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Starting earlier this year, many U.S.-based companies will be required to report information about who owns or controls their company to the Financial Crimes Enforcement Network (FinCEN), a requirement set forth in the Corporate Transparency Act (CTA) passed by Congress in 2021 to prevent illegal activities by anonymous companies.
This represents a fundamental shift in the way US-based companies will operate. Reporting deadlines vary depending on the date the company was founded and failure to comply will result in heavy fines.
How can entrepreneurs prepare for this massive change? You need to understand what a beneficial owner is; What types of companies are required to report? what needs to be reported; how to prepare for reporting; and penalties for non-compliance.
What is a beneficial owner?
A beneficial owner is a natural person who exercises substantial control over the reporting entity or one or more intermediary entities or owns or controls at least 25% of the ownership interests of the reporting entity.
A person who falls into one of the following categories exercises significant control:
- They are senior officials in the C-suite; or serve as company president or general counsel;
- You have the authority to appoint or remove officers or a majority of the directors of the reporting company;
- They are key decision makers for the reporting company;
- They have any other form of significant control that is exercised in new or unique ways, such as through flexible corporate structures that allow for methods of control other than those listed above.
Related: The 5-Step Guide to Navigating Legal and Regulatory Changes in Business
Who has to report and who doesn't?
Next, it is important to understand what type of companies are required to report their beneficial owners:
Alternatively, there are 23 types of companies that are exempt from reporting requirements; This includes publicly traded companies, non-profit organizations and certain large operating companies. There is also an exception for inactive companies.
I'm preparing for reporting
Once a business owner understands that they need to report their beneficial ownership information to FinCEN, there are several pieces of information that need to be put in order.
Economic analysis
First, they need to start analyzing their cap table, their management structure and their contractual obligations. Because FinCEN defines “beneficial owners” as those individuals who own or control at least 25% of the ownership interest of a company and those who have “substantial control” over a company, determining who the beneficial owners are is not a simple and straightforward process Analysis. For this reason, it is important to look at the company's management structure and contractual obligations in addition to the cap table to determine who has ultimate control of the company.
Next, collect names, addresses, and passport/driver's license information for each beneficial owner or obtain their FinCEN identifiers for reporting purposes.
Set up processes
Make sure everyone is aware that any changes in beneficial ownership must be reported to FinCEN within 30 days. So if the company adds a major shareholder; appoints a new senior official; has a new director; or enters into a voting agreement, management should be advised that an update of the company's BOI report with FinCEN must be made within 30 days.
Since this is not part of a company's standard operating procedure, it takes some learning to remember that this needs to be done.
What needs to be reported?
Two sets of information are required for the reporting process.
First, a reporting company must report:
- His official name;
- Trade names, D/B/A or T/A names;
- The address of his main office;
- Its place of jurisdiction for incorporation or registration; And
- His tax identification number
The other information focuses on the beneficial owners. Reporting must include:
- The person's name;
- Birth date;
- residential address; And
- An identification number from an acceptable identification document, such as a passport or U.S. driver's license.
Reporting deadlines and penalties
Reports will be accepted starting January 1, 2024. If the company was incorporated or registered before January 1, 2024, it has until January 1, 2025 to report company and beneficial ownership information.
If the company was incorporated or registered on or after January 1, 2024, it must report beneficial ownership information within 90 years – including about itself, its beneficial owners and applicants of the company (i.e. applicants or those who have filed the Check initial registration). Calendar days from the date of effective registration.
Finally, any updates or corrections to beneficial ownership information previously filed with FinCEN must be submitted within 30 days. Updates must be filed for each reporting entity and reporting beneficial owner after previously submitting changes such as address changes or a new passport or driver's license number to FinCEN.
Failure to file a report may result in civil penalties of up to $500 per day, criminal penalties of up to two years in prison, and a fine of up to $10,000.
Related: Your business may be unknowingly violating federal regulations – which could cost you a lot of money. Here's how to avoid it.
The final result
For entrepreneurs, the Corporate Transparency Act takes some getting used to. However, it is an important piece of legislation that they need to understand so that they can comply by submitting the correct information within the appropriate time frame.
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