Millions of companies organized in the United States, and many more businesses around the world who are registered to do business in the U.S., will be required to report “beneficial ownership information” (BOI) about that company's owners starting Jan. 1, 2024.
Here's what you need to know about the new reporting requirements and what they mean for your business.
The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury that collects and analyzes information to help fight financial crimes, issued a final rule on the new BOI reporting requirements in September 2022.
According to FinCEN, financial criminals routinely use shell corporations and front companies to launder and hide money in the United States, all while keeping their identities hidden. The new BOI reporting requirements aim to make it more difficult to use these types of entity structures to conceal laundered cash.
Impacts of the Requirement
FinCEN estimated that there will be nearly 33 million companies who must file a BOI report in 2024, and 5 million additional companies in each year thereafter.
Corporations, LLCs and other entities created under the auspices of a U.S. state's Secretary of State office, or foreign companies registered to do business in the U.S., must file a BOI report. Exemptions exist for entities that are already subject to substantial federal and/or state regulation and already have to provide their beneficial ownership information to a governmental authority. This includes investment companies or investment advisers and venture capital fund advisers, but it does not cover the actual private equity (PE) or venture capital (VC) investment funds. The specific criteria outlining business entities subject to the BOI filing requirement are outlined in our previous article.
Content of Reports
Each business must provide the following information:
- The full name of the reporting company
- Any trade name or "doing business as" name of the reporting company
- The business street address of the reporting company
- The jurisdiction of formation of the reporting company, and for a foreign reporting company, the U.S. jurisdiction where such company first registers
- An IRS tax identification number of the reporting company.
Beneficial Owners Who Must Be Listed on a BOI Report
An individual is considered to be a "beneficial owner" and must be included on a company's BOI report if the individual meets at least one of the following two criteria:
- The individual exercises substantial control over the reporting company; or
- The individual owns or controls at least 25% of the ownership interests of a reporting company.
An individual is deemed to exercise substantial control over a reporting period if the individual serves as a senior officer of the reporting company or has authority over the appointment or removal of such senior officer or a majority of the board of directors or similar body. Further, directing, determining or exercising substantial influence over important decisions made by the reporting company would be considered exercising substantial control. This could include such decisions as the transfer of any principal assets, reorganizations, major expenditures or investments, issuances of equity, or approval of the operating budget of the company. The final rule also includes the exercise of indirect substantial control in this test.
Ownership interests need to be analyzed both for direct and indirect ownership. “Ownership interest” is broadly defined to encompass equity, partnership and LLC interests, convertible debt, warrants and derivatives.
Company Applicants Must Be Reported
The individual who directly files the document (for example with a Secretary of State) that creates the entity, or that registers the entity in the U.S., must also be listed on the BOI report, for entities formed on or after Jan. 1, 2024.
Steps PE/VC Firms Need to Take
Similar to other information reports that businesses may need to file with various local, state and federal agencies, the BOI reporting requirements aren't as straightforward as one might expect. Companies need to set aside enough time to insure it is taking full advantage of the exceptions built into the finalized reporting requirements. Here are some suggestions for how your company can prepare to comply with these filing requirements:
1) Determine which entities in your structure need to file.
While millions of businesses will need to file a BOI report, there are nearly two dozen types of businesses that are exempt from the reporting requirements. The first step is to confirm that your company does indeed need to file this report based on the published criteria. Exemptions exist for investment companies or investment advisers and VC fund advisers, but not for the investment funds themselves.
The next step is to determine if any persons are considered “beneficial owners” that must be included in the report. Funds should consider their ownership interests in portfolio companies and if any individual investors could be considered a beneficial owner of such portfolio company. Additionally, firms should evaluate whether any persons associated with the PE firm, such as fund managers, could be deemed to be exercising substantial control over portfolio companies, for example by virtue of sitting on the board of directors of such entities.
2) Identify your company's initial BOI report due date.
Companies created or registered before Jan. 1, 2024 will need to file their initial reports by January 1, 2025. Companies created or registered after Jan. 1, 2024 must file an initial BOI report within 30 days following receipt of the official notice confirming the entity's creation or registration. FinCEN is working to develop the specific forms which will be used to report the BOI information.
3) Monitor and report any changes in a timely way.
An updated BOI report must be filed within 30 days following any change in information previously filed with FinCEN, for example any changes in ownership. Any inaccuracies discovered on previously filed reports must also be reported within 30 days. While tax advisors can assist with the preparation of these new forms, business entities must constantly (and quickly) inform tax advisors about ownership changes every time they occur, since tax advisors will not be privy to that information in a timely manner.
For more information on complying with the new BOI reporting requirements, please contact a CBIZ tax advisor.
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