How the Corporate Transparency Act Affects LLCs, LLPs, and Inc.

FinCEN itself has released fact sheets explaining that one purpose for BOI reports is to prevent other countries and foreign entities from evading sanctions put in place by the U.S. government. It points out that after the invasion of Ukraine, the Russian government, oligarchs, and Russian government-controlled companies used shell companies to get around sanctions.

BOI reports also help address the national security concern that exists when unknown foreign entities control companies in the U.S. The government has a vested interest in knowing who is conducting business within its borders, and the reports are designed to make that information more accessible for government and regulatory purposes.

The whole point is to make it clear who owns or controls companies that are operating in the U.S. so law enforcement can identify the actual identities of people and entities conducting business and financial transactions in the U.S. FinCEN's action makes it harder to launder money and more difficult to form a U.S. company designed to support crime or terrorism.

The law is not intended to prevent law-abiding citizens and entities from conducting business, exert control over small businesses, or invade the privacy of small business owners. There is no fee involved with filing the necessary report under the Corporate Transparency Act, so there is no revenue generation involved.

Previously, banks and financial institutions were responsible for gathering and reporting information to the government about account holders. Some of that burden has now shifted to the businesses themselves, creating a more direct reporting method that the Financial Crimes Enforcement Network believes will be more accurate.

What is a reporting company under the Corporate Transparency Act?

A reporting company under the Corporate Transparency Act is a company that shares ownership information to FinCEN. These include:

• Limited liability companies (LLCs)
• Limited liability partnerships (LLPs)
• Some limited partnerships (LPs)
• Corporations that do not fall under a large reporting company exemption
• Any business entity created by filing paperwork with a state's Secretary of State or corporation office

Reporting companies are broken down into two categories:

1. Domestic reporting companies: These are companies registered in the U.S., formed through a state's Secretary of State or other corporation office.
2. Foreign reporting companies: A foreign reporting company is formed in a foreign country but is also registered to do business in the U.S.

Is a sole proprietorship a reporting company?

No, a sole proprietorship that has neither filed for a single-member limited liability company nor a corporation is not considered a reporting company. However, if you are a sole proprietor who has formed a single-member LLC by filing articles of organization or other formation documents with the Secretary of State in your state, or if you have formed a corporation for your sole proprietorship, then you also may be a reporting company and can file.

Along these same lines, a general partnership is not a reporting company because the business was not formed by filing a document with the state. A limited liability partnership (LLP) has filed a formation document with a state Secretary of State and, therefore, may be considered a reporting company.

Which reporting companies are exempt?

There are 23 types of business entities that are not considered reporting companies.

Beneficial ownership information

The Corporate Transparency Act asks a reporting company to identify and document beneficial owners and report certain information about them to FinCEN. So, what is a beneficial owner? A beneficial owner is someone who:

• Owns or controls 25% or more of the reporting company, or
• Exercises substantial control over the reporting company

FinCEN looks not only at current ownership but future interests, as well as actual control over the company. Anyone who falls into one or more of the following categories is a beneficial owner under the Corporate Transparency Act.

They have an ownership interest

Any person who holds 25% ownership or more in a reporting company is considered to be a beneficial owner. This includes ownership of stock, equity, voting rights, capital interest, or profit interest. Assets and profits of an LLC are considered ownership interests for the purpose of the Corporate Transparency Act.

FinCEN specifies that this is limited to natural persons, not legal entities. So, if a legal entity (such as another LLC) is an investor in a reporting company, it does not need to be disclosed.

Another category of ownership involves convertible instruments. An instrument that can be converted to stock, equity, voting rights, profit interest, or capital interest gives economic benefits to the owner, and that person is considered to have an ownership interest and be a beneficial owner. Also included are future interests in convertible instruments or the right to purchase ownership interests.

The previous legislation that required banks to report beneficial owners involved with accounts at the banks capped the number of beneficial owners that must be listed at five. The Corporate Transparency Act does not limit how many beneficial owners can be reported. 

They have a future interest

A future interest in a reporting company exists when an individual has an option or privilege to buy or sell ownership interests. The Corporate Transparency Act uses broad language and also includes "any other interest, contract, arrangement, understanding, relationship, or mechanism used to establish ownership." Any person with a future interest like these is a beneficial owner for the purposes of the Corporate Transparency Act.

They have substantial control over the company

In addition to 25% ownership or future interest, the Corporate Transparency Act also includes anyone who has "substantial control" over senior officers (such as the ability to remove or appoint them) or who has substantial control over the reporting company's decisions as a beneficial owner.

The following are considered senior officers:

• Chief executive officer (CEO)
• Chief financial officer (CFO)
• Chief operating officer (COO)
• President
• General counsel

A director does not always have substantial control under the law but may qualify. Directors are considered on a case-by-case basis by the Financial Crimes Enforcement Network.

