Bite-Sized Bits of Knowledge

Hi, welcome to another dose of Bite-Sized Bits of Knowledge where we give you meaningful information in a short amount of time. Today we’re talking about the Corporate Transparency Act, the long and short of it is that this has been kind of evolving for a while and has become effective as of January 2024. It’s the Financial Crimes Enforcement Network. Federal government wants to have all of the companies that are filed domestic companies, or foreign companies, filed in any state on record in a database. So to be clear it’s only if you file, you know, an entity so general partnerships, sole proprietorships, are not included. Trusts are not included in that context. There’s a whole body of law of rules that discuss who has to file, who has to be reported, etc. We have a whole page on our website talking about that. 

So here’s what I want to talk about today, essentially who has to file, who has to be reported, there’s some penalties for doing it wrong, and when you have to update it, and what are the complexities. So we’re going to do that real quick. Number 1, as I said, all file entities foreign and domestic here in the United States have to file. As of now, as the date of this recording, which is in February 2024, any entities that were filed prior to 2024 have to be filed this year. You have a whole year. Entities filed in 2024 have to be filed 90 days afterwards. Any entities filed next year, or starting next year have 30 days to file. So you got to file this. It’s important. 

Skipping to the last thing I mentioned on my list, if you don’t file, there’s financial penalties and criminal penalties. So they’re driving people to file and they’re going to succeed. Who has to report it? There’s something called a beneficial owner report. That’s the report we’re talking about here, the beneficial ownership report, BOI report. Essentially it comes down to this, if you own 25% of the equity or you’re a control person, if you own 25% of equity of course it can be broken down into straight up equity 25%. But then you get into options, warrants, safe agreements. Essentially if you were to exercise whatever options you have, you deemed to have done so, and therefore you have to be included in that computation of 25%. So don’t play games. If you’re a 20% owner but you have options, just err on the side of disclosure so you don’t get into trouble. 

I’ll talk about what happens if you have an entity that’s owning an entity or trust owning entities, etc. The control person is really, you know, the manager, members of the board, chief financial officer, chief executive officer, general counsel, anybody who has a material impact in the business and the decisions of the business, whether to maintain the business, whether to sell assets. Pretty much anybody in a significant role in the business has to be disclosed, and I would encourage you to err on the side of disclosing them. So that’s the ownership and control person. 

So next I would say is, what are the complexities? Well if you have a company that owns a company, or a company that owns multiple companies, you kind of have to do the math. So if you have a company that owns a company, then the owners of that company are kind of looking through the companies to the owners of the top company. And so if you have two partners, 50/50 of company 1 and company 1’s company owns company 2, then really company 2 is owned 50/50 by those two people at the top. And those are the people who you’d want to report. Again each company having its own filing, but that’s how the beneficial ownership rule will work. 

Trusts are interesting because trusts have multiple parties. You have your grantor, trustees, successor trustees, trust protectors, beneficiaries, and successor beneficiaries, to name a few. In a grantor trust you’re going to want to say the grantor and the trustee. Those are the people who are the beneficial owners and controlling parties. An irrevocable trust is going to be the trustee and possibly, trust protector, depending on the rights the trust protector has. In terms of the beneficial owners, in any case irrevocable or revocable, you’re going to have your beneficiaries, and you have to look at the trust to see how much of an entitlement those beneficiaries have to the trust to see if they need to be reported as a beneficial owner. So if you have a trust that splits into two parts versus a pool trust, this requires some analysis. You got all these different people, with all these different rights, and all this different control. Directed trustees, for example, have very limited control. You just got to do the analysis. But I would always recommend erroring on the side of disclosure when it comes to some penalties, like they’re asserting here for failed compliance. 

Last thing I’ll mention is that if you change your address, you change anything in your disclosure, you have 30 days to file an updated BOI report. So be mindful, that is not just your address. If you’re a trustee and you’ve transitioned in the ways that we’ve described in our other videos, you’ve died, grantor died, or a trustee succeeds another trustee, or beneficiaries die, all these things are triggering the Corporate Transparency Act beneficial ownership report if there is an ownership interest by the trust. So be mindful of all these things. 

And lastly, I’ll close with, there is a lot of information online, we have a whole website on it. We’re going to continue to supplement that website. The FinCEN website has helpful resources, especially for small businesses with checklists and stuff. We’re actually working on our own assessment right now. But just be mindful that this is something that’s kind of happened, it’s real, it’s something to take seriously, and to make sure that you’re doing your reporting on time. So thank you for stopping by and stay tuned for more.