Many small-business clients have recently been surprised to learn that they will now be subject to federal information reporting requirements.
Under the Corporate Transparency Act, passed in January 2021, nearly all entities formed or registered to conduct business in the United States must report beneficial ownership information to the Treasury's Financial Crimes Enforcement Network (FinCEN). The law created a federal database to store information about an entity's ownership structure.
The legislation is intended to limit taxpayers' ability to use shell companies and ownership structures that can allow money laundering and other criminal activity to take place. The rules are now effective — and the exemptions are limited — so nearly every small-business client must prepare to report basic ownership information in the coming months.
Beneficial Ownership Reporting Obligations: The Basics
FinCEN's beneficial ownership reporting obligations apply to all domestic "reporting companies," including corporations, LLCs, limited partnerships and any other entity formed by filing a document with a secretary of state in the United States. Certain foreign corporations that are registered to conduct business in the United States must also report.
Both foreign and domestic reporting companies must identify and provide information about beneficial owners to the federal database.
A "beneficial owner" is a natural person who either:
- exercises substantial control over the company, or
- owns or controls 25% or more of the ownership interests in the company (whether directly or indirectly).
When making the determination of whether an individual owns or controls 25% of the business, the individual's options, convertible instrument and other similar equity rights are treated as though they have been exercised.
Individuals are deemed to exercise "substantial control" over a company if they:
- serve as manager or senior officer
- have the right to appoint a majority of the board of directors or governing body, or
- otherwise have substantial influence over decisions made by the reporting company.
For new entities, information about a "company applicant" must also be provided. If the entity was created on or after Jan. 1, information about a maximum of two company applicants will be required. A company applicant is:
- an individual who directly files the document to create or register the company, or
- the individual who is primarily responsible for directing or controlling the filing when more than one person is involved.
In many cases, a corporate formation agent or attorney who is responsible for filing formation documents with the secretary of state (or similar office) will be the company applicant. FinCEN provides examples outlining various scenarios to help companies determine who is primarily responsible for their filings.
What Needs Reporting
The reporting company must report the entity's legal name, any trade names or dba names, principal place of business, state of formation and unique taxpayer ID number.