LLCs, LLPs, and beneficial ownership

Members (owners) of LLCs qualify as beneficial owners based on their ownership percentage (25% or greater) or their level of control of the LLC. This is true whether the LLC has one owner or many. The same holds true for LLPs. All partners who have substantial ownership or control are considered to have FinCEN beneficial ownership.

BOI ownership exemptions

While the definition of beneficial ownership is broad, there are some exemptions to be aware of. The following groups of people are exempt from the definition of a beneficial owner:

• Minors
• Individuals who act as nominees, custodians, intermediaries, or agents on behalf of someone else
• Employees who are not senior officers and whose control or interest is based only on their employment status
• Individuals whose interest in the reporting company is due only to their right of inheritance
• Contingent trust beneficiaries
• Creditors who only have an interest in recovering business debts

Anyone in these categories is not a beneficial owner, even if their interest in or control of the reporting company would seem to indicate otherwise.

BOI reporting

The Corporate Transparency Act is a request for reporting companies to submit information about the company, the beneficial owners, and the applicants in an initial BOI report to FinCEN.

Reporting company information

The reporting company files information about the company itself (and if it has a parent company, the parent company cannot file this for it), including:

• The full legal name of the company
• Any trading or DBA names used by the company
• The address of the company
• The federal tax ID of the company
• The jurisdiction where the company was created, including state, Tribal, or foreign jurisdiction

Beneficial owner reporting details

The company provides the following information about its beneficial owners:

• Full legal names
• Dates of birth
• Home addresses
• Images of identification documents, such as passports or driver's licenses, with the name of the issuing jurisdiction and the ID number of the document

Applicant reporting details

The applicant reports the following:

• Full legal name
• Date of birth
• Home address (however, they provide their business address instead if they are acting as a professional, such as an attorney)
• Image of identification documents, such as passports or driver's licenses, with the name of the issuing jurisdiction and the ID number of the document

Filing a report

Now that you understand what a reporting company is, what a beneficial owner is, and what information must be reported, filing the report is the next step. The form you file with FinCEN is called the Beneficial Ownership Information Report. This submits beneficial ownership information to FinCEN. The actual form should be available from FinCEN. LegalZoom can help you with filing your Beneficial Ownership Information Report.

How do I file?

The report is filed electronically with FinCEN.

The submission form is accessible on the Beneficial Ownership Information Reporting website. At the time this article was written, the form was not yet available. There is no filing fee, and you can have LegalZoom handle the filing for you, rely on another professional, or file it yourself.

FinCEN is developing an interface that will allow third-party services to file reports for reporting companies directly to FinCEN using compatible software. This was not yet available at the time this article was written. It is expected that tax professionals, accountants, and business formation specialists will offer BOIR filing services to businesses.

It is important to be aware that the only place you should file this report or share the information for FinCEN is through the website above unless you are working with a trusted professional, such as LegalZoom, who is filing for you. There will likely be scams and fraudulent social media posts about the Corporate Transparency Act, trying to get people to share confidential information and also attempting to collect money through these scams.

FinCEN identifiers

Beneficial owners or reporting companies can request an identifier number, a unique identifying number assigned by FinCEN. If the reporting company requests one, it is called an entity FinCEN identifier. If an individual applies for one, it is called an individual FinCEN identifier. This is optional, not mandatory. The identifier can come in handy if you are filing for multiple companies that involve the same individuals. You can obtain an identifier number for each individual involved with each company.

Access to filed information

FinCEN is developing a Beneficial Ownership Secure database (BOSS) where all of the filed information will be securely stored and protected. The network is not yet up and running, but FinCEN has promised it will use rigorous security to protect this sensitive information. More details will be available once everything is operational.

The information in BOSS will not be publicly available or available through Freedom of Information Act (FOIA) requests.

The information in the database will be accessible only to the following:

• U.S. federal agencies involved in national security, intelligence, and law enforcement activities and state, local, and Tribal law enforcement agencies with court authorization.
• Foreign law enforcement agencies, judges, prosecutors, central authorities, and competent authorities. These entities must make a request through an intermediary federal agency that will access BOSS for them and retrieve the information. Authorities that are not from a trusted foreign country must make a request under an international treaty.
• The U.S. Department of the Treasury, including the Financial Crimes Enforcement Network. Any Treasury official will have access to business ownership information, as long as it is in connection with their official duties.

The purpose of the CTA

The Corporate Transparency Act is designed to allow the Financial Crimes Enforcement Network and law enforcement agencies to obtain information about U.S. and foreign companies operating in the U.S. to improve national security, stop criminal money laundering and tax fraud, and prevent terrorists from financing their operations through the U.S.

The goal of the legislation is not to make it more expensive or complex to run a small business in the U.S., but instead to allow the government to see who owns companies operating within the country. Because this legislation is somewhat new, it is recommended that all business owners continue to monitor changes and interpretations of the law as they emerge.