Corporate Transparency Act and Beneficial Ownership Interest Reporting Requirements

Who Really Owns the Company!?

Have you heard about the Corporate Transparency Act (CTA) Beneficial Ownership Interest Reporting (BOIR) requirements? The penalties for non-compliance are $591(adjusted for inflation) a day up to $10,000 and/or two years in jail. This article outlines the requirements for small private companies and ends with some suggestions for business valuation analysts.

Have you heard about the Corporate Transparency Act (CTA) Beneficial Ownership Interest Reporting (BOIR) requirements? The penalties for non-compliance are $591(adjusted for inflation) a day up to $10,000 and/or two years in jail. This article outlines the requirements for small private companies and ends with some suggestions for business valuation analysts.

Beginning on January 1, 2024, approximately 32.6 million private companies in the U.S.[1] are required to report information about their beneficial owners (i.e., the individuals who ultimately own or control the company) to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. The reporting requirements are designed to help prevent and combat money laundering, terrorist financing, tax fraud, and other illicit activity. The information will be maintained in a secure database accessible to federal agencies engaged in national security, intelligence, law enforcement, and other authorities meeting specific criteria.[2]

These regulations have been under consideration since 2019, and the resulting CTA was included in the National Defense Authorization Act for the fiscal year 2021. The final rule on reporting requirements was effective September 29, 2022, and the Access and Final Rule is dated December 21, 2023, with reporting to begin January 1, 2024.

Your firm may have become aware of the requirements from an e-mail from its malpractice carrier, as I did. I am not an attorney. The information below is sourced from the FinCEN website: https://www.fincen.gov/. Small Business Resources are on the website, which includes a Small Entity Compliance Guide (“Guide)”, Frequently Asked Questions, Quick Reference, and a Short Introductory Video. The required reporting is done on the FinCEN website.

The Guide details who must report, who is a beneficial owner, reporting company applicants, what information must be reported, where to file, and when and where to report changes and inaccuracies in reported information: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf.

Who Must Report?

There are two categories of reporting companies: domestic reporting companies and foreign reporting companies. This article covers only domestic reporting companies. A domestic reporting company is one that was created or formed under U.S. laws, including laws of states and Indian tribes. Such companies can be corporations, LLCs, or any entity created by filing a document with a secretary of state or similar office under the law of a State or Indian Tribe. The latter may be a partnership or a sole proprietorship that filed a fictitious name. The Guide lists 23 types of entities that are exempt,[3] including “Large Operating Companies.” One must read page 12 of the Guide to determine that the regulations target small companies.

To qualify as a Large Operating Company and be exempt from reporting, the entity must:

• Employ more than 20 full-time employees (with respect to a calendar month, an employee who is employed an average of 30 hours of service a week).
• Employ more than 20 full-time employees of the entity in the United States.
• Have an operating presence at a physical office within the United States.
• Have filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 of gross receipts or sales. If the entity is part of an affiliated group of corporations, refer to the consolidated return for such group.
• Have reported this greater than $5,000,000 as gross receipts or sales (net of returns and allowances) on the entity’s IRS form 1120, consolidated form 1120, form 1120-S, form 1065, or other applicable form.
• When gross receipts or sales from sources outside the United States, as determined under Federal income tax principle, are excluded from the entity’s amount of gross receipts or sales, the amount remains greater than $5,000,000.

The bottom line is that companies with less than $5,000,000 of gross receipts or sales must report, and companies with more than $5,000,000 of gross receipts or sales but fewer than 20 full-time employees must also report. What is not clear is how to measure “20 full-time employees”. What about companies with more than $5,000,000 in revenue with a seasonal workforce that dips below 20 employees in the off-season?

An “Inactive Company” is defined in the Guide. Such a company may meet most of the requirements to be exempt, but if it owns any assets, it must report. This will require reporting by inactive entities such as LLCs that hold land or mineral rights, even though they do not generate any revenue.

Who is a Beneficial Owner?

A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company. There is no maximum number of beneficial owners that must be reported. FinCEN expects that every reporting entity will be able to identify and report at least one beneficial owner. The Guide provides examples of those that might exercise substantial control: senior officers such as the president, CFO, General Counsel, CEO, COO, or any other officer, regardless of title, who performs a similar function. Also, any individual with the ability to appoint or remove any senior officer or a majority of the board of directors. “Important decision-maker” is defined as any individual who directs or has substantial influence over important decisions made by the reporting company.

Many small companies do not have non-shareholder board members. Still, those who do must determine if such board members are “important decision-makers” or fall into the “catch-all” category. Individuals can exercise substantial control through contracts, arrangements, understandings, relationships, or otherwise. The trustee of a trust or similar arrangement may exercise substantial control over a reporting company. There is a checklist on page 20 of the Guide.

What is an Ownership Interest?

