On April 18, 2024, the Financial Crimes Enforcement Network (FinCEN) released further guidance regarding to Corporate Transparency Act compliance (CTA) by updating and expanding the Beneficial Ownership Information Reporting Frequently Asked Questions regarding the Beneficial Ownership Information (BOI) Reporting Rule (FAQs). Importantly, the updates provide insight on BO access by foreign governments, law enforcement and financial institutes.
1. Understanding Beneficial Ownership Reporting
A beneficial owner is an individual who either directly or indirectly: (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of a reporting company’s ownership interests. Because beneficial owners must be individuals (i.e., natural persons), trusts, corporations, or other legal entities are not considered to be beneficial owners. FinCEN’s updates clarify the reporting obligations of certain entity types and entities with exempt beneficial owners.
S-Corporations and Domestic Entities Formed without Filing
S-Corporations, despite their pass-through tax treatment, are subject to beneficial ownership reporting requirements if they qualify as reporting companies. The pass-through structure does not exempt them from compliance. Conversely, in the unusual event that a domestic corporation or LLC is created without a filing with a secretary of state or similar office, such entities are exempt from reporting.
Homeowners Associations (HOAs)
The status of HOAs as reporting companies hinges on their corporate structure and tax designation. While some HOAs may qualify for exemptions, others may be required to report beneficial ownership information to FinCEN, depending on factors such as their tax designation and organizational structure. For example, incorporated HOAs may fall under reporting obligations, while those designated as tax-exempt under section 501(c)(4) of the Internal Revenue Code may be exempt.
Although there may be cases in HOAs where no individual owns or controls 25 percent of the ownership interest, FinCEN still expects at least one individual to exercise substantial control over the HOA. Individuals meeting specific criteria are deemed to exercise substantial control, including being a senior officer, having authority to appoint or remove officers/directors, serving as an important decision-maker, or possessing any other form of substantial control over the HOA.
2. Defining Beneficial Owners, Trusts, and Corporate Trustees
Trusts, though not considered beneficial owners, may involve individuals with trustee, beneficiary, or grantor roles who indirectly control reporting entities.
Determining beneficial ownership through trusts requires a review of trust arrangements and the roles of trustees, beneficiaries, and grantors. Key indicators of beneficial ownership include trustees’ authority over trust assets, beneficiaries’ entitlement to trust income/principal, and grantors’ right to revoke the trust.
Corporate trustees in trust arrangements introduce complexities in identifying beneficial owners, with reporting companies required to assess individual ownership/control of trust assets to determine reporting obligations accurately. Exemptions may apply if corporate trustees are exempt entities and individual beneficial owners do not exercise substantial control over reporting companies. The FAQs also provide further analysis on reporting by corporate trustees.
3. Address Reporting and Timeline
Foreign Reporting Companies
If a reporting company lacks a principal place of business in the United States but operates at multiple locations within the country, it may designate any of these locations where it receives important correspondence as its primary address for reporting purposes. However, if the reporting company does not conduct business functions in any US location, its primary address is the address of the person designated, according to State or other applicable law, to accept service of legal process on its behalf. This person or entity, often the registered agent, and their address should be reported to FinCEN as the company’s address.
Losing Exempt Status
A reporting company created or registered before January 1, 2024, which loses its exempt status between January 1, 2024, and January 1, 2025, has a grace period to file its initial BOI report. Typically, a company losing its exempt status must submit a BOI report within 30 calendar days. However, reporting companies meeting the aforementioned criteria have until January 1, 2025, to file their initial BOI report. Specifically, entities that lose exempt status in 2024 benefit from whichever timeframe is longer: the remaining days in the one-year filing period for existing companies or the standard 30-calendar-day period for companies losing exempt status.
For example, if an exempt company loses its status on February 1, 2024, it has until January 1, 2025, to file its initial BOI report. Similarly, if the exemption is lost on December 15, 2024, the company has until January 14, 2025, to complete its filing.
Newly Exempt Entities
If a reporting company’s size fluctuates above and below the thresholds for the large operating company exemption, it still needs to file a BOI report if it meets the definition of a reporting company and does not qualify for the large operating company exemption or any other exemption.
If the company files a BOI report and later qualifies as a large operating company, it should submit a “newly exempt entity” BOI report to FinCEN, indicating its exemption status. However, if the company no longer qualifies for the exemption at a later date, it must file an updated BOI report with FinCEN within 30 calendar days of the change.
To qualify for the large operating company exemption, the entity must have more than 20 full-time employees in the United States, have filed a federal income tax or information return in the United States demonstrating more than $5 million in gross receipts or sales in the previous year, and maintain an operating presence at a physical office in the United States.
4. Authorized Recipients of BOI
FinCEN will implement a phased rollout for access to beneficial ownership information. The initial phase, starting in spring 2024, includes a pilot program for select Federal agency users. Following this, the second phase in summer 2024 will extend access to Treasury offices and other Federal agencies involved in law enforcement and national security activities. The third phase, anticipated in fall 2024, will further broaden access to additional Federal agencies, as well as State, local, and Tribal law enforcement partners. By winter 2024, the fourth phase will facilitate access for intermediary Federal agencies handling foreign government requests. Finally, in spring 2025, the fifth phase will grant access to financial institutions subject to customer due diligence requirements and their supervisors. This structured approach ensures a methodical and controlled rollout of access across various stakeholders.
Federal agencies, including law enforcement and regulatory bodies, will obtain access to beneficial ownership information following established protocols, ensuring responsible data utilization aligned with national security and anti-money laundering goals. Similarly, state entities and foreign governments seeking access must comply with prescribed procedures to safeguard the integrity and confidentiality of sensitive information.
The updates from FinCEN continue to offer clarity to potential reporting companies who are grappling with BOI reporting requirements under the Corporate Transparency Act. For more information on BOI reporting obligations under the Corporate Transparency Act, click here.
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