Category: Technical Topics

Do I Report My Lawyer as a Company Applicant?

The evolving landscape of business regulation has recently brought heightened scrutiny to company formation processes with the requirement to report certain individuals to the government – “company applicants” – who are instrumental in the creation of business entities.

Lawyers, more often than not, play this pivotal role, and understanding when and why they need to be reported is essential for ensuring compliance with the Corporate Transparency Act (CTA).

Who is a Company Applicant?

Reporting company applicants to the Financial Crimes Enforcement Network (FinCEN) is mandated under the CTA for any new entities formed in 2024 and on. These individuals will be reported on the Beneficial Ownership Information Reports (BOIRs) of any entities that they assist in the formation of.

This reporting rule is part of broader efforts to increase transparency within the corporate sector, helping to prevent the misuse of companies for illicit activities such as money laundering, tax evasion, and financing of terrorism.

A company applicant is someone who files the necessary legal documents to form a business entity, such as the articles of incorporation or organization. It also includes those that are in charge of directing the filing with the state. Take this example:

An attorney directs a paralegal at their firm to file executed formation documents with the state. The paralegal is a company applicant because they directly submitted the documents. The attorney is also a company applicant because they directed the submission of said documents. 

These individuals could be anyone – attorney’s, accountant, business owners themselves, or a corporate service provider. The rule ensures that the identities of these key individuals are documented and made available to regulatory authorities, thereby enhancing the overall accountability of business practices.

Why Might FinCEN Request That Company Applicants be Submitted?

Essentially, requiring the disclosure of individuals involved in the formation of a business serves as a vital tool in the fight against financial crime. Here’s why:

1. Enhancing Transparency: BOI Reporting ensures that the individuals who create business entities are known to authorities. They may be able to connect company applicants to multiple entities that are involved in illicit activities.
2. Vetting of Bad Actors by Lawyers: By submitting themselves to the federal government in connection with entities that they may never have future involvement, may cause lawyers to be more careful about which clients they engage with for entity formation. Ultimately, making it harder for bad actors to form entities.
3. Point of Contact: It is not definite that company applicants will face any legal ramifications for forming entities that are later engaged in illicit activities. By reporting a non-owner, authorities will have an extra point of contact to help in locating business owners if needed.

Common Examples of Reportable Company Applicants

• A lawyer who drafts and files the articles of incorporation for a new LLC.

• An accountant who directs a business owner where to file their documents online.

• A corporate service provider that completes and files all formation documents for a new startup.

• Users of online automated formation services (LegalZoom, Rocket Lawyer, etc.)

• A business owner that drafts and files articles of organization in their jurisdiction.

What Entities Don’t Need to Report a Company Applicant?

While reporting company applicants applies to newly formed entities in 2024 and on, entities formed before January 1, 2024 do not need to report any company applicants on their BOI Reports due by January 1, 2025.

How to Handle Inactive Reports: An Overview

In the ever-evolving landscape of business compliance, navigating the requirements for Beneficial Ownership Information (BOI) reporting can be complex, especially when dealing with entities that are not “fully” dissolved. One FAQ from July 2024 sheds light on how to handle inactive reports.

When a business is listed as inactive at the Secretary of State but has not been formally and irrevocably dissolved, it often raises questions about ongoing compliance obligations. 

Does such an entity still need to report its beneficial ownership information under the Corporate Transparency Act (CTA)? The answer, according to FinCEN’s latest guidance, is nuanced and depends on specific circumstances.

Understanding Dissolved Status

First, it’s essential to understand what FinCEN means when they refer to dissolved entities that do not fall under CTA obligations. A company is dissolved when it ceases to exist by completing the process of formally and irrevocably dissolving with its jurisdiction.

Generally, this includes:

• Filing dissolution paperwork with its jurisdiction of creation or registration,
• Receiving written confirmation of dissolution,
• Paying related taxes or fees,
• Ceasing to conduct any business,
• Winding up its affairs (e.g., fully liquidating itself and closing all bank accounts).

While certain entities may not be conducting business, or fail to file their required annual report, they still exist in a legal sense until they are formally dissolved and must comply with the CTA. It is important to assess by jurisdiction as states require different actions for permanent dissolution. 

