If you own a small business or family office, you could soon be required to report ownership details to the federal government—or possibly face stiff penalties. Here's what you need to know.
What is it?
The Corporate Transparency Act (CTA), which went into effect on January 1, 2024, requires otherwise unregulated companies to report information about "beneficial owners"—those who own at least 25% of or exercise substantial control over the reporting company. Newly formed Companies that fall under the definition of “Reporting Companies” will need to file the Beneficial Ownership Information (“BOI”) report with the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of Treasury, beginning on January 1, 2024. Companies formed after January 1, 2024, will have 90 days after formation to file the BOI report with FinCEN. Reporting Companies formed prior to January 1, 2024, will have until December 31, 2024, to file the BOI report with FinCEN. A Reporting Company is broadly defined as any entity formed by a filing with a secretary of state or any foreign entity that is registered to do business in the United States, which includes corporations, limited liability companies, and limited partnerships.
The law exempts certain categories of businesses such as significantly tax-exempt entities and large operating companies. Large operating companies, put simply, have more than 20 full-time employees in the United States, a physical office in the United States, and more than $5 million in U.S. gross receipts.
What is the Impact on Trust Administration?
Trusts are exempt from filing under the Act unless they own an interest in or control a Reporting Company. For trusts that own an interest in a Reporting Company, the following individuals will be considered beneficial owners:
- Any trustee, direction advisor, protector, designated representative or other individual acting on behalf of the trust (whether a fiduciary under state law or not):
- Who has the power to dispose of trust assets when the trust(s) and such individual (collectively) holds at least a 25% ownership interest in the reporting company;
- Who controls a majority of the voting power or voting rights of the reporting company;
- Who directs, determines or has substantial influence over important decisions made by the reporting company;
- With the right to remove and replace senior officers of the reporting company;
- With the right to remove and replace a majority of the board of directors of the reporting company;
- Any trustee of a trust(s) that owns a majority of the voting power or voting rights in the reporting company; and
- Remainder beneficiaries and permissible appointees of a power of appointment likely are not considered beneficial owners because of the inheritance exception. Accordingly, a minor child is excluded from the definition of Beneficial Owner if information about a parent or legal guardian for that child is disclosed as the Beneficial Owner. An individual acting as nominee, intermediary, custodian, or agent is not a Beneficial Owner because that person does not ultimately control or economically benefit from the entity.
What can you do to prepare?
FinCEN has not yet made public or initiated the Beneficial Ownership Secure System (“BOSS”) where the BOI report must be electronically filed. This became operational on January 1, 2024.
What can you do now to prepare?
1. Secure FinCEN Identifiers as soon as possible.
To protect the privacy of any person who will be considered a Beneficial Owner, these individuals should secure FinCEN Identifiers as soon as it is possible. This will ease the burden on Reporting Companies to ensure that information provided in the BOI report is accurate, and regarding Beneficial Owners, up to date. Going forward, this will require the person securing the Identifier to continually update his or her address and possibly other information on the application or be subject to penalties.
2. Consult with your legal or accounting team.
Determining who must file and when may require some analysis by a law firm or other specialist. We can help you navigate your way through this initial process. If engaged to do so, we will provide additional guidance for you to help you comply with this new law.
3. Don’t panic
The information you provide to FinCEN regarding the Reporting Company is the same information you need to provide to the Secretary of State except you must include the Tax ID Number and the FinCEN Identifier number of the Beneficial Owner and the Company Applicant. The database is not open to public view, and creditors and other entities other than the federal government should not be able to view the information. Your Reporting Company will continue to provide you with asset protection and other administration advantages.
