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Watch out: New 2024 Companies and Rentals May Activate FinCEN Filings

You can be required to file new federal reports and keep them current if, in 2024 (nearby), you launch a small business or purchase a rental property using a new limited liability corporation (LLC).

Consider this seriously

The consequences for failing to submit the newly mandatory reports on time can be severe.
First, there are civil penalties with a $10,000 maximum that can be up to $500 for each day that a violation persists.

Second, there are potential criminal consequences that include up to two years in prison for anyone who willfully1 violates the law.

• gives misleading or deceptive information about beneficial ownership, or attempts to do so,
• fails to provide FinCEN with accurate or updated beneficial ownership information.

If you make a mistake, you have 90 days to file a revised report to avoid civil or criminal penalties.2

What Exactly Is This New Small Business Filing?

When most small business corporations and LLCs file with their secretaries of state, the Corporate Transparency Act (CTA), which was implemented in 2021, adds this whole new 2024 online federal filing requirement.

You must submit the following two reports to the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury simultaneously in order to comply with this requirement:

1. An information report on a “beneficial owner” (BOI report)
2. An applicant report for a corporation

Major point

State and municipal filings are entirely unrelated to this new federal file. Determining if this filing is necessary moving forward and submitting it by the deadline must be a regular element of creating most new corporations and LLCs.

How many brand-new small companies are we referring to? According to FinCEN, 5 million new small businesses are created annually and must abide by the CTA.

Here is a method that is step-by-step:

Step 1: Determine if the entity is a reporting company

The CTA is only applicable to “reporting companies.” The CTA is not a concern if the firm you are forming is not a reporting company.

Unfortunately, reporting organizations make up the majority of small enterprises.

The CTA applies to business enterprises that are established by filing a document with a secretary of state office or other comparable authority, such as articles of incorporation or organization, subject to several notable exclusions.3 This comprises

•  LLCs
• Corporations
• Limited partnerships in the majority of states, and
• Limited liability companies.

Sole proprietors

Because a sole proprietorship cannot be lawfully established by filing any paperwork, the CTA does not apply to them. You simply launch a company that you are the owner of.

Single member LLCs

Even though a single-member LLC is taxed as a sole proprietorship (a “disregarded entity”) and is therefore a “disregarded entity,” the CTA nonetheless applies to individual business owners who create one-member LLCs to run a business. Reason: Just like with multi-member LLCs, you must file a document (often called articles of organization) with the secretary of state to establish a one-member LLC.

Rentals

Many people create LLCs in order to own their rental properties. The CTA reporting requirements are triggered by the newly created LLCs in 2024.

General relationships

Except in a few states, like Delaware, where general partnerships must file a state form to establish itself, the CTA does not apply to general partnerships. The BOI must be filed by the partnership in states where registering as a general partnership is optional.

Business trusts

Since no official documents must be filed in order to establish a business trust, most of them are not reporting businesses. There are, however, some exceptions, such Delaware statutory trusts.

Foreign companies

Foreign corporations, LLCs, and other organizations that register to conduct business in the United States are also subject to the CTA.4 Typically, a document is sent to the state’s secretary of state to do this.

Small companies

The CTA does not apply to all corporations, LLCs, or other business entities. It focuses on smaller companies that aren’t already subject to onerous federal regulation. Of the roughly 5,616,000 new enterprises that are created each year, FinCEN predicts that 617,894 of them will be exempt.

The most inclusive exception is reserved for “large operating companies.” These are companies with. 5

• over 20 full-time workers (those who put in over 30 hours every week),
• $5 million in domestic sales or gross receipts on their previous tax return, and
• an actual presence in the United States.

Major point

This exemption will not apply to newly founded businesses without a prior-year tax return. However, they can lose this exemption in the future.

other exempt organizations

• Additionally, the CTA is not applicable to 6
  listed companies and other commercial enterprises that issue securities that are registered with the SEC;
• investment funds, investment advisors, registered broker-dealers, banks, registered money transmitters, credit unions, insurance firms, and registered public accounting firms; and
• non-profit organizations that are exempt from paying taxes, such as 501(c)(3) companies and Section 527 political organizations.

A completely owned company, whether directly or indirectly, is likewise excluded.7 Thus, a completely owned subsidiary corporation formed by a sizable operational company that is a corporation is exempt.

Step 2: Determine the Beneficial Owners of the Entity

Businesses are required by the CTA to identify their beneficial owners and provide contact information for them. The FinCEN Beneficial Ownership Secure System (BOSS) database stores this data for use by the IRS, police enforcement, and other governmental organizations. The BOSS data is not made publicly available by FinCEN.

The actual owners and/or controllers of a reporting firm are known as the beneficial owners. An LLC or corporation are not permitted to be beneficial owners. The human owners of the business entity, not the entity itself, must be listed as the beneficial owners if the reporting company is owned by that entity.

Two categories of beneficial owners exist:8

• The people who own at least 25% of the company’s ownership interests in either direct or indirect ownership.
• The people who have significant authority over the business

The term “ownership interests” can refer to stock in a company or the membership interests in an LLC. It is usually easy to determine who the beneficial owners are for firms. For instance, there are three beneficial owners in a three-member LLC where each member has a one-third ownership interest.

The same holds true for a company with four shareholders, each of whom owns 25% of the company’s stock.