Reporting companies must identify all individuals who own or control at least 25% of the company’s ownership interests. Ownership interests may be equity, stock, voting rights, a capital or profit interest, convertible instruments, options, or other non-binding privileges to buy or sell any of the foregoing and any other instrument, contract, or other mechanism used to establish ownership. Reporting companies will need to review all their agreements to determine which, if any, constitutes a 25% or greater ownership interest. There is a checklist on page 22 of the Guide.

What are the Exceptions to the Beneficial Owner Definition?

• A minor child—a parent or legal guardian must report their information
• Nominee, intermediary, custodian, or agent
• Employee who is not a senior officer of the reporting company
• Inheritor who is entitled to a future interest
• Creditor

Company Applicants

A reporting company created on or after January 1, 2024, must identify and report to FinCEN at least one and, at most, two company applicants who must be individuals. There are two categories: “direct filer” and “directs or controls the filing action.” A direct filer is the individual who directly filed the document that created a domestic reporting company. See page 34 of the Guide.

Company applicant information is not reported for companies formed before January 1, 2024.

What Information Must a Company Report?

The reporting company will fill out a form on the FinCEN website with its full legal name, any trade name or DBA name, a complete current U.S. address, state, tribal or foreign jurisdiction of formation, and IRS taxpayer identification number.

For each beneficial owner: full legal name, date of birth, complete current street address, unique identifying number, and image of either a U.S. passport, state’s driver’s license, or identifying document issued by a state or local government.

FinCEN Identifiers for Individuals

Individuals may electronically apply for FinCEN identities by providing the same information required for a beneficial owner. This may be useful if an individual is a beneficial owner in several reporting companies, as the reporting company would use the identifier number instead of the other information. The individual is responsible for updating the information for changes in address or identifying document.

Changes or Inaccuracies in Reported Information

In addition to filing an initial report, reporting companies must update and correct information in previously filed reports on the FinCEN website no later than 30 days after the date on which the information changes.

Suggestions for Business Valuation Analysts

• If you practice in a CPA firm, be aware of firm policies regarding client communication and assistance with BOIR. Most malpractice carriers sent guidance. There is a related article in the January 2024 issue of the Journal of Accountancy, https://editions.journalofaccountancy.com/publication/?i=809710&p=4&view=issueViewer.
• If you practice in a small firm or as a sole member LLC, your firm may need to report. CPA firms that are registered in accordance with section 102 of the Sarbanes-Oxley Act are exempt.
• During management interviews or in management questionnaires, you may want to ask if the company is required to report and if it has done so. Any fines for failure to report may or may not be material to the company. In addition, many companies may not be aware of the requirements as, of this writing, there has been no widespread outreach from FinCEN.
• Analysts may consider adding a sentence to the assumptions and limiting conditions section of their reports to address the Corporate Transparency Act, such as: 
  “We have not made a specific compliance survey or analysis to determine if the subject company is subject to, or in compliance with, the Corporate Transparency Act Beneficial Ownership Interest Reporting regulations that were effective January 1, 2024, and this valuation does not consider the effect, if any, of non-compliance.”

• FinCEN will be adding guidance. You can stay informed by signing up for updates at https://service.govdelivery.com/accounts/USFINCEN/subscriber/new.

The above is a brief overview of the requirements. Please refer to the Small Entity Compliance for more detailed information.

 

[1] Federal Register/ Vol. 87, No. 189/ Friday, September 30, 2022/Rules and Regulations p. 59500, note 21.

[2] https://www.fincen.gov/news/news-releases/fact-sheet-beneficial-ownership-information-access-and-safeguards-final-rule.

[3] See Chart 1.2 on page 4 of the Small Company Compliance Guide.

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Judy O’Dell, CPA, CVA, is president of O’Dell Valuation Consulting LLC CPA. She has over 40 years of public accounting experience starting with a local firm in Iowa, moving to the Philadelphia office of a national firm, and then to several local firms, serving as managing director of Beucler Kelly & Irwin in Wayne, PA for 13 years. During her career, she provided audit, accounting, and tax services to private closely held and family businesses. In 2000, she obtained the Certified Valuation Analyst (CVA) designation. She founded O’Dell Valuation Consulting LLC in 2002 and has limited the practice to business valuation, litigation, forensic, and exit/succession planning services.

Ms. O’Dell has performed valuation services for numerous private companies for divorce, estate, gift, succession, and litigation purposes. She has served as an expert witness in divorce cases and in connection with an embezzlement for which she performed forensic services.

Ms. O’Dell is the former chair of FASB’s Private Companies Financial Reporting Committee. She was named one of Accounting Today’s Top 100 Most Influential People from 2007 through 2011 for her role as advocate for private companies, the American Institute of CPAs Special Recognition Award for work to create needed changes for private company financial reporting standards, and the Case Western University Weatherhead School of Management 2014 Braden Award to an outstanding leader in the professional practice community who has made distinctive contributions to the knowledge and advancement of the discipline of accounting. She has made numerous presentations at conferences throughout the United States and has authored several articles for professional journals.

Ms. O’Dell may be contacted at (443) 480-5800 or by e-mail to jodell@odellvalue.com.