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What Dry Cleaners Should Know About New Reporting Requirements (Part 2)

Who are beneficial owners and what information is required?

NASHVILLE, Tenn. — In order to fight financial crimes and get better visibility into the flow of money in the United States, the federal government recently passed the Corporate Transparency Act (CTA), which went into effect on January 1. The CTA requires most small- to mid-sized businesses to disclose those who have control and provide information about these people. 

The CTA was the topic of a recent webinar, “Beneficial Ownership Reporting is Here: What Small Business Owners Need to Know about the New Reporting Requirements,” hosted by the National Federation of Independent Business (NFIB). In the webinar, Sandra Feldman, attorney and beneficial ownership information reporting expert with Wolters Kluwer CT Corporation, offered information about the new requirement, along with information about filing and penalties in the event of violations.

In Part 1 of this series, we looked at what the CTA is and the role FinCEN plays in gathering Beneficial Ownership Information (BOI). Today, we’ll continue by examining who beneficial owners are when it comes to this discussion and what goes into the BOI report.

What Information is Reported for BOI?

“All reporting companies have to provide information in their initial report about the company, and about all of their beneficial owners,” Feldman says. Reporting companies created on or after Jan. 1, 2024, also must provide information in their application to form a company.

Information about the company in a BOI report includes:

  • Full legal name (as it appears in the articles of organization)
  • Any trade or DBA name
  • Street address of the company’s principal place of business (PPB)
  • The state where the company was formed
  • IRS Taxpayer Identification Number — This is either the employer identification number (EIN) or social security number if that’s what the company utilizes.

Information necessary for all beneficial owners includes:

  • Full legal name
  • Date of birth
  • Residential street address
  • Unique ID number and its issuing jurisdiction (this can include non-expired passports, state IDs or driver’s licenses)

The report also must include an image of the document from which the unique identifying number was obtained.

“All reporting companies created on or after Jan. 1, 2024,” Feldman says, “also have to include in their initial report the same information for their individual company applicant or applicants as they provide for the beneficial owners, except that company applicants in the business of being applicants have to set forth their business address instead of their residential address.”

Who are Beneficial Owners?

“The term ‘beneficial owner’ is defined extremely broadly,” Feldman says, “and it could include some individuals who you might not have realized were beneficial owners.”

According to the FinCEN, beneficial owners are defined as “any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interest of a reporting company.”

“Note that an individual can be a beneficial owner, either by exercising substantial control or owning 25%,” Feldman says. “You don’t have to be both — you can be, but you don’t have to be.”

Feldman gives the example of an LLC that has five members, each owning 20%. “None of those members would be beneficial owners based on the 25% ownership criteria,” she says. “But if any of those members exercised substantial control, they are beneficial owners, even though they don’t own 25%.” 

“FinCEN has said that it expects every reporting company will be able to identify and report at least one beneficial owner who has substantial control,” Feldman says. 

So, what does it mean to exercise substantial control over a company? Feldman says FinCEN views substantial control by an individual in any one of four ways: 

  • They serve as senior officer (President, CFO, GC, CEO, COO)
  • They are authorized to appoint or remove senior officers or majority of board
  • They direct, determine or influence important decisions, such as sale, lease, mortgage of principal assets; reorganization, dissolution, or merger; major expenditures; selection or termination of business lines; compensation and/or incentive programs for senior officers; entering into or terminating contracts; or mending governance documents
  • Any other form of substantial control

The last method, Feldman says, is the “catch-all provision, as FinCEN tries to eliminate any loopholes in the definition.”

A beneficial owner is also an individual who owns or controls at least 25% of the reporting company’s ownership interests, Feldman says, and the term ‘ownership interest’ is also defined very broadly.

“It includes any equity or stock,” she says, “which is the ownership interest you typically see in a corporation. It also includes capital or profits interest, which is typical for an LLC and often referred to as a ‘unit’. It also includes convertible instruments, options privileges, and we have another catch-all — any other instrument, contract, arrangement, understanding, relationship or mechanism used to establish ownership.”

Beneficial Owner Exceptions

“There are five exceptions to the definition of beneficial owner,” Feldman says. “That is, these are individuals who would otherwise be a beneficial owner, but because they qualify for an exception, the reporting company will not report them as beneficial owners.”

These exceptions are:

  • Minor children (“However,” Feldman says, “the reporting company has to provide the required personal information of a parent or legal guardian to qualify for this exception.”)
  • Nominees, intermediaries, custodians or agent on behalf of the beneficial owner
  • Future inheritors
  • Employees who aren’t senior officers
  • Creditors

When are Reports Due?

When the BOI must be filed depends on when the company was created, Feldman says. 

  • Companies created before Jan. 1, 2024, must file with FinCEN by Jan. 1, 2025.
  • Companies created in 2024 must file within 90 calendar days after receiving a notice of creation.
  • Companies created in 2025 and beyond must file within 30 calendar days after receiving a notice of creation.
  • Companies that were once exempt but lose that exemption for whatever reason must file within 30 calendar days of no longer qualifying.

“Congress wants this information to be current,” Feldman says, “so if there’s a change in the information that was last reported the FinCEN concerning the company or the beneficial owners, the reporting company must file an updated report within 30 calendar days after the change occurs.”

Feldman gives examples of this, including if the company changes its name or moves its principal office, or if there’s a change in respect to who is a beneficial owner. 

An example of this, she says, is if a company hires a new senior officer or a 25% owner sells his or her ownership interest. 

“This also includes if there’s a change in the information reported for any beneficial owners — if a beneficial owner changes his or her residential address,” she says. “It will also include if the reporting company, after it files its initial report, meets the criteria for an exemption. That’s considered a change, and an updated report has to be filed notifying FinCEN that it is now exempt.”

Congress not only expects the information to be up to date, but also to be accurate, Feldman says. 

“If any report contained inaccurate information about the reporting company, beneficial owners or company applicant when the report was filed,” she says, “the reporting company has to file a corrected report within 30 calendar days after the date the company becomes aware of or has reason to know of the inaccuracy.”

Come back Thursday for the conclusion of this series, where we’ll detail where and how to file a BOI, along with the penalties for violations. Click HERE for Part 1 of this series.

What Dry Cleaners Should Know About New Reporting Requirements

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Have a question or comment? E-mail our editor Dave Davis at [email protected].