As of January 1, 2024, millions of startups and small businesses must file a Beneficial Ownership Information (BOI) Report with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).
The reporting requirement was established under the Corporate Transparency Act (CTA) which is intended to prevent corporations, LLCs, and other business entities from concealing the identities of the individuals who ultimately own or control them.
This article explores the challenges and considerations for startups in fulfilling BOI reporting requirements.
Beneficial ownership information reporting under the CTA
Under the CTA, many U.S. business entities are required to report information about their beneficial owners. A beneficial owner is an individual who directly or indirectly either:
- Has substantial control over the company, or
- Owns or controls at least 25% of the ownership interests of the company.
The goal of the CTA is to gather additional information regarding the ownership of entities engaging or operating in the U.S. market to combat illicit activities such as money laundering and tax evasion.
The CTA does not apply to all entities. It only applies to an entity that is an LLC, a corporation, or created by the filing of a document with the Secretary of State or similar office. So, for example, a sole proprietorship that was formed merely by the individual going into business and that did not require a filing to create it would not have to file a report. In addition, there are 23 categories of entities that are exempt. Exemption stems from the fact that these entities are already subject to scrutiny by federal or state agencies and, most likely, have already disclosed beneficial ownership information (for example, publicly traded corporations or financial institutions) or because they are less likely to engage in the type of activities the CTA is designed to combat (for example, large operating companies and inactive entities).
For LLCs, corporations, and other entities that must comply and file a BOI report (called “reporting companies”), the following deadlines apply:
- For reporting companies created before January 1, 2024, the initial BOI report must be filed with FinCEN by January 1, 2025.
- For reporting companies created in 2024, the initial BOI report must be filed within 90 calendar days of the date it receives notice that its creation is effective
- For reporting companies created in 2025 and beyond, the initial BOI report must be filed within 30 calendar days of the date it receives notice that its creation is effective.
- All reporting companies must file an updated BOI report with FinCEN within 30 calendar days of any change in the information reported about the company or its beneficial owners, including any change in who the beneficial owners are.
Penalties for noncompliance are significant, including fines and potential criminal charges.
Potential CTA challenges for startups
There are several challenges that startups must address when complying with BOI reporting requirements:
- Changing ownership: Startups can encounter a significant challenge with the new BOI reporting requirement due to their continuous fundraising activities. Reporting companies must file an updated BOI report upon any changes with respect to who their beneficial owners are. The frequent changes in business ownership can make BOI reporting almost a regular task, consuming valuable time for business owners and those responsible for their compliance. To stay compliant, startups must vigilantly monitor potential triggering events, which not only include a change in ownership but changes to the information reported about the company, such as a change in name or principal place of business address, or changes to the personal information the company reported about its beneficial owners (such as if they change residential address).
- Data protection: Startups should consider how they will protect personal information they may be collecting and reporting. The CTA requires companies to provide a beneficial owner’s name, date of birth, home address, and a passport or driver's license number and a copy of that document. To mitigate risk associated with data protection, a third-party provider could be designated to collect and store this information or the beneficial owner could apply for a FinCEN Identifier, whereby they will provide their personal information directly to FinCEN instead of the company.
- Defining a beneficial owner based on substantial control: “Substantial control” of a company is defined very broadly. An individual exercises substantial control if the individual is a senior officer, has the authority to appoint or remove senior officers or a majority of the board of directors or similar governing body, is an important decision maker, or has any other form of substantial control. Substantial control can be exercised directly or indirectly. An example of indirect control is controlling an intermediate entity that controls the reporting company.
- Defining a beneficial owner based on 25% ownership: When it comes to the 25% ownership rule, owners and founders must first determine the type of ownership interests in their company and the individuals that hold them. Then they must calculate the percentage of ownership interests held directly or indirectly by those individuals to determine who owns or controls at least 25%. To calculate the diluted equity of the startup, a reporting company must take into account the total number of shares that would be outstanding if all derivative instruments (stock options, convertible debt, etc.) were exercised. Because ownership interests can change, it’s important to keep track of the information reported on an initial BOI filing and update it whenever there is a change in who owns or controls at least 25%.
- Direct or indirect ownership: Similar to substantial control, ownership can be direct or indirect. An individual can have direct or indirect ownership or control of a reporting company through various means, including joint ownership, representation by another individual, involvement in trusts or similar arrangements, or through intermediary entities owning or controlling ownership interests in the reporting company.
State disclosure requirements
In addition to the federal CTA reporting requirements, certain states are imposing or moving towards imposing their own BOI disclosure laws.
For example, in December 2023, the New York LLC Transparency Act (NYLTA) was signed into law. The Act goes into effect on December 21, 2024, and reflects many of the provisions of the CTA – although it only applies to LLCs formed in New York (domestic LLCs) or authorized to do business in the state (foreign LLCs).
The NYLTA requires domestic and foreign LLCs that meet the definition of a reporting company to file a beneficial ownership disclosure statement with the Department of State and update the information as it changes. The Act defines a beneficial owner just as the CTA does – an individual who, directly or indirectly, exercised substantial control over the LLC or owns or controls at least 25% of its ownership interests. Because of this overlap, owners and founders of LLCs face the same compliance challenges as those subject to the CTA. (Note that legislation has been introduced that would repeal the current version of the NYLTA and enact a new BOI reporting law for LLCs that differs significantly from the current version).
While New York is leading the way with state disclosure requirements, other states, including California, Massachusetts, and Maryland have proposed their own BOI reporting frameworks.
Data protection and privacy
As mentioned above, startups must consider data protection and privacy when fulfilling their beneficial ownership information reporting requirements.
Reporting companies must provide, in the BOI report, personally identifiable information (PII) about all of the company’s beneficial owners. PII about a company applicant or applicants (the individual who directly files the document that creates the domestic reporting company, and if more than one individual is involved, the individual primarily responsible for directing or controlling the filing) is also required for reporting companies created on or after January 1, 2024. (Unless the beneficial owners or company applicants choose to obtain a FinCEN Identifier, in which case they provide the PII to FinCEN and their 12-digit FinCEN Identifier to the reporting company.)
Importance of compliance
Staying compliant with both the CTA and state BOI reporting rules is crucial for startups, as they could incur hefty penalties for failing to do so, including fines, reputational damage, inability to access funding, and other legal issues.
Take our quiz to determine Beneficial Ownership Information filing status. For more information, visit our Beneficial Ownership Information Report solutions page.
