Corporate Transparency Act: Best practices for beneficial ownership information reporting

What are the CTA reporting requirements?

The reporting requirements and deadlines for an initial BOI filing are as follows:

• Domestic companies formed before January 1, 2024, must report beneficial ownership information to FinCEN by January 1, 2025.
• Foreign companies registered to do business in the U.S. before January 1, 2024, must also file a BOI report with FinCEN by January 1, 2025.
• Entities formed or first registered in 2024 (that are not exempt) must file a report within 90 calendar days of formation or registration notice.

Penalties for wilfully failing to file a BOI report include fines of up to $591 per day for each day the violation continues and criminal penalties of up to two years in prison and a fine of up to $10,000.

FinCEN has issued many updates and clarifications about CTA compliance and how businesses can prepare, including 109 FAQs as of September 2024. For example, recent FAQs addressed the CTA and its applicability to Indian Tribes, dissolved and withdrawn entities, and disregarded entities.

Many factors determine a company’s compliance requirements, and it is crucial that your organization develops a compliance strategy before the filing deadline of January 1, 2025. Dealing with complex entity structures or multiple entities makes compliance particularly complex.

What businesses are affected by the CTA?

Under the CTA, the following entities must file a BOI with FinCEN (unless they qualify for an exemption):

• U.S. corporations,
• limited liability companies (LLCs),
• and other entities created by the filing of a document with a Secretary of State or similar office.
• Entities created under the law of a foreign country and registered to do business in the United States by filing a document with a Secretary of State or similar office.

All reporting companies must report a taxpayer identification number (TIN). This can include an EIN (Employer Identification Number), a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). Foreign entities may use a TIN from a foreign jurisdiction if they don’t have a U.S. identification number.

Recently, FinCEN provided guidance on how disregarded entities must report a TIN, as follows:

• When the disregarded entity has its own EIN: It can use that EIN as its TIN. If the disregarded entity doesn't have an EIN, it is not required to get one if it can provide another type of TIN. If the entity is a foreign reporting company without a TIN, a tax identification number issued by a foreign jurisdiction along with the name of that jurisdiction will suffice.
• If the disregarded entity is a single-member LLC (or has only one owner who is an individual with an SSN or ITIN): The disregarded entity can use that individual’s SSN or ITIN as its TIN.
• If the disregarded entity is owned by a U.S. entity with an EIN: The entity may report the other entity’s EIN as its TIN.
• If the disregarded entity is owned by another disregarded entity or a chain of disregarded entities: The disregarded entity may report the TIN of the first owner up the chain of disregarded entities with a TIN as its TIN.

Practical view: Understand your corporate structure and scope of BOIR entities

The first step in streamlining the compliance process is understanding your entity portfolio. This involves taking the following steps:

• Identify your company’s universe of entities: Order an all-state, all-entity health check. This will provide a report on entities, jurisdictions, and Secretary of State compliance status.
• Rationalize current entities: Determine which entities will no longer be needed before January 1, 2025. This can take time, so be sure to review your entities during your slower months. Consider dissolving and withdrawing these entities or explore the viability of a merger; however, be sure to review tax and legal implications, documents, and filing turnaround times. As you do this, identify the states that require tax clearance (as this can be a lengthy process). If you need assistance, evaluate companies who can help with obtaining all state requirements. And don’t forget to consider state backlogs as year-end volume can cause delays. Note: Even if you formally dissolve a domestic entity or withdraw a foreign entity in 2024, you must file an initial BOI report for it by January 1, 2025.
• Identify personal entities and the next steps to have any reporting needs addressed by the individual owners.

Although it is advisable to terminate entities when they are no longer needed, terminating an entity that existed at any time on or after January 1, 2024, will not exempt it from filing an initial report, if it is a reporting company.

On July 8, 2024, FinCEN released an FAQ clarifying the reporting obligations related to BOI for companies that have been terminated. On September 10, 2024, FinCEN released an FAQ clarifying the reporting obligations for non-U.S. companies that ceased to be registered. Companies that ceased to exist as legal entities before January 1, 2024, and non-U.S. companies that ceased to be registered before January 1,2024 are not obligated to submit a BOI report. However, non-exempt companies that existed as legal entities for any period on or after January 1, 2024 (meaning they did not complete the formal dissolution process before that date) and non-U.S. reporting companies that were registered to do business in the U.S. for any period on or after January 1, 2024 (meaning they did not complete the process of formally and irrevocably withdrawing by that date) are required to file a BOI report, even if they ceased to exist or ceased to be registered before their initial BOI report was due. This applies both to reporting companies created or registered before January 1, 2024 and those created or registered on or after January 1, 2024.

Determine CTA exemption status of your entities

When conducting your analysis, it is important to review each entity individually rather than applying a one-size-fits-all approach. Just because the parent entity meets one of the exemption requirements does not mean that it automatically applies to all subsidiary entities.

Keep in mind that the "subsidiary of certain exempt entities" exemption applies to a subsidiary if it is controlled or wholly owned by an approved exempt entity, with ownership interests being fully, 100 percent owned or controlled by the exempt entity. FinCEN has not clarified this further, raising some questions as to instances where even a small equity interest in a subsidiary entity is owned by another entity, such as joint ventures with non-exempt entities as minority investors. Careful review of structures and consideration of the risks and ambiguity should be made when determining what entities qualify for the subsidiary exemption.

Given the complexity of entity structures and the limits in guidance, some firms choose to file for every entity without detailed analysis of all potential exemptions. Consider involving your external legal counsel in this process.

Make sure to document the reasons for an entity's exemption in your entity management system in case the rules change or for future audits. Also, document your process for determining exemption to demonstrate good faith effort in case it is questioned. Liability for violations of the rules can only be imposed for wilful violations.

Consider obtaining a Legal Opinion from counsel or, if cost or ambiguity is an issue, a Memorandum of Understanding. This will provide you with a document you can rely on when not filing for exempt entities.

Benefits and considerations in recommending your beneficial owners obtain a FinCEN ID

Keep in mind that CTA compliance is an ongoing requirement, and you must update and maintain the information provided to FinCEN.

For example, after your initial BOI filing, you must report any changes to previously reported company or beneficial owner information by filing an updated report no later than 30 calendar days after the change. These changes can include a change in your principal place of business or a new residential address for a beneficial owner.

While not required, obtaining a FinCEN ID has practical benefits. An individual with a FinCEN identifier can provide it to a reporting company, which can then use the identifier instead of other personally identifiable information. This streamlines the reporting process and helps protect an individual's sensitive, personal information.

Some considerations regarding FinCEN IDs:

• An individual may only receive one FinCEN identifier.
• If there is any change to required information previously submitted by an individual to FinCEN, the individual must file an updated application reflecting the change within 30 calendar days after the date of the change.
• Even if they are no longer a beneficial owner, individuals with a FinCEN ID must continue to update FinCEN upon changes to their name, home address, or the number on their driver’s license, passport, or state or local ID document.
• Currently, there is no option to relinquish a FinCEN ID, but FinCEN is considering allowing individuals to do so in the future.

To obtain a FinCEN ID, you must create an account through the FinCEN ID Application. Refer to these step-by-step instructions.

Coming soon

Look out for the next article in this series, in which we discuss ongoing CTA compliance for reporting companies across the entity lifecycle and considerations for formations, acquisitions, and dissolutions.

Learn more

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