Steps for Compliance

For businesses that find themselves in the situation, for example, where they are administratively dissolved and required to report, the following steps are essential to ensure compliance with BOI reporting requirements:

1. Review Your Entity’s Status: Verify with a state attorney whether your entity is classified as permanently dissolved or not. This can also be done through the Secretary of State’s office where your business is registered.
2. Prepare Beneficial Ownership Information: Gather necessary information about your entity and its beneficial owners. This includes details such as names, addresses, DOB, and ID details.
3. Submit Required Reports: Use the appropriate forms and procedures to submit your beneficial ownership information to FinCEN. Ensure that you meet all deadlines to avoid potential penalties.
4. Consider Formal Dissolution: If your entity is truly no longer in use and you wish to avoid ongoing compliance obligations, consider formally dissolving it. This involves completing the dissolution process with the Secretary of State, which legally terminates the entity’s existence.

Importance of Staying Informed

Understanding and adhering to these requirements is essential for maintaining compliance and avoiding potential fines. It’s important to stay up to date with FinCEN guidance since many questions get raised about reporting, including those about what it means for dissolved entities.

By taking proactive steps to review your entity’s status, prepare the necessary information, and submit reports on time, you can ensure that your business meets all regulatory obligations.

FinCEN (Financial Crimes Enforcement Network) BOI reporting plays a crucial role in maintaining financial transparency and combating financial crimes. However, businesses often encounter challenges when preparing and submitting their reports. 

Understanding these common challenges and knowing how to address them can help ensure compliance and avoid penalties. This blog explores some of the most common challenges in FinCEN reporting and offers practical solutions to overcome them.

Understanding Complex Regulations

Challenge: FinCEN regulations can be complex. Businesses may struggle to keep up with regulations as it pertains to their entity, leading to confusion, and potentially non-compliance.

Solution: Stay informed about the latest regulatory changes by subscribing to FinCEN updates and industry newsletters. Consulting with legal and compliance experts can also provide clarity on intricate regulations.

Accurate Beneficial Ownership Information (BOI) Reporting

Challenge: Accurately reporting beneficial ownership information can be challenging, especially for companies with complex ownership structures or numerous owners.

Solution: Implement a thorough data collection process to ensure all relevant information is gathered. Utilize advanced software solutions to automate data collection, access broken down regulations, and other tools that make reporting easier.

Gathering and Verifying Required Documentation

Challenge: Collecting and verifying the necessary documentation for FinCEN reports can be time-consuming and cumbersome. Missing or incorrect documentation can lead to delays and compliance issues.

Solution: Develop a streamlined process for collecting and verifying documentation. Create checklists to ensure that all necessary information is collected and verified before submission.

Managing Deadlines and Reporting Timeliness

Challenge: Meeting FinCEN reporting deadlines can be stressful, especially for businesses with multiple regulatory requirements and tight schedules.

Solution: Establish a clear reporting calendar with deadlines for each reporting task. Use project management tools to track progress and set reminders for upcoming deadlines. Consider automating reminders and workflows to ensure timely completion of all reporting requirements.

Addressing System Integration Challenges

Challenge: Integrating FinCEN reporting requirements with existing financial systems and software can be complex and may lead to data discrepancies.

Solution: Work with IT and software vendors to ensure smooth integration and address any compatibility issues. Regularly test and update your systems to ensure they are functioning correctly and they fit well with your existing processes.

Navigating Cross-Border Reporting Requirements

Challenge: For businesses operating internationally, navigating cross-border reporting requirements and ensuring compliance with both U.S. and foreign regulations can be challenging.

Solution: Stay informed about international compliance requirements and collaborate with legal and compliance experts who have experience in cross-border regulations.

Tackling Challenges in FinCEN Reporting Puts You A Step Ahead

FinCEN reporting is an essential aspect of federal compliance, but it comes with its own set of challenges. By understanding these challenges in FinCEN reporting and implementing effective strategies to overcome them, businesses can ensure accurate and timely reporting.

Leveraging technology, staying informed, and maintaining a strong compliance framework are key to navigating the complexities of FinCEN reporting and achieving regulatory success.

When it comes to complying with FinCEN’s Beneficial Ownership Information (BOI) reporting requirements, understanding the specific taxpayer identification numbers (TINs) that need to be reported can be challenging, especially for disregarded entities. So, what are the reporting considerations for tax-disregarded entities? Disregarded entities, often structured for tax efficiency, still bear the responsibility of reporting their beneficial ownership information if they meet the criteria of a reporting company.

