commentary:

• The earliest that any entity has to report is March 31, 2024, for entities formed on Jan. 1, 2024, (i.e., 90 days from the date of formation).
• As new entities are formed, the 90- and 30-day timelines could pose a variety of challenges. For example, the precise equity ownership of some entities is determined in the months following formation when the entity is funded or when equity is otherwise issued to various individuals. Further, those in substantial control of an entity may shift as boards seats are filled and C-suite executives are hired. This could make it difficult to determine who to include on initial reports or may require entities to file updated reports shortly after the initial report is filed, as discussed further below.

Continuing obligations

A reporting company doesn’t have to file any reports after an initial report is filed unless a change occurs with respect to the information included on the report or information is determined to be incorrect. Any updated reports are due within 30 days of the event. Some common changes to information that will cause an update include the addition or removal of a beneficial owner (such as the hiring of a new chief executive officer), a change in the legal name of a beneficial owner, a change to a reporting company’s address or a beneficial owner’s address, or an update to a beneficial owner’s document previously supplied (e.g., driver’s license or passport reissued with a new name, address, or unique identification number).

A reporting company that qualifies for an exemption after filing an initial BOI report is required to file an updated report indicating that it’s now exempt from the filing requirements. Companies that qualify for an exemption to the filing requirements prior to the deadline to file a BOI report don’t need to file anything to prove that they are exempt.

Commentary:

• Learning of these changes and performing proper reporting within 30 days could be particularly challenging if business processes aren’t updated to ensure that any changes in underlying information are timely communicated to those who are responsible for BOI reporting. This information could come from many sources including legal counsel, executive team members, a human resources department, or from beneficial owners directly.
• Some changes in information may require multiple rounds of updated reports. For example, a beneficial owner that changes its address may cause a filing requirement both at the time the address changes and also at the time when a driver’s license previously supplied to FinCEN is updated with the new address (assuming those events occur more than 30 days apart).
• FinCEN Identifiers have the potential to minimize the necessity for entities to file updated reports with respect to information that’s specific to a single beneficial owner, such as a home address. If a FinCEN Identifier has been obtained and provided to the entity, then only the individual is responsible for updating that information with FinCEN. This may be particularly useful for entities that don’t desire to take on the obligation to ensure this type of information is up-to-date or for individuals that are beneficial owners or in substantial control of multiple entities where a single updated report filed by the individual could prevent the need for updated reports filed by many reporting companies.

Where to learn more about beneficial ownership reporting?

FinCEN has created a number of useful resources for potential filers to learn more about the requirements and how the requirements might apply to their business. The BOI homepage houses resources, including detailed FAQs, the Small Entity Compliance Guide, and press releases and updates, to name a few. FinCEN also provides a number of contact points for those who need additional assistance interpreting how the rules and exemptions apply. Entities should consider consulting with legal counsel for any advice needed to determine filing requirements or any other matters related to BOI reporting.