Category: Technical Topics

Tiered Ownership Structures in BOI Reporting: An Introduction

Did you know that strategically filing Beneficial Ownership Information Reports (BOIRs) in a certain sequence can save time and reduce the need for redundant inputs? In situations where entities are organized across multiple levels of ownership, it becomes crucial to carefully strategize. Even though different professionals might manage these entities, a comprehensive approach to understanding the ownership structures can make a difference. If all involved professionals consider every beneficial owner holding at least a 25% ownership interest and work together, the reporting process can be made more streamlined and effective.

Tiered Ownership Structures in BOI Reporting: A Helpful Tool

One tool that can be harnessed by professionals to save time, is the final rule issued on November 8, 2023 that specifies when and how entities required to file a BOIR may use the FinCEN Identifiers (FinCEN IDs) of certain related entities in the beneficial owners section of their report, rather than details about the individuals. The criteria that need to be met in order to be able to utilize this includes:

1. The other entity has obtained a FinCEN identifier and provided that FinCEN identifier to the reporting company;
2. An individual is or may be a beneficial owner of the reporting company by virtue of an interest in the reporting company that the individual holds through an ownership interest in the other entity; and
3. The beneficial owners of the other entity and of the reporting company are the same individuals.

It’s important to emphasize here that upon analyzing entity tiers this allowance is accepted in relation to ownership interest and does not require that beneficial owners with substantial control be the same across the tiers. Watch our recent video for further discussion about tiered ownership structures in BOI reporting.

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The Corporate