These new reporting requirements are to safeguard U.S. national security and financial system interests, and they will have a significant impact on the formation of new business entities going forward.
If a foreign or domestic entity is formed by the filing of a document with a secretary of state or similar office in the U.S., then it is likely a “Reporting Company.” A Reporting Company may be a corporation, limited liability company or limited partnership, among others, and unless your company fits within twenty-three narrow exemptions, it is likely this rule will require your company (and any subsidiaries) to take immediate action.
We have summarized below some of the key details you need to know now that the CTA is in effect.
Where to File?
FinCEN has released a BOI E-Filing System which supports the electronic filing of BOI Reports. A BOI Report may be filed via PDF submission (this requires Adobe Reader), and the PDF may be prepared offline, saved locally and be reusable for filing updates and corrections. Alternatively, a BOI Report may be filed online; however, note that a new BOI Report must be manually entered online and prepared for each change, correction and submission that occurs.
For those who elect to work with a third-party service provider, the BOI Report filing process can be automated through a system-to-system transmission via secure Application Programming Interface (API).
The BOI E-Filing System can be accessed here.
What is the Filing Deadline?
Reporting Companies created or registered to do business prior to January 1, 2024, will have one year (until January 1, 2025) to file an initial BOI Report.
Reporting Companies created or registered on or after January 1, 2024 (and before January 1, 2025) will have 90 calendar days after receiving notice of their formation to file their initial BOI Reports.
Reporting Companies created or registered on or after January 1, 2025, will have 30 calendar days after receiving notice of their formation to file their initial BOI Reports.
Reporting Companies must report changes to outdated or inaccurate information in previously filed reports within 30 days of learning of, or having reason to know of, such inaccuracy.
What if I Have a Group of Affiliated Companies?
All non-exempt Reporting Companies are required to file their own BOI Reports; further, parent companies cannot file a single BOI Report on behalf of a group of companies. Even if a group of companies are affiliates or share common ownership, each Reporting Company must be analyzed individually. For example, if one entity in the group meets the exemption for a large operating company by employing greater than 20 full-time employees, the Act does not permit consolidation of employees across multiple entities in order for an affiliated entity to also meet such exemption.
However, there is one “special reporting rule” released by FinCEN that allows a Reporting Company to include a parent company’s name on the BOI Report in lieu of information about its Beneficial Owners. This special rule only applies if the parent company is an exempt entity itself and if the Beneficial Owners only hold their ownership interests in the Reporting Company through the parent company.
Who Can Be Held Liable?
As of January 1, 2024, Reporting Companies have a legal requirement to report, update and correct beneficial ownership information by filing BOI Reports with FinCEN. It is the responsibility of the Reporting Company to ensure true, correct and complete information is submitted. Even though the Reporting Company will rely on individual Beneficial Owners and Company Applicants to provide accurate personal information, it is the responsibility of the Reporting Company to verify the information they receive and to put mechanisms in place to ensure compliance with the Act.
Disregarding BOI reporting obligations could result in both civil and criminal penalties under the Act, with violations including willfully failing to file a BOI Report, willfully filing false information or willfully failing to correct or update previously reported information. However, there is a safe harbor to avoid penalties which provides that mistakes or omissions in BOI Reports may be corrected within 90 days of the deadline for the original report. Otherwise, Reporting Companies must report changes to outdated or inaccurate information in previously filed reports within 30 days of learning of, or having reason to know of, such inaccuracy.
Willful violation of the reporting requirements may result in civil penalties of up to $500 for each day that the violation continues. Willful violation may also result in criminal penalties of imprisonment for up to two years, as well as a fine of up to $10,000.
Both individuals and entities can be held liable for willfully failing to report complete, accurate and updated information. This includes individuals who file, or attempt to file, false information, as well as any person who willfully provides the filer with false information. Further, while this liability can fall to any individual responsible for a violation, liability can also be placed on any senior officer at the company at the time of the failure, regardless of their personal involvement in the violation.
What Are My Next Steps?
Reporting Companies should advise their Beneficial Owners and Company Applicants of the CTA’s requirements as well as the potential penalties both Beneficial Owners and Company Applicants may face if they willfully cause a violation of the Act. Mechanisms should be put in place to ensure Beneficial Owners and Company Applicants provide the required information as well as mechanisms for them to provide changes, updates and flags for any inaccuracies to previously reported information.
Going forward, before creating or registering a new legal entity that may qualify as a Reporting Company, it is advised to take steps to ensure the company will have access to necessary BOI and to provide mechanisms to ensure the company is kept apprised of any changes to the information.
Finally, remember that it is the responsibility of the Reporting Company to verify information and ensure all BOI Reports contain true, correct and complete information.
Klehr Harrison can help you analyze whether you need to file BOI Reports for your entities and assist you with other aspects of the process. For additional information or assistance regarding CTA compliance mechanisms, filing instructions or legal analysis, contact Jon Katona or Patrick Murphy.