Learn

Language:

Unpacking the FinCEN Beneficial Ownership

By Adnan Farooqui

Published on 26 Jun 2023 8 min read

The FinCEN beneficial ownership final rule takes effect on January 1, 2024, and it introduces new reporting requirements for business entities registered in the United States. There has been some confusion as to what obligations this regulatory change will create, particularly for small business owners. 

Fortunately, more information has now been provided by the Financial Crimes Enforcement Network (FinCEN) regarding these reporting requirements. Let’s take a closer look at them to better understand how US entities will now need to provide details about beneficial ownership.

What Is the FinCEN Beneficial Ownership?

A need was felt to increase transparency and accountability as very few states or territories in the US require companies to disclose information about their beneficial owners. This lack of transparency enables criminals and other bad actors to obscure their identities and launder illicit funds through the US via shell companies. It hurts ordinary Americans as this creates an uneven playing field for legitimate US businesses. This anonymity also makes it difficult for law enforcement to take action against criminal activity. 

To address this issue, the Corporate Transparency Act was enacted in 2021. This law requires certain types of US and foreign entities to provide information about their beneficial owners to the Financial Crimes Enforcement Network of the Treasury Department, called FinCEN. FinCEN is tasked with safeguarding the US financial system from illicit use. 

On March 24, 2023, FinCEN released the public guidance materials regarding the new beneficial ownership information reporting requirements that will take effect on January 1, 2024. These materials are based on the final rule that FinCEN made public on September 30, 2022. 

There will be strict safeguards and controls in place based on which FinCEN will disclose the reported ownership information to certain authorized government authorities, authorized users, and financial institutions. Doing this will make it harder for bad actors to hide or benefit from their illicit gains. Companies that report their beneficial information will therefore be contributing to this important goal of safeguarding the US financial system from bad actors.

What Is the Purpose of the Beneficial Ownership Report?

The Corporate Transparency Act enacted by Congress introduced new reporting requirements for certain US companies and foreign companies that are registered to conduct business in the United States. The new requirements were aimed at enhancing disclosures about the beneficial owners of these companies.

This has been hailed as a landmark opportunity to unmask shell companies and protect the US financial system from abuse by criminals, sanctioned oligarchs, money launderers, etc. The purpose of this report is to obtain absolute clarity about the ownership of these entities, eliminating anonymity to increase accountability and enhance the safety of the US financial system.

Who Is Required to File the Beneficial Ownership Report?

FinCEN has clarified what a reporting company is required to disclose in its report. It divides reporting companies into two types – domestic and international.

A domestic reporting company includes: 

• A corporation, 
• A limited liability company, or 
• Any other entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.

A foreign reporting company includes: 

• A corporation, limited liability company, or other entity formed under the law of a foreign country.
• Any other entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.

Unless an exemption has been provided, if you need to file a document with a state or Indian Tribal-level office like the secretary of state to incorporate your company, then you’re required to provide FinCEN with the information it seeks by filing a report about the beneficial ownership of your company. 

If your business or LLC has no other owner, keep in mind that since no one else owns or controls ownership interests in your LLC or exercises substantial control over it, and if there are no other facts to consider for deciding ownership, you’ll be considered the only beneficial owner of this reporting company, and your information must be reported to FinCEN.

What Information Is Required for the Beneficial Ownership Report?

A reporting company is required to provide the following information in the report submitted to FinCEN:

• The legal name,
• Any “doing business as” or “trading as” names,
• Current street address of its principal place of business if that’s in the US,
• The jurisdiction of formation or registration, and
• The Taxpayer Identification Number.

Companies will need to indicate the filing that’s being made, in that whether an initial report is being filed, a correction of an earlier report, or an update to an earlier report.

A company will also have to report the following information for each individual who is a beneficial owner or a company applicant:

• The name, date of birth, and address
• A unique identifying number from an acceptable ID
• The name of the state or jurisdiction where the ID was issued
• For beneficial owners, the residential street address must be reported
• For company applicants, the individual’s street address must be reported 

The acceptable identification documents include: 

• A non-expired driver’s license issued by a US state
• A non-expired identification document issued by a US state or local government
• A non-expired passport issued by the US government 
• Or if the aforementioned documents aren’t available, the identification number from a non-expired passport issued by a foreign government

An image of the ID associated with this unique number must also be reported to FinCEN.

FinCEN is in the process of creating the policies and procedures that will govern access and handling of the information reported to it. The secure and confidential IT system it’s creating to store the information will be consistent with federal law, so it will be cloud-based, and compliant with the highest Federal Information Security Modernization Act (FISMA) level to keep the information secure.

How and When to File the Beneficial Ownership Report?

Companies that are required to file this report with FinCEN will be able to do so online. A secure filing system is currently being developed. It’s going to be available through FinCEN’s website. The system is going to be available before January 1, 2024, as FinCEN beneficial ownership reports will not be accepted before then. There will be no fee for submitting this report.

Existing companies that were created or registered to do business in the United States before January 1, 2024, will need to file their reports by January 1, 2025. Entities created or registered to do business in the US on or after January 1, 2024, will need to file their reports within 30 calendar days of entity creation.

Who Are Exempted from Reporting?

Twenty-three types of entities have been exempted from the ownership information reporting requirement by the Corporate Transparency Act. These include, among others, certain types of banks, federal or state credit unions, US governmental authorities, select money-transmitting businesses, insurance companies, certain types of investment companies, etc. 

The exemptions have been provided because many of these 23 entities are already regulated by the federal and/or state government. Most of them already disclose their beneficial ownership directly to a governmental authority.

More information about the exempt entities is available in 31 CFR § 1010.380(c)(2). Consider the text of these regulations carefully as they feature the specific criteria based on which these exemptions can be claimed.

Defining Important Terms

The final rule has clearly defined certain terms to eliminate confusion and make it easy for eligible entities to understand what information they’re supposed to provide FinCEN. 

Report Company’s Beneficial Owners

A beneficial owner has been defined as an individual who directly or indirectly exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests in that company. 

Individuals who are minors, acting as a nominee or agent for another individual, those acting solely as an employee of the company, creditors, and individuals whose only interest in the company is a future interest through a right of inheritance, aren’t considered beneficial owners.

Company Applicant

A company applicant is someone who directly files the document that forms an entity in the US or first registers a foreign entity to conduct business in the US. The individual who is mainly responsible for directing or controlling this filing for both a domestic and foreign company is also considered a company applicant if more than one individual is involved. 

It’s pertinent to note here that entities that were created before January 1, 2024, aren’t required to report company applicant information. New entities created after this date are required to report the company applicant information but they’re not required to update this information in the future.

Substantial Control

Individuals exercising substantial control include senior officers such as the CEO, president, COO, general counsel, etc. They may also include those who have authority over the appointment or removal of any senior officer, direct or have substantial influence over important company decisions such as reorganization, merger, dissolution, selection or termination of business lines, compensation schemes, etc. 

It is further clarified in the notes to the Final Rule that reference to substantial control is deemed to cover different governance structures for different entities such as series LLCs and decentralized autonomous organizations, as different indicators of controls may be relevant for them.

Ownership Interests

The standards and mechanisms provided for determining if an individual owns or controls a 25% “ownership interest” are defined as:

• Equity, stock, or similar instrument, whether or not it’s transferable, classified as stock, or anything similar
• Confers voting power
• Any capital or profit interest in an entity
• Any instrument convertible with or without consideration
• Any future on any such instrument, any put, call, straddle, or other option that gives the privilege of buying or selling any of the aforementioned options
• Any other instrument, contract, understanding, relationship, or mechanism used to establish ownership

Set a Reminder for Your FinCen Beneficial Ownership Reporting

Make sure that you’ve set a reminder for after January 1, 2024, so that you don’t forget to file the beneficial ownership report with FinCEN. You’ll have a year to do it for your existing entities starting next year, but it’s best to get it over with to ensure that you comply with these latest regulations. 

Tax compliance is also necessary for businesses and that’s impossible to achieve without good bookkeeping. Fortunately, Doola’s bookkeeping service makes it super easy for businesses to balance their books, manage cash flow, track expenses, and close their books with one single click to make tax season a breeze. Try it out today and experience what effortless bookkeeping truly is.

FAQs