Business Formation in Delaware

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Hello Small business owners! Welcome to my blog. Get ready for a new and very important reporting requirement as of 2024. This requirement is called Beneficial Ownership reporting. I've written this blog to answer some FAQs that I am being asked by my clients about this reporting requirement.

 In a nutshell, Beneficial Ownership reporting shines a light on the real people who ultimately control or benefit from a business, even if their names aren't officially on the paperwork. Think of it as peeling back the corporate layers to reveal who's truly calling the shots. This REQUIREMENT was created by Corporate Transparency Act of 2019.

 To determine if your company needs to file a beneficial ownership report, we need to consider two things:

1. Company Type:

The rule applies to two main types of businesses:

• Domestic reporting companies: This includes corporations, limited liability companies (LLCs), and other entities formed or registered under the laws of a U.S. state or Indian tribe. In simpler terms, most businesses established within the US fall under this category.
• Foreign reporting companies: This covers corporations, LLCs, and other entities formed under the laws of a foreign country but registered to do business in any U.S. state or Tribal jurisdiction. Think of international companies operating in the US.

2. Exemptions:

While the rule covers a broad range of businesses, some exemptions exist, including:

• Domestic sole proprietorships: If you're the sole owner and operator of your business, you're generally exempt.
• Certain financial institutions: This includes banks, credit unions, investment companies, insurance companies, and regulated public utilities.
• Other specific entities: Certain trusts, certain tax-exempt organizations, and companies already subject to similar reporting requirements may also be exempt.

So, in summary:

• Most businesses operating in the US (except domestic sole proprietorships) need to file a beneficial ownership report.
• Foreign companies registered to do business in the US also need to comply.
• Certain financial institutions and other specific entities might be exempt.

You can find a complete list of exceptions in FinCEN’s Beneficial Ownership Information Reporting FAQs.

A beneficial owner:

• Directly or indirectly exercises “substantial control” over a company, or
• Directly or indirectly owns or controls 25% or more of a company’s ownership interests.

 In simplest terms, beneficial ownership refers to the real person or people who ultimately control or benefit from a legal entity or asset, even if their name isn't on the official paperwork. Imagine an iceberg – what you see above the water is the legal ownership (the company name, for example), but the hidden mass beneath represents the beneficial ownership, the individuals truly pulling the strings and reaping the rewards.

Here are some key points to understand about beneficial ownership:

• It can be different from legal ownership: Someone can legally own shares in a company, but not be the beneficial owner if they're acting as a nominee for someone else.
• It's used for various reasons: Sometimes, it's done for legitimate purposes like privacy or estate planning, but it can also be used to hide illegal activities like money laundering or tax evasion.
• Transparency is crucial: Knowing who the beneficial owners are helps law enforcement combat financial crime and ensures businesses are operating ethically.

Here's an example to illustrate:

A wealthy individual creates a shell company in a different country and uses it to buy a luxury property in the US. The shell company's name appears on the official documents, but the true owner is the wealthy individual, the beneficial owner. This might be done for reasons like tax avoidance or asset protection.

 This depends on when your company was formed:

• Companies formed or registered before January 1, 2024: These companies have until January 1, 2025, to file their initial beneficial ownership report.
• Companies formed or registered on or after January 1, 2024, and before January 1, 2025: These companies have 90 calendar days from the date of receiving actual or public notice of their creation or registration to file their initial report.
• Companies formed or registered on or after January 1, 2025: These companies have 30 calendar days from the date of receiving actual or public notice of their creation or registration to file their initial report.

2. Any recent updates to your beneficial ownership:

• You must file an updated report within 30 calendar days of any changes to your beneficial ownership information, such as a new beneficial owner exceeding the 25% ownership threshold or a change in the contact information of a beneficial owner.

Key dates to remember:

• January 1, 2024: Beneficial ownership reporting requirements go into effect.
• January 1, 2025: Deadline for companies formed or registered before January 1, 2024, to file their initial report.

The following items need to be included in the beneficial ownership report:

 Company Information:

• Full legal name and any trade names: Specify the official legal name of the company, along with any other names it operates under (e.g., "DBA" names).
• Current address: Provide the company's main physical address within the United States (PO boxes are not allowed).
• Jurisdiction of formation: Indicate the state or Indian tribe under whose laws the company was formed or registered.
• Taxpayer identification number (TIN): Provide the company's federal tax identification number (e.g., EIN).

