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What Is Beneficial Ownership Reporting?
Beneficial ownership information reporting requirements stem from the Corporate Transparency Act (CTA), part of the Anti-Money Laundering Act of 2020. While this legislation has been around for a few years, FinCEN, a bureau within the U.S. Treasury Department, recently issued a final rule establishing the beneficial ownership information reporting requirements, which take effect on January 1, 2024.
The beneficial ownership rule applies to two types of businesses:
- Domestic reporting companies – These are corporations, limited liability companies (LLCs) and other entities created by filing with a secretary of state or similar office under the law of a state or Indian tribe.
- Foreign reporting companies – These are corporations, LLCs and other entities formed under the law of a foreign country that are registered to do business in any U.S. state or Tribal jurisdiction.
So, the beneficial ownership rule applies to most businesses in the U.S. other than domestic sole proprietorships. Certain exemptions to beneficial ownership reporting requirements have been provided, including certain types of banks, credit unions, investment companies, insurance companies and regulated public utilities.
Which Companies Have to File a
Beneficial Ownership Report?
A beneficial owner:
- Directly or indirectly exercises “substantial control” over a company, or
- Directly or indirectly owns or controls 25% or more of a company’s ownership interests.
A person can be a beneficial owner when they have significant influence over the activities and decisions of the entity, even if they don’t own a substantial portion of the company’s stock or hold a formal title such as, but not limited to, CEO or President.
“Beneficial owners” could be found beyond the normal scope of ownership potentially extending to certain family members. These rules are complex and should be examined thoroughly to ensure compliance.
Companies created or registered to do business before January 1, 2024, will have until January 1, 2025, to file their initial beneficial ownership report. Companies created or registered after January 1, 2024, have 90 days to file a beneficial ownership report. That 90-day window starts when the company receives notice from the secretary of state or another office that its creation or registration is effective.
What Is Beneficial Ownership?
What Is the Timeframe for
Beneficial Ownership Reporting?
What Information Do Companies Need to Include in a Beneficial Ownership Report?
A beneficial owner:
- Directly or indirectly exercises “substantial control” over a company, or
- Directly or indirectly owns or controls 25% or more of a company’s ownership interests.
A person can be a beneficial owner when they have significant influence over the activities and decisions of the entity, even if they don’t own a substantial portion of the company’s stock or hold a formal title such as, but not limited to, CEO or President.
“Beneficial owners” could be found beyond the normal scope of ownership potentially extending to certain family members. These rules are complex and should be examined thoroughly to ensure compliance.
Why Is Beneficial Ownership
Reporting Being Introduced?
The purpose of beneficial ownership reporting is ultimately to help prevent the creation of anonymous shell companies. Beneficial ownership reporting is an effort to help prevent money laundering and other financial crimes by requiring those with control over businesses or legal entities to provide identifying information.
Because few U.S. states require companies to disclose information about their beneficial owners, criminals and corrupt officials can hide their identities and launder money through the U.S. via shell companies.
By requiring entities to report information about their beneficial owners to FinCEN, the Corporate Transparency Act aims to safeguard the U.S. financial system.
What Are the Penalties for Noncompliance with the Beneficial Ownership Rule?
Businesses not complying with beneficial ownership information reporting requirements can face stiff penalties. Any company that fails to file a required beneficial ownership report or amendment by its filing deadline is subject to a fine of $500 per day, up to a maximum of $10,000.
Willful failures or intentionally filing inaccurate information is a felony, punishable by up to two years in prison. When combined with anti-money laundering violations, the penalty is up to 10 years in prison.
This is a big change that can affect many businesses. Take the time to educate yourself about your business’s obligations and filing requirements under the CTA, and consult your legal counsel if you have questions about the new compliance requirements.
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