At the start of this year (2024), new legislation was enacted requiring many companies operating in the U.S. to complete an additional filing. Before you start dreading this extra to-do, you should know a few things. First, the filing is relatively simple. Secondly, you don’t need to do it annually. Third, it’s fee-free.
While that means it’s not as daunting as it could be, this added requirement comes with hefty penalties if you and your company don’t comply. As a result, it’s critical that every tech startup and its founders know about the Corporate Transparency Act (CTA) — and the beneficial ownership information (BOI) reporting requirement it puts in place.
What is the Corporate Transparency Act?
Congress sought to tackle a widespread problem: individuals getting involved in U.S. entities to their own illegal gain and the detriment of both national security and the economy. Elected officials were concerned, for example, about hidden owners within a company using that company to finance terrorism operations, launder money, or commit tax fraud.
In short, they sought a way to target shell corporations that would otherwise obscure the identities of what Secretary of the Treasury Janet Yellen calls “corrupt actors.”
To combat these unsavory hidden players in companies operating in the U.S., Congress enacted the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act.
The CTA went into effect on January 1, 2024. From that date forward, companies that meet certain criteria are required to disclose information about all individuals who have what’s called a “beneficial” ownership stake in the organization. In essence, if the individual has enough sway in the company to benefit from its operations, they’re considered a beneficial owner. And, as a result, their personal details need to be reported to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
If you’re thinking that sounds like it might impact your tech startup, it’s because it probably does.
How does the Corporate Transparency Act impact your company?
For a quick snapshot of what this means for companies operating in the U.S., FinCEN has a handy brochure. In short, it says that as of January 1, 2024, many companies need to report information about their beneficial owners to FinCEN. This new to-do is known as beneficial ownership information reporting (BOIR).
Still, that leaves some questions unanswered. If this applies to many companies, which are exempt? And what constitutes a beneficial owner? Perhaps most importantly, what paperwork needs to be submitted to comply with this reporting requirement?
Let’s break it all down here.
Does your company need to file?
Two categories of companies are subject to the reporting requirement of this piece of legislation:
- Domestic companies formed through a secretary of state or another similar office (e.g., C-corporations, S-corporations, LLCs)
- Foreign companies that have registered to do business in the U.S. by filing with a secretary of state or another similar office
So, basically, if you established your startup by filing paperwork in the U.S., you probably need to file. The CTA does, however, lay out some clear exemption categories.
BOI reporting exemptions
There are 23 specifically named entity types that don’t have to file a BOI report:
- Securities reporting issuers
- Governmental authorities
- Banks
- Credit unions
- Depository institution holding companies
- Money services businesses
- Brokers or dealers in securities
- Securities exchanges or clearing agencies
- Other Exchange Act-registered entities
- Investment companies or investment advisers
- Venture capital fund advisers
- Insurance companies
- State-licensed insurance producers
- Commodity Exchange Act-registered entities
- Accounting firms
- Public utilities
- Financial market utilities
- Pooled investment vehicles
- Tax-exempt entities
- Entities assisting a tax-exempt entity
- Large operating companies
- Subsidiaries of certain exempt entities
- Inactive entities
Some of those are clearer than others. Most people can agree on what constitutes an insurance company, for example. But other exemption categories are less obvious.
A “large operating company” (exemption 21), for example, is any company that can meet these six criteria:
- It employs more than 20 full-time employees.
- 20 or more of the company’s full-time employees work in the U.S.
- The company has an operating presence (i.e., regularly conducts business) at a physical office location in the U.S.
- The company reported more than $5,000,000 in gross receipts or sales on last year’s Federal income tax or information return.
- That $5,000,000+ in gross receipts or sales was reported on the company’s IRS Form 1120 or a similar IRS form.
- The company still exceeds the $5,000,000 threshold even when it excludes receipts and sales from outside the U.S.
If you think your startup might qualify for one of these exemptions, you can use FinCEN’s BOI small business compliance guide. Starting at Chapter 1.2, there’s a checklist for each exemption number. If your company can check all of the required boxes, it qualifies for the exemption.
That said, don’t take this lightly. Since the penalties for non-compliance are steep, you should check with an expert — like your accountant or attorney — to confirm that you don’t need to file a BOI report.
What does your company need to file?
If your company is required to file, you need to submit a beneficial ownership information report, or BOIR. That needs to include information on both your company and all beneficial owners.
As far as your company goes, you need to report:
- The company’s legal name and any trade names (e.g., your DBA)
- The current U.S. address
- The state, Tribal, or foreign entity with which you formed your company
- The taxpayer identification number (TIN)
For all beneficial owners, you need to report:
- Their full legal name
- Their date of birth
- Their current residential street address
- A picture — along with the identification number and the issuing authority — of a qualifying non-expired identifying document, like a:
- State driver’s license
- U.S. passport
- State, local, or Tribal identification document
- Foreign passport (only applicable if the beneficial owner doesn’t have any domestic identifying documents)
Note that you don’t have to report the reason an individual is a beneficial owner in your startup.
Who is a beneficial owner?
Your BOIR needs to contain information about anyone that FinCEN considers a beneficial owner. Per their compliance guide, that’s anyone who checks one or both of these boxes:
- Exercises substantial control over the company
- Controls 25% or more of the company’s ownership interest
In other words, the BOIR needs to contain the reporting details on you and any other founders, along with any other shareholders who have 25% or more of your issued ownership interest. That includes stock, equity, voting rights, convertible instruments, and more. (This is yet another reason to keep an updated capitalization table, or cap table.)
To clarify what constitutes substantial control, the compliance guide says that usually includes anyone who:
- Is a senior officer at the company
- Has the power to appoint or remove a senior officer
- Is an important decision-maker on business operations, finances, or the company’s structure
Even if someone falls outside those indicators, FinCEN may still consider them a beneficial owner. The compliance guide has a step-by-step identification guide that can help here.
One last thing. If your company was established or registered after the CTA went into effect (i.e., after January 1, 2024), you also need to report any company applicants as beneficial owners.
When does your company need to file?
The clock is ticking. For most companies, the filing deadline is coming up on January 1, 2025.
Here’s a breakdown of deadlines based on qualification criteria.
- If your company was created or registered to start operating before January 1, 2024, you need to file by January 1, 2025.
- If your company was created or registered at any point in 2024, you have 90 days from the notice of your creation/registration to file.
- If you create or register your company on or after January 1, 2025, you have 30 days from the notice of your creation/registration to file.
Beyond your initial filing, you’re required to refile within 30 days anytime you need to update any of the information filed on your initial report.
What happens if I don’t file?
The CTA specifies that anyone who wilfully violates this reporting requirement is subject to civil penalties of up to $591 per day for every day the violation continues. That amount gets adjusted periodically for inflation (it started at $500).
You can also be subject to criminal penalties, including:
- Up to two years in prison
- A fine of up to $10,000
In other words, the fallout for failing to meet this requirement is pretty steep.
What are the steps to file?
Fortunately, filing your BOIR is fairly easy. You’ll use the BOI’s e-filing system.
Here’s your step-by-step guide to get it done:
- Figure out what information you need. Identify your company’s beneficial owners and get all of the required details, including a picture of their identifying document.
- Choose your style of filing. The e-file system gives you the option to either prepare and submit your BOIR as a PDF, or to do it all online. Generally, the online option is easier because you don’t need to have Adobe Reader. To access that option, click the button next to the “Web” icon that says “Prepare & Submit BOIR.”
- Complete “Filing Information.” Choose your filing type. If you’ve never done this before, choose “Initial report.” Read the attached notice, then click “Next.”
- Complete “Reporting Company.” First, decide if you want to get assigned a FinCEN ID. This is totally optional, but it can make future filings easier. Then, enter your company’s legal name and any alternate names (e.g., DBAs). Provide a tax identification number, the name of the country or jurisdiction in which the company was formed, and the company’s current address. Hit “Next.”
- Complete “Company Applicant(s).” If your company was created or registered before January 1, 2024, check the box at the top, then click “Next” to move on. Reporting companies that existed before January 1 don’t have to report company applicants.
- Complete “Beneficial Owner(s).” The FinCEN ID is optional. The required information is their legal name, date of birth, address, and details on their identifying document (e.g., passport or driver’s license). If you have multiple beneficial owners, click the “Add Beneficial Owner” button in the top-right of the form next to the heading where it says “Part III. Beneficial Owner Information.” You’ll see an additional drop-down form pop up to complete. You can click that button to keep adding beneficial owner forms until you have a sufficient amount for all of your beneficial owners.
- Submit the BOIR. Enter your email address and first and last name, check “I agree” and confirm that you’re human, then click the “Submit BOIR” button.
If all of this sounds like a lot of work — or you simply don’t have the time to navigate a new set of paperwork — consider getting help. Companies like CorpNet can handle this filing on your company’s behalf.
How do companies maintain ongoing compliance?
You’re required to submit a new BOIR within 30 days anytime any information changes. That means that you need to re-file if:
- Your company’s address changes
- You add a new DBA or trade name
- You add a new beneficial owner
- The reported details of any of your beneficial owners changes
That means you have a filing requirement if one of your beneficial owners moves to a new address or gets married and changes their name.
Maintaining compliance, then, can be pretty tricky. Again, this can be a place where it serves your company well to get some help. As experts in BOI compliance, the team at CorpNet can help you determine when you need to re-file. And if you do, they can handle the filing for you.
Learn more about the CTA and BOI filings
For any specific question you have, the best place to start is FinCEN’s BOI FAQs. The network has answered a broad range of questions on topics like the reporting process, what constitutes a beneficial owner, exemptions, and its enforcement measures.
If you want to do further reading to ensure you understand the Corporate Transparency Act and what it requires of your startup and you as a founder, we have a few resources to recommend. For starters, the Treasury’s fact sheet on its actions to prevent and disrupt corruption provide added context for the CTA. The heading “Enhancing Corporate Transparency” expands on BOI reporting and FinCEN’s efforts to support compliance.
FinCEN also has an educational YouTube page. It features videos like, “Beneficial Ownership Information Reporting Requirements: What You Need to Know” and “FinCEN Info Session: How to Comply with New Beneficial Ownership Reporting Requirements.”
For a guide that’s similar to this one in providing an overview of the CTA and BOI reporting (sometimes hearing things phrased differently helps), we recommend the one from the U.S. Chamber of Commerce.
In that guide, the Chamber of Commerce recommends consulting with a knowledgeable advisor to complete BOI reporting. Someone like an accountant or attorney can help you be compliant with this potentially complex new requirement, an expert quoted by the Chamber says.
To speak with an accountant who understands BOI reporting requirements and how to comply as a tech startup, we’re here. We can help you determine if you qualify for an exemption and who at your company is classified as a beneficial owner. And we can help you develop tools — like a regularly updated cap table — to monitor ownership stake and ensure ongoing compliance.
For support for your startup’s BOIR compliance, get in touch.