Determining the 25 percent or more shareholders for reporting organizations with complex ownership arrangements can be challenging. It is necessary to compare all different kinds of ownership interests to all active ownership interests. The 25 percent owners of LLCs or limited liability partnerships are calculated by comparing a person’s capital or profit interest to the entity’s total outstanding capital and profit interests.

However, there is a default rule: A person is considered to be a beneficial owner if they hold or have influence over at least 25% of any class or kind of ownership interest in a reporting firm.

If there are people who don’t hold a 25% or more interest in the company but have significant power over it, things could grow even more convoluted. Because the management of an LLC has significant authority over the entity, even if the manager owns less than 25% of the LLC, they would still be considered a beneficial owner.

Significant control

The term “substantial control” has an astonishingly broad definition. It features 9

• senior executives, which normally do not include the secretary or treasurer of a corporation but may include the president, chief financial officer, general counsel, chief executive officer, and chief operational officer;
• those who have the power to appoint or dismiss a corporation’s top officers or directors, or the managers and members of an LLC;
• people who make important decisions that affect the company, such as those that involve expanding into new business segments, reorganizing, dissolving, or merging the business, selling key assets, taking on significant debt, setting senior officers’ compensation, or changing any governance documents; and
• any other individual who exercises significant control (direct or indirect) over the business.

It could be required to analyze the governing documents for businesses with complicated ownership or governance structures to identify everyone with significant control. These may include shareholder agreements, LLC operating agreements, business bylaws, and any other instruments that confer particular voting rights.

Even so, it could not be adequate because significant control could still be in place even in the absence of a formal written agreement thanks to informal understandings or connections.

A decent rule of thumb is to include a person in the BOI report if you are unsure whether they exercise substantial control but believe they may.

Exemptions:

Persons who otherwise meet the criteria for beneficial ownership may not be included in the BOI report if they are 10

1. if their parent or legal guardian is listed, minor children;
2. persons serving in the capacity of nominee, intermediary, custodian, or agent on behalf of another person (assuming that the person on whose behalf they are acting is identified);
3. other than senior officers, employees;
4. the owners of a company’s heirs;
5. Unless the creditor is a beneficial owner based on substantial control, ownership, or control of 25 percent or more of the ownership interests, creditors of a reporting corporation are not permitted to be beneficial owners.

Step 3: Retrieve information about the beneficial owner

Following the identification of the beneficial owners, you must ask them for the following details to be included in the BOI report for the new company:11

• Complete legal name
• Name and birthdate
• Complete current street address
• A special identification number from a valid driver’s license, state or local ID card, current U.S. passport, or, if none of those are available, a foreign passport

A picture of the record from which the special identification number was derived

Step 4: Find potential employers

In your BOI report, you must also include details on the “company applicants” when forming a reporting company.

A company applicant is the person who submitted the articles of incorporation for a corporation or the articles of organization for an LLC on behalf of the reporting firm. Each reporting business may receive a maximum of two company applications.12

Example

Jack, Moe, and Manny decide to set up an LLC to run their new company. To create the LLC, they work with the XYA law office. The company’s paralegal submits the articles of incorporation to the secretary of state. Both the paralegal and the lawyer overseeing the case are candidates for the company.

What if you create a corporation or an LLC using a service for incorporation like LegalZoom? It’s unclear if you will need to provide LegalZoom with the identity of the person who submits your articles or the person in charge of the computer system that performs it when you apply as a corporation. FinCEN needs to answer this query.

The same information as for the beneficial owners must be included in your BOI report for each company application, however you are only need to submit a business street address rather than a home one.

Step 5: Submit the BOI Report in 90 days

Following the formation of a new business entity, or 90 days following the filing of the formation document, the BOI report must be submitted within that timeframe. 13 The deadline for filing is January 1, 2024. There isn’t a filing charge.

The BOI report must include the following details for the business entity itself, in addition to the information for the beneficial owners and company applicants:14

• Legal name (as well as any business names or dba)
• The location of the company’s main office (which cannot be a PO box, the place of incorporation, or the registered agent);
• State or country of formation
• Taxpayer identification number from the IRS

Step 6: Submit updated BOI reports

It will only be necessary to file once for many small firms. If nothing changes with the information in the BOI report, there is no need to renew or update the BOI file. 15

Exempt organizations that have lost their exemption must submit a BOI report no later than 30 days following the end of their exemption.

Governmental Documents for Businesses Should Address CTA

The governing documents of all businesses other than those with a single owner, such as one-member LLCs or corporations with a single shareholder, should mandate that all beneficial proprietors comply with the CTA’s requirements.

Takeaways

Here are the article’s five main lessons.

1. For small firms founded in 2024, CTA reporting starts in 2025.

2. Within 90 days of the entity’s formation, you must submit a BOI report to FinCEN if your newly created business entity for 2024 is not exempt.

3. The BOI report must include information on all of the entity’s beneficial owners, or the people who either

• have 25% or more of the entity’s ownership interests;
• exert a significant amount of power over the entity.

4. The BOI report must also include the names and contact details of the business applicants, which are the one or two people who submitted the paperwork to establish the entity.

5. The new FinCEN BOSS database accepts online submissions of the BOI report. The report never expires and there is no filing charge. But you must update the report within 30 days if the data changes.