On September 30,2022, The U. S. Treasury Departments Financial Crimes Enforcement Network (FinCEN) issued final regulations implementing Section 6403 of the Corporate Transparency Act, also known as the BOI Rules.
The intent of these rules is to protect You. S. Financial system from illicit use. The rules went into effect January 1, 2024 and are designed to introduce a new federal framework by which businesses that are operating in the United States will be subject to beneficial ownership information reporting requirements. These reporting requirements will occur at the time of the businesses initial formation and upon change in ownership as well as other events.
An entity will be subject to the BOI rules if it falls within the following:
A domestic reporting company, defined as a corporation, limited liability, or other entity that is created by the filing of a document the secretary of state or other similar office under the laws of a state or Native American tribe; or
A foreign reporting company, defined as a corporation, limited liability company or other entity that is formed on the laws of a foreign country and that is registered to do business in the United States by the filing of a document with a secretary of state or equivalent office under the laws of the state or an Indian tribe.
These rules exclude sole proprietorships to the extent that such entities are not created by the filing of a document with a secretary of state or similar office. The rules in some instances may pertain to trusts. However, even if an entity fits within the above criteria, FinCEN provides 23 separate exemptions which, if applicable, provide safe harbor for an entity to not submit a Beneficial Ownership Information Report (BOI Report). Among the entities that are exempt include some of the following:
Large operating companies which employ more than 20 full-time employees in the U.S., filed a federal income tax return in the U.S. demonstrating more than $5 million in gross receipts or aggregate sales, and operate at a physical office within the U.S.;
Pooled investment vehicles operated or advised by certain other exempted entities;
Investment companies and investment advisers that are registered with the SEC;
Venture capital fund advisers that have filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV with the SEC;
SEC reporting companies; and
Subsidiaries whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more certain exempted entities.
In addition to the reporting company itself, there are two categories of persons or entities that must file these reports. They include:
Beneficial Owners. This is an individual who, directly or indirectly exercises substantial control over the reporting company or owns or controls 25% or more of the company’s ownership interest. Substantial control involves an individual who is or exercises the authority of a senior officer of the reporting company, such as the chief executive officer, chief operating officer, chief financial officer and General Counsel. It also involves someone who has authority to appoint or remove senior officers or majority of the directors or managers of the reporting company. It also entails an individual who directs, determines or exerts substantial influence over important decisions of the company. This could include reorganization, issuance of debt, borrowing activities etc. it also includes an individual who otherwise has direct or indirect substantial control over the reporting company. For purposes of the 25% ownership or control rule this involves interest associate with equity interest, profit interest, convertible instruments, warrants, options and any other such company interest owned or controlled through joint ownership, a trust arrangement or indirect arrangements.
Company Applicants. The company applicant is the individual who directly files the document that creates a domestic reporting company or registers a foreign reporting company. If more than one individual is involved in the filing the individual who is primarily responsible for directing or controlling such filing is the company applicant.
Information reported. The BOI rules establish two groups of information which must be reported:
Company Information. This generally consist of the full legal name of the entity as well as any assumed names, a physical address (no PO Box), the state, tribunal or foreign jurisdiction of formation and the federal tax ID number or foreign tax ID number.
Beneficial Owner and Company Applicant Information. Each beneficial owner and the company applicant must provide their full legal name, date of birth, residential address (no PO Box) an image of any unique identifying number shown on either a current US passport, state issued driver’s license, state, local or tribunal identification document or foreign passport. If by chance none of that information is available reporting company individuals may apply to FinCEN for a FinCEN identifier number.
When to First Report.
New Entities. Entities created on or after January 1, 2024 will be required to submit the report within the 30 day calendar days of the date of the earlier on which the reporting receives actual notice from the government authority that its formations become effective for the date on which the governmental agency first provides public notice. Public notice could be posting on the Secretary of State website.
Existing Entities. Entities that existed prior to January 1, 2024 will be required to submit the reports by January 1, 2025.
The filing easy electronic and must be done through the FinCEN website. That website contains FAQs and updates.
Penalties
Reporting entities that fail to submit their report are subject to both criminal and civil counties for willful violations. The panties can be up to $500 per day and criminal counties up to $10,000 or imprisonment for up to two years.
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