As we inch closer to the end of 2023, another mandate will be imposed on businesses, whether you just started out or you have been in existence for many years. This requirement will enforce the new beneficial ownership information mandated by the Corporate Transparency Act of 2021. These new reporting requirements will be phased in two calendar years: 2024 & 2025. Under these new reporting requirements, business entities that are required to comply must report specific information about certain owners and officers to the United States Treasury Department’s Financial Crimes Enforcement Network (also known as FinCEN).
The information that will initially be collected by FinCEN will be used by a multitude of government organizations in order to combat persistent issues across the globe such as: money laundering, tax evasion and human trafficking. Failure to comply with this new mandate can result in being fined $500 per day in civil penalties and up to $10,000 per day in criminal penalties and/or being imprisoned for up to 2 years, so it is vital to understand how to remain in compliance at all times. You might be thinking that if the entity is penalized, the beneficial owner is free from liability. Well, FinCen has made it clear that it can not only levy penalties against the entity but against any beneficial owner as well. At the time of writing this, FinCEN estimates that there are 32 million entities that will have to comply with these new mandates, with a few million more new entities that must file reports each year.
The good news is that most larger companies do not have to comply with this mandate. The bad news is that companies that are not exempt from reporting will be held responsible for obtaining and reporting personal information on all individuals deemed to be a beneficial owner. The complexity in all of this is constantly making sure that all beneficial owners’ personal information is updated with FinCEN on an ongoing basis. The more beneficial owners there are in an entity, the harder it will be.
So, by now you are probably asking yourself, who is required to comply with the reporting mandate? Per FinCEN, the definition of a reporting company is quite broad and expansive, leading most small to medium-sized businesses to be subjected to these reporting requirements. Not sure whether these reporting requirements will apply to your business, according to FinCen their motto is simple: when in doubt, report. If you are unsure if an individual would be considered a beneficial owner, it is in the entity’s best interest to report them to avoid being hit with any penalties later on.
The first step in determining whether a company is required to report is defining what a reporting company is. According to FinCen, a reporting company is:
- A domestic corporation, LLC (including a single member LLC) or other entity that is created by filing documents with a Secretary of State’s office or similar office under the law of the state.
- A foreign corporation, LLC, or other entity formed under the law of another country and registered to do business in any state by filing a document with a Secretary of State or similar office.
Didn’t I say the definition of a reporting company is broad? You are probably thinking to yourself that this would include any business that operates within our 50 states & U.S. territories, such as Puerto Rico, Guan, and any other commonwealth territories. Lucky enough, FinCen also established rules for entities that are exempt from having to report, which include but not limited to:
- Large operating companies (with at least 20 full-time U.S. employees)
- Inactive entities (meeting certain criteria)
- Security dealers or brokers
- Investment companies and advisers registered with the SEC
- Tax-exempt organizations (those organized under a 501(c), political organization or charitable trust)
- SEC reporting issuers
Additional exemptions can be found on the FinCen website: https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet
For entities that were formed in 2024, the entity must reporting information about the entity’s applicants. This could be one of two people:
- The individual who would directly file the document that registers the company.
- The individual who is responsible for directing the filing documents by another.
For entities that were formed before 2024, do not have to report company applicant information.
This is a lot of information to digest but it is important you stay informed and ensure you are meeting FinCen’s reporting requirements. Be on the lookout for Part 2 of this article which should be out shortly.
If you are confused with any of the reporting requirements, do not hesitate to reach out and make an appointment with us.
Guirguis & Gibbs Inc. is located at 27819 Smyth Drive Floor 2. Valencia, CA 91355. Give us a call at (661) 209-3287.
*Mark Guirguis is a Registered Representative of Cetera Financial Specialists LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity. For a comprehensive review of your personal situation, always consult your tax and/or legal advisor. Neither Cetera Financial Specialists LLC nor any of its affiliates offer tax or legal services.
