Beneficial Ownership Information Reporting for Closely Held Businesses

The comment period has ended with respect to rules proposed to implement beneficial ownership information (“BOI”) reporting. Final regulations may be released later this spring and reporting by companies could begin before the end of 2022.

What is BOI reporting?

The Corporate Transparency Act (“CTA”) was passed into law effective January 1, 2021, as part of the larger Defense Authorization Act for Fiscal Year 2021. CTA requires most business entities registered to conduct business in the U.S. to report information about the entity’s beneficial owners to the Department of the Treasury. Specifically, BOI is reported to the Financial Crimes Enforcement Network (“FinCEN”) division of Treasury (FinCEN currently collects information from individuals, businesses and trusts regarding ownership and authorization over certain foreign financial accounts).

The goals of CTA are to limit the use of shell companies to hide the actual individuals owning or controlling activities that may evade tax or may be criminal. BOI information may be shared with government agencies, law enforcement, financial institutions, and regulators. The information is not intended to be shared with the general public.

FinCEN released a notice of proposed rulemaking in December 2021 to implement BOI reporting. The proposed rules describe who must file a report, what information must be provided, and when a report is due. The opening summary to the proposed rules notes the impact these may have:

Requiring entities to submit beneficial ownership and company applicant information to FinCEN is intended to help prevent and combat money laundering, terrorist financing, tax fraud, and other illicit activity. Once finalized, these proposed regulations will affect a large number of entities doing business in the United States.

Who must file a report?

The proposed rules outline reporting requirements for both domestic and foreign entities. Corporations, limited liability companies, or any entities created by the filing of a document with a secretary of state or similar office under the laws of a state or Indian tribe may be required to file a report. The last category appears to include limited partnerships, limited liability partnerships, and business trusts created under state law. Foreign entities similar to those described above that are registered to do business in a state or tribal jurisdiction will be required to file a report as well.

The proposed rules adopt without change or addition the CTA’s list of 23 exemptions from required reporting. Most of the exemptions apply to entities that are already under regulatory oversight by Treasury or another governmental agency such as financial institutions, publicly traded companies, public utilities, and insurance companies. The CTA also exempts tax-exempt organizations from reporting. Many businesses may not be required to report BOI information under the CTA exemption for large operating companies. The proposed rules define a large operating company as one that,

• employs more than 20 employees on a full-time basis in the United States,
• filed Federal income tax returns in the United States in the prior year reporting more than $5,000,000 in gross receipts; and
• has an operating presence at a physical office within the United States.

An entity that does not meet one of the 23 exemptions is referred to as a “reporting company.”

Who is a beneficial owner?

The CTA describes a beneficial owner as an individual who exercises substantial control over a reporting company, or who owns or controls at least 25% of the ownership interest of a reporting company. The proposed regulations define key terms and set standards for determining if an individual has substantial control or meets the ownership threshold. A beneficial owner may meet either test directly, indirectly, through any contract, arrangement, understanding, relationship or otherwise.

The purpose of these terms and definitions is to unveil the person or persons making significant decisions on behalf of an entity. As with reporting companies, the CTA exempts some individuals from reporting. Among these are minor children and certain employees. Reporting companies should start planning now how they will identify their beneficial owners.

The CTA and proposed rules also require a reporting company to disclose information about the company applicant. A company applicant is an individual who files, or who directs the filing of, a document that creates a domestic reporting company or initially registers a foreign reporting company with a secretary of state.

What information is reported?

The CTA requires each reporting company to submit to FinCEN a report identifying each beneficial owner of the reporting company and each company applicant by: (1) full legal name, (2) date of birth, (3) current residential or business street address, and (4) a unique identifying number from an acceptable identification document. The last item in the list may be a passport, driver’s license, or similar, and may require the reporting company to submit images of these documents with its report to FinCEN.

In addition, to ensure that each reporting company can be identified, the proposed regulations would require each reporting company to report its name, any alternative names through which the company is engaging in business (‘‘d/b/a names’’), its business street address, its jurisdiction of formation or registration, as well as a unique identification number. FinCEN is currently designing systems and forms to collect the reporting information.

When is BOI reported?

The proposed rules would require any existing reporting company created or registered before the effective date of the final regulations to file a report not later than one year after the effective date of the final regulations. For newly formed or registered companies, the proposed rules set a deadline of 14 days from the date of formation for filing the first report to FinCEN. The proposed regulations also set a short window of time for reporting companies to correct errors in reports or to update information that may have changed form a prior report.

What happens next?

The comment period for the proposed regulations ended on February 7, 2022. FinCEN will now assess all comments, consider updates and revisions to its regulations, and then either reissue new proposed regulations or submit final regulations. Along with the regulations, FinCEN continues to develop the reporting forms, delivery mechanism, and data systems to support BOI reporting. FinCEN is also proposing rules and protocols for those agencies and institutions that may be authorized to access BOI.

Business entities that may be reporting companies should begin planning now for their own systems and procedures to identify beneficial owners, to collect required data, to protect such data, and plans to transmit BOI to FinCEN. Entities should also review governing documents and discuss any concerns regarding disclosures of owner information with legal counsel  Cherry Bekaert will continue to monitor FinCEN regulatory activity and will share news and updates.