What you need to know about Beneficial (entity) Ownership Information Reporting to the United States Treasury
Do you, or did you, have an interest in a Limited Liability Company, small corporation, limited partnership, or some similar entity? If so, the U.S. government now wants to know who the beneficial owners are or were. It may not matter that you put the entity on the back burner, haven’t thought it for a long time, and that it may be dormant and unused. Beneficial Ownership Information (BOI) reporting must still be addressed, starting in January 2024.
Summary and Takeaways
If you have an interest in a business in the U.S., a law passed in 2021 may require you to do additional reporting to the U.S. government, even if that business entity has been dormant for an extended period of time. There are proactive steps you can take to manage and minimize the effect of the law. There are also numerous exceptions under the law that can reduce the need for you to do reporting, if you are eligible for those.
- The intent of the law is primarily to combat money laundering and other financial crimes, by helping the U.S. government monitor U.S. corporations and LLCs.
- U.S. citizens living in Canada and Canadians and nationals of any other country who have companies registered to do business in the U.S. are also subject to the rules.
- Full compliance is mandatory and noncompliance can result in serious penalties and fines.
- The greatest challenge at this time is to gain an understanding of the nuances of the new law, and this article provides an excellent, detailed overview to help you in that regard.
Although this is a U.S. law and involves U.S. reporting, it doesn’t only apply to Americans in the U.S. with U.S.-based enterprises. U.S. citizens living in Canada who have these kinds of U.S. entities and Canadians and nationals of any other country who have companies registered to do business in the U.S. are subject to the rules for beneficial ownership reporting to the U.S. Treasury. That includes those who recently moved from Canada to the U.S., and brought their company with them – which is a growing trend as cross-border businesses and remote work become increasingly popular. At Cardinal Point Capital Management, we have clients who fit into all the categories and situations outlined above. We want to ensure that they and others potentially impacted by the soon-to-be-implemented law are fully aware of what is coming down the pipeline, how it may affect them, and what proactive steps they may want to take in response to it.
First, here is an overview of the Corporate Transparency Act (CTA).
In January 2021, the Corporate Transparency Act (CTA) became law, as part of the Anti-Money Laundering Act of 2020 – which was a component of the National Defense Authorization Act for Fiscal Year 2021. The U.S. Code reference for the CTA is: Title 31 U.S.C. 5336.
The summary at the beginning of the original bill reads:
An Act to ensure that persons who form corporations or limited liability companies in the United States disclose the beneficial owners of those corporations or limited liability companies, in order to prevent wrongdoers from exploiting United States corporations and limited liability companies for criminal gain, to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct involving United States corporations and limited liability companies, and for other purposes.
Although the summary above references United States corporations and limited liability companies, please note that foreign companies might also be deemed reporting entities if they are doing business in, or are registered to do business in, the United States.
The Financial Crimes Enforcement Network (FinCEN) is a division of the U.S. Department of Treasury, responsible for collecting the information and maintaining the confidential database of Beneficial Ownership Information (BOI). Implementation of the CTA has been delayed while FinCEN builds its database framework and makes it possible for you to add/maintain your information.
Now that we know that the purpose of the law is to combat money-laundering and other financial crimes, let’s look at what sorts of entities are required to report.
“Reporting companies” are required to report Beneficial Ownership Information unless they qualify for an exemption.
A reporting company is defined as any corporation, limited liability company or similar entity that is:
- created by filing a formation document with a Secretary of State or similar governmental office (e.g., Indian Tribe); or
- is formed under the law of a foreign country and registered to do business in the United States
Foreign-owned shell or holding companies authorized and/or registered to do business in the United States are reporting companies.
The clause “created by filing a formation document with a Secretary of State or similar office (e.g., Indian Tribe)” is worth paying close attention to because it is a key requirement. When this legislation was proposed in 2019, there was much concern that Trusts, and their beneficial owners, would be captured in the reporting mechanism. But notably, the definition of “reporting company” specifies that it is an entity that is created by the filing of a document with a Secretary of State or similar office under the law of a State or an Indian Tribe. Donative Trust agreements are normally not registered in that way, unless they are charitable organizations seeking tax exempt status. Limited partnerships, LLPs, LLLPs and business statutory Trusts, however, do typically file a registration with a state body. So, they are subject to the new reporting law, as are foreign entities that are equivalent to a U.S. entity that is categorized as a reporting company.
Please note that commonwealths (i.e., Puerto Rico), territories, possessions, and any other subdivisions of the United States are counted as a U.S. state or government for purposes of this law.
Importantly, there is an extensive list of exemptions from classification as a reporting company. There are 23 specific exemptions and the 24th is a catch-all where the Secretary of the Treasury has determined that BOI reporting would not serve the public interest − and would not be useful in combatting money-laundering and other financial crimes or in protecting national security.
Most of the exemptions can be grouped into four general categories that are already highly regulated and are already required to disclose ample information to governments and regulatory authorities. Those categories are:
- Publicly traded companies
- Governments and their agencies
- Public charities
- Banking, insurance, and financial services providers
The other exemptions that may apply to your entity are:
(xix) A 501(c) public charity, 527(e)(1) political organization, or a charitable trust [IRC code 4947(a)] or a split-interest trust [IRC code 4947(b)]. Some of our clients do have charitable or split-interest trusts.
(xxi) Any entity that employs more than 20 full-time employees in the U.S., filed a U.S. federal income tax return for the prior year demonstrating gross receipts of more than $5 million, and has an operating presence at a physical office within the United States
The presumption is that a business described in (xxi) is already publicly visible and transparent.
(xxiii) Any corporation, limited liability company, or other similar entity –
- In existence for over 1 year
- That is not engaged in active business.
- That is not owned, directly or indirectly by a foreign person,
- That has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds in an amount greater than $1,000 (including all funds sent to or received from any source through a financial account or accounts in which the entity, or an affiliate of the entity maintains an interest; and
- That does not otherwise hold any kind or type of assets, including an ownership interest in any corporation, limited liability company, or other similar entity.
The exemption (xxiii) is the dormant/inactive entity exemption. To qualify for it your entity must meet all five of the tests outlined above. When in doubt, you are strongly advised to report in order to avoid potential penalties.
If you do not now have a reporting company and have not had one in the past, then thank you for reading – and enjoy your day without concern for this new law won’t apply to you.
But if you realize from reading this that you may have a reporting company or have had one in the past, now we will take you through the next appropriate steps.
Who is responsible for doing the reporting?
The company (incorporator/designated person) is responsible for reporting the BOI to FinCEN. The formation company or lawyer who helped you file the documents is not responsible for that, nor do they have all the sensitive information about the beneficial owners that is needed to report.
Who is a beneficial owner?
A beneficial owner, for the purposes of the CTA, is: “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise”:
- Exercises substantial control over the entity; or
- Owns or controls not less than 25% of the ownership interests of the entity.
The CTA does exclude from reporting as beneficial owners a minor child if the parent or guardian reports their information; nominees, agents, custodians and intermediaries; employees in their status as such; individuals whose only interest in the entity is through right of inheritance; and creditors of the entity − unless they meet the criteria in (i) or (ii) above.
What information is reported?
For each reporting company, you must provide the entity’s:
- Legal name as well as any trade names or DBAs
- Jurisdiction in which it was first formed or registered
- Tax ID number
For each beneficial owner of the applicable reporting company and each applicant with respect to that reporting company, you must report: their:
- Full legal name
- Date of birth
- Residential or business street address
- A unique identifying number from an acceptable identification document, or a “FinCEN identifier
- Acceptable identification documents for the above are a non-expired U.S. passport or an identification document or driver’s license issued by a U.S. State or tribal government. If you don’t have those a non-expired foreign passport will be accepted.
The “applicant” is the individual who files or filed an application to form the entity. Think of that as the organizer or incorporator. Information regarding the applicant(s) is only required for entities formed after December 31, 2023.
An exempt entity having an ownership interest only needs to report its name.
How do you report?
As we currently do with foreign account reporting (FinCEN 114 aka FBAR), BOI reporting will be done electronically through a secure filing system. Although the FinCEN reporting website has not yet been activated to receive reports, FinCEN states that it will be ready to accept reports on January 1, 2024. The applicant (or the person in the company who has subsequently taken over their role) will access the website and do the reporting. Upon request, FinCEN will issue a FinCEN identifier to the person doing the reporting. Beneficial owners may also request a FinCEN identifier. This creates an additional level of personal identity protection for reporters or owners. That FinCEN identifier can then be used to report the individual’s beneficial ownership in multiple entities.
Who can see the data?
The information in the database is not publicly available. It can be used for law enforcement and to comply with banking and financial regulations. FinCEN is in the process of identifying what information can be seen by whom, and how information will be requested and delivered. They are also building protocols and safeguards to protect this potentially sensitive information, and a system of FinCEN identifiers is being created. Penalties will also be established regarding improper use or disclosure of the reported information.
When do we start reporting?
The initial report for any company formed before 2024 must be filed by January 1, 2025. Entities formed after 2023 must file their initial report within 30 calendar days of formation.
Any changes in the information for the reporting company or the beneficial owner should be reported within 30 calendar days. Corrected reports are also due within 30 days of becoming aware of the error being corrected. If you have non-family co-owners in your entity and they are 25% beneficial owners, they will need to keep you informed of any changes in their legal names or addresses.
What if I don’t report?
Compliance is not optional, and penalties for non-compliance are part of the legislation.
The main reason this is a rather big deal at this time is that the CTA is new and unfamiliar to everyone, including government agencies, accountants, and entity owners. But once it gets rolling, it will be easier to comply with than the annual FinCEN 114/FBAR for foreign asset reporting. The biggest challenge for now is to gain a basic awareness of what the law entails and whether or not it applies to you.
The cross-border financial planners, tax experts, and wealth managers at Cardinal Point Capital Management continue to work diligently to inform you of recent changes in both Canadian and United States rules and regulations. For example, we alerted you when Canada introduced its Underused (and Vacant) Housing Tax – which went into effect in 2022, and informed you of the province of Ontario’s Transparency Register which was first enforced on January 1, 2023.
As the ancient Greek philosopher Heraclitus said, “Change is the only constant in life.” We write these articles to keep you abreast of significant changes to help you remain fully compliant with the law, and to highlight any potential opportunities for you as they present themselves. We will stay in touch.