Beneficial Owner Information:

For each individual identified as a beneficial owner:

• Full legal name: Include the first, middle, and last name as listed on a valid government-issued identification document.
• Date of birth: Provide the complete date of birth.
• Residential address: Indicate the beneficial owner's current street address within the United States (PO boxes are not allowed).
• Unique identifying number and image: Submit a copy of the front and back of a valid government-issued identification document (e.g., passport, driver's license) that confirms the beneficial owner's identity and matches the information provided.

Additional Information:

• Type of ownership interest: Specify the nature of the beneficial owner's ownership interest (e.g., percentage of shares, voting rights).
• Date on which control began: Indicate the date when the beneficial owner gained control over the company or exceeded the 25% ownership threshold.
• Method of control exercise: Describe the means through which the beneficial owner exercises control over the company (e.g., board membership, voting agreements).

Remember:

• The provided information must be accurate and complete.
• Updates to any reported information (including changes to company or beneficial owner details) must be filed within 30 calendar days.
• The FinCEN website provides comprehensive information and resources on Beneficial Ownership Reporting: https://fincen.gov/boi.

 There are several key reasons why Beneficial Ownership Reporting is being introduced in the US:

1. Combatting Financial Crime:

• Money Laundering: Complex ownership structures are often used by criminals to launder dirty money, making it difficult to track and seize. By revealing the true owners, it becomes harder for them to mask their illicit activities.
• Tax Evasion: Similarly, hidden ownership structures can be used to avoid paying taxes. Transparency makes it harder for individuals and businesses to hide their assets and income.
• Corruption: Corrupt officials and individuals often use shell companies to hide their ill-gotten gains. Beneficial Ownership reporting makes it harder for them to operate in the shadows.

2. Protecting National Security:

• Terrorism Financing: Terrorist groups frequently use anonymous companies to fund their activities. By identifying the real owners, it becomes easier to disrupt their financial networks.
• Proliferation of Weapons of Mass Destruction: Similar to terrorism financing, anonymous companies can be used to facilitate the trade of weapons of mass destruction. Beneficial Ownership reporting can help governments identify and stop these transactions.

3. Promoting Market Integrity:

• Market Manipulation: Anonymous ownership can be used to manipulate markets through activities like front running and pump-and-dump schemes. Beneficial Ownership reporting helps to ensure that market participants are playing by the rules.
• Insider Trading: When the true owners of companies are unknown, it becomes easier for insiders to trade on non-public information. Transparency helps to prevent this type of illegal activity.

4. Protecting Consumers:

• Knowing who they're dealing with: Consumers can make more informed decisions when they know who owns the businesses they interact with. This can help them avoid scams and make better investment choices.
• Holding businesses accountable: When there is transparency about ownership, it is easier to hold businesses accountable for their actions and ensure that they operate ethically.

Overall, Beneficial Ownership reporting is a critical tool for improving transparency and safeguarding the financial system from a variety of threats. While there are some concerns about privacy and administrative burdens, the benefits of increased transparency outweigh these concerns.

Filings will be done Electronically ONLY Through a secure filing system on the FinCEN website (FinCEN ID registration is optional).

FinCEN has stated it will not charge a fee for companies submitting beneficial ownership reports.

FinCEN will store the information in a secure, non-public databases and Access will be provided to law enforcement and other authorized investigators like Department of Justice and Treasury Department. 

The penalties for noncompliance with the Beneficial Ownership Rule can be quite significant, serving as a powerful deterrent to companies and individuals who might be tempted to ignore the reporting requirements. Here's a breakdown of the potential consequences:

Civil Penalties:

• Fines: Companies can be fined $500 per day, up to a maximum of $10,000, for each day they are in violation of the reporting requirements. This means that the longer a company delays filing their report or updates inaccurate information, the higher the potential fine.

Criminal Penalties:

• Willful noncompliance: If a company or individual intentionally fails to file a report or submits false information, they could face criminal charges, including imprisonment for up to two years. This is a serious consequence that underscores the importance of taking the reporting requirements seriously.

Reputational Damage:

• Negative publicity: Companies that are found to be noncompliant with the Beneficial Ownership Rule may face negative publicity and reputational damage. This could lead to lost business opportunities, decreased investor confidence, and other negative consequences.

Additional Measures:

• Denial of access to the financial system: FinCEN may also take additional measures to prevent noncompliant companies from accessing the financial system, such as denying them access to bank accounts or other financial services.

It's important to note that these are just the potential penalties. The actual penalties imposed will depend on the specific circumstances of each case, including the nature of the violation and the intent of the company or individual.

This is a significant requirement and should not be taken lightly. Take the time to educate yourself about your business’s obligations and rules and regulations under the CTA, and consult Gary Mehta CPA, EA if you have questions about the new compliance requirements.