This article will cover the types of TINs that disregarded entities should report to FinCEN.

What is a Disregarded Entity?

A disregarded entity is a business entity with a single owner that is not considered as separate from its owner for federal tax purposes. Common examples include single-member limited liability companies (LLCs) and certain types of trusts. Despite their special tax status, disregarded entities are not by default exempt from BOI reporting requirements, even if they may not be required to file any income tax returns.

TINs for Disregarded Entities

FinCEN requires reporting companies to submit their taxpayer identification number (TIN) if one has been issued, as part of their BOI report. The applicable TINs that may be reported include:

• Employer Identification Number (EIN)

• Social Security Number (SSN)

• Individual Taxpayer Identification Number (ITIN)

Special Foreign Entity Rule 

For foreign reporting companies that have not been issued a TIN, they must provide a tax identification number issued by a foreign jurisdiction along with the name of that jurisdiction.

Reporting Considerations for Tax-Disregarded Entities: Scenarios

Let’s explore several scenarios to understand which TIN should be reported:

• Disregarded Entity with its Own EIN 

If the disregarded entity has an EIN, it can report this number as its own TIN. This is straightforward and aligns the entity’s reporting with its federal tax identification.

• Disregarded Entity Without EIN – Owned by an Individual 

For a single-member LLC or other disregarded entity with only one owner who is an individual, the entity may report the owner’s SSN or ITIN. The downside of this approach is that it reports a sensitive SSN on the BOI report. 

• Planning Point 

Consider having a disregarded entity obtain an EIN prior to filing the BOI report, if not previously on file. This will eliminate the owner’s SSN from being reported on the company’s BOI report.

• Disregarded Entity Without EIN – Owned by a U.S. Entity 

If a disregarded entity is owned by a U.S. entity with an EIN, the disregarded entity can report its’ owner’s EIN as the TIN on its BOI report. 

• Chain of Disregarded Entities Without EIN

In cases where a disregarded entity is part of a chain of disregarded entities that don’t have an EIN, it can report the TIN of the first owner up the ownership chain that has its own TIN. 

Compliance is Key

Understanding the proper TIN to report is crucial for compliance with FinCEN’s BOI requirements. Disregarded entities must carefully assess their structure and identify the appropriate TIN to ensure accurate reporting. Failure to comply can result in significant penalties and increased scrutiny from regulatory authorities.

Conclusion

Navigating the BOI reporting requirements can be complex, especially for disregarded entities. However, by understanding the types of TINs that can be reported and the specific scenarios that apply, these entities can fulfill their reporting obligations with confidence. Whether using an EIN, SSN, ITIN, or a foreign-issued tax identification number, accurate reporting is paramount in maintaining compliance and supporting the broader goals of financial transparency and accountability.

In the evolving landscape of regulatory compliance, understanding the nuances of the Corporate Transparency Act (CTA) and its requirements is crucial for professionals involved in company formation – including the question of whether to report your CPA as a company applicant!

One key aspect that often raises questions is when a Certified Public Accountant (CPA) must be reported as a “company applicant.” While the role of a CPA is typically associated with financial management and tax planning, their involvement in the formation of entities can, in certain situations, make them subject to being reported under the CTA.

This blog will explore the specific circumstances under which a CPA must be reported as a company applicant, why this is important, and what professionals should keep in mind to ensure compliance.

What is a Company Applicant?

A company applicant, as defined by the CTA, is any individual who files a document to create a company or registers a company to do business in the United States. 

This definition typically includes lawyers who draft and submit formation documents. However, the scope of WHO may be considered a company applicant can extend beyond just legal professionals, particularly when other professionals, such as CPAs, play a significant role in the formation process.

When Must a CPA Be Reported as a Company Applicant?

A CPA may be considered a company applicant under the following scenarios:

1. Direct Involvement in Filing Formation Documents: If a CPA personally files the documents with the state or similar body that is required to form a company, they are acting as a company applicant. This direct involvement in the administrative process is the most straightforward scenario in which a CPA must be reported.
2. Providing Direction for Entity Formation: In some cases, a CPA might not physically file the documents themselves but instead provide significant guidance or direction to a lawyer, client, or third party on how to form an entity. This includes directing the overall process. When a CPA’s involvement goes beyond simple advice and steps into the realm of actively managing or directing the formation process, they may also need to be reported as a company applicant.

Why Is It Important To Report My CPA As a Company Applicant?

Failing to accurately report company applicants can have significant legal and regulatory consequences. Entities can submit up to 2 company applicants on their initial BOI report, so it will be important to evaluate the individuals who were most involved in the formation process. 

The CTA is designed to increase transparency and combat illicit activities such as money laundering, and as such, the reporting of company applicants is a critical part of this framework. Not reporting a CPA who meets the definition could lead to penalties for the entity as well as the CPA if they knew about their role in this reporting requirement.

Furthermore, transparency in reporting helps maintain the integrity of the business environment and ensures that all parties involved in the formation of an entity are accountable. 

When To Report A CPA As a Company Applicant

Let’s consider a few common scenarios where a CPA would need to be reported as a company applicant:

• Scenario 1: A CPA is hired by a client to form a limited liability company (LLC) and solely takes on the responsibility of preparing and submitting all necessary documents to the Secretary of State. In this case, the CPA is the only one involved in the formation and should be reported as the company applicant.
• Scenario 2: A client asks their CPA to coordinate with a lawyer to form a corporation. The CPA provides detailed instructions on the structure and oversees the process, even though the lawyer is the one who files the documents. Here, the CPA’s role of directing the filing of the documents would require them to be reported as a company applicant along with the lawyer who filed the documents.
• Scenario 3: Consider the scenario above, but instead of a lawyer filing the documents, the CPA provides detailed instruction to the client for them to file with the Secretary of State online. Again, the CPA’s role of directing the filing of the documents would require them to be reported as a company applicant. Since the client filed the formation documents, they would be the second company applicant.

Exceptions: When a CPA Does Not Need to Be Reported

While there are scenarios where a CPA must be reported, it’s equally important to understand when this is not required. For example, if a CPA provides general tax or financial advice without any direct involvement in the formation process, they would not be considered a company applicant. Additionally, CPAs who simply consult on the implications of forming an entity, without taking any administrative actions, do not fall under this reporting requirement.

Understanding the Role of CPAs in Entity Formation

As regulatory requirements become more complex, it’s vital for CPAs to understand when their role in entity formation crosses the line into being a company applicant. Accurate reporting under the CTA is not only a legal obligation but also a reflection of a CPA’s commitment to transparency and ethical practices. By being aware of the situations that necessitate reporting, CPAs can better serve their clients while ensuring compliance with federal regulations.

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The implementation of the Corporate Transparency Act (CTA) in the United States has prompted discussions about the necessity and effectiveness of beneficial ownership information (BOI) reporting.

While a recent court ruling has temporarily challenged the CTA’s constitutionality – for a narrow set of entities – it’s important to recognize that the U.S. is not alone in this effort. Many countries around the world have long-standing BOI reporting requirements, driven by the need to increase transparency and combat financial crimes.

This global trend suggests that, regardless of current legal battles, BOI reporting might remain a fixture in the U.S. regulatory landscape.

BOI Reporting in Other Countries: A Global Perspective

Understanding the international landscape of BOI reporting provides valuable context for why the CTA exists and its potential long-term staying power. Many countries have established BOI reporting requirements to increase transparency, prevent money laundering, and combat financial crimes.

Countries such as the United Kingdom, France, Canada, Australia, India, Switzerland, Singapore, and Hong Kong have established beneficial ownership databases.

The widespread adoption of BOI reporting regulations across the globe underscores a growing commitment to financial transparency.

The Financial Action Task Force (FATF) has specifically called out the United States for having weak insight into its corporate structures, highlighting the need for stronger regulatory frameworks. The FATF advocates for robust measures to combat money laundering and other financial crimes, and this international pressure suggests that beneficial ownership reporting is a critical component of modern financial regulation.

The consistent international demand for transparency, coupled with the U.S.’s own legislative efforts, indicates that BOI reporting is not a transient requirement but a necessary step towards comprehensive financial oversight.

Implications for the United States

Given the global trend towards transparency and the U.S. being called out for its lack of transparency by organizations like FATF, the CTA might be here to stay. Even if the current legal challenges result in a temporary delay or modification of the CTA, the underlying impetus for transparency and accountability in business ownership remains strong.

Businesses in the U.S. should prepare for BOI reporting requirements, ultimately aligning us with international standards.

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