chevron-down Created with Sketch Beta.
July 12, 2024 Feature

Construction Bills

Rowan T. Mason and Brian R. Zimmerman

Corporate Transparency Act Creates Large Database of Small Business Owners

As of January 1, 2024, many small business entities will be required to report “Beneficial Ownership Information” (BOI) to a Federal Beneficial Ownership Secured System (BOSS) database maintained by the US Government’s Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of Treasury.

These new reporting obligations are the result of the Corporate Transparency Act (CTA), enacted in 2021, with the goal of enhancing transparency in small business ownership to combat money laundering, tax fraud, and other illicit financial activities.

Reporting Companies

Entities required to report BOI (reporting companies) include corporations, LLCs, LLPs, LPs, and other entities:

  1. created in the United States through filing a document with a secretary of state or similar governing office or Indian tribe, or
  2. foreign companies registered to do business in any US state or Indian tribe.

Exempt Entities

The CTA identifies 23 categories of businesses exempt from the reporting requirements. Many of the exempt business categories include those related to regulated industries, including banks, insurance companies, brokerage companies, credit unions, accounting firms, public utilities, securities brokers, tax-exempt entities, and several other special entities.

Noticeably absent from the specific exemptions listed are law firms, as well as architects, engineers, contractors, or other construction industry participants.

However, there is a broad exemption for “large operating companies” that have:

(a) over 20 full-time employees in the United States;

(b) an operating presence at a physical office in the United States; and

(c) more than $5 million of gross receipts or sales, excluding from sources outside the United States, as reported on a federal income tax or information return in the United States for the previous year.

There are special rules requiring only limited information reporting for entities whose ownership interests are held through one or more entities, all of which are exempt from reporting. For example, a general contractor that falls into the large operating company exemption, which has a wholly owned subsidiary LLC, is only required to report the names of the exempt entities.

Reporting Requirements

Entities in existence prior to January 1, 2024, will have until January 1, 2025, to file BOI through the BOSS. A reporting company created or registered in 2024 has 90 calendar days to file BOI through the BOSS. Entities created or registered on or after January 1, 2025, will have only a 30-day filing window.

Update Reports

After the initial BOI report is filed, if there is any change or correction to any of the information on a filed BOI report, those changes must be reported within 30 days of the change or correction. Such updated reports are required if (1) there are any new beneficial owners; (2) any individual is no longer a beneficial owner; (3) there is any change in information previously reported; or (4) there is a change in status making the entity exempt from the CTA.

Beneficial Owner

A beneficial owner is any individual(s) owning 25 percent or more of the entity and/or any individual who has substantial control over the company. Substantial control includes any of the following:

  • A senior officer (president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function).
  • A person with authority to appoint or remove officers or a majority of directors.
  • A person who is an important decision-maker.
  • A person with any other form of substantial control, as defined in the rules.

Company Information Reporting

The reporting company is required to report the following information: full legal name; trade names; complete US address; state, tribal, or foreign jurisdiction of formation; first registration jurisdiction for foreign entities; and the IRS employee identification number or tax identification number.

Beneficial Owner Information Reporting

The BOI report requires the name, date of birth, residential address, and a copy of the photo ID (US passport, driver’s license, etc.) for any beneficial owner of the company.

Company Applicant

In addition to reporting of BOI, any company created after January 1, 2024, is also required to report “company applicants” who either are the “direct filer” or “direct or control the filing action.” The direct filer is the individual who filed the document that created the company or who registered the foreign company. One who directs or controls the filing action is the individual who was primarily responsible for directing or controlling the filing of the creation or first registration document.

For example, if a paralegal files the articles of organization of a new limited liability company with their state’s Secretary of State, the paralegal is a direct filer, and the attorney overseeing that entity is the person directing or controlling the filing action. Both of these individuals will need to report information to FinCEN as part of the BOI filing for the company.

Access to Information

The goal of the CTA is to combat money laundering, financing of terrorism, proliferation financing, tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption, harming the national security interests of the United States and allies of the United States. Accordingly, the intention of the reporting of BOI is to provide access to this information by authorized recipients to combat illicit activities and impede illicit actors’ ability to use legal entities to conceal proceeds from criminal acts.

Although BOI information is deemed confidential under the CTA, it may be disclosed under specific circumstances to six categories of recipients: (1) US federal agencies engaged in national security, intelligence, or law enforcement activity; (2) US state, local, and Tribal law enforcement agencies; (3) foreign law enforcement agencies, judges, prosecutors, central authorities, and competent authorities (foreign requesters); (4) financial institutions using BOI to facilitate compliance with customer due diligence (CDD) requirements under applicable law; (5) federal functional regulators and other appropriate regulatory agencies acting in a supervisory capacity assessing financial institutions for compliance with CDD requirements under applicable law; and (6) Treasury officers and employees.

The circumstances and requirements applicable to use are lengthy but come with substantial penalties for unauthorized use or disclosure of BOI, including criminal penalties of up to $250,000 or five years in prison.

Information Security

The BOI is required to be stored by FinCEN on a cloud-based system with the highest Federal Information Security Management Act (FISMA) level (FISMA High). “A FISMA High rating indicates that losing the confidentiality, integrity, or availability of information within a system would have a severe or catastrophic adverse effect on the organization maintaining the system, including on organizational assets or individuals.”

Commentary

The BOI reporting requirements represent a substantial collection of data regarding small business entities, with an estimate of 32 million companies reporting in the first year, and approximately 5 million new companies each year thereafter.

Although not targeted specifically at the construction industry, such reporting obligations will require small construction industry businesses, such as contractors, architects, and engineers, to report BOI information.

Moreover, the reporting requirements applicable to the numerous single-purpose entities utilized by project owner/developers as holding companies for real estate and construction projects are a stated target of the CTA. Such entities previously enjoyed significant anonymity and lack of reporting on ownership. The reporting also implicates the attorneys and staff oftentimes responsible for the formation of such entities.

Although the BOI information is to be stored in a secure database, many people are concerned that their personally identifiable information is being stored in a centralized location, presenting a target for cyberattack. Likewise, many people are further concerned about the ability of enforcement agencies to access such information, relying on FinCEN as a gatekeeper, in certain circumstances without the requirement of a warrant.

    Entity:
    Topic:
    The material in all ABA publications is copyrighted and may be reprinted by permission only. Request reprint permission here.

    Rowan T. Mason and Brian R. Zimmerman

    -

    Brian R. Zimmerman is a shareholder at Hurtado Zimmerman S.C. in Milwaukee, Wisconsin. Rowan T. Mason is a partner with Ralls Gruber & Niece in the San Francisco Bay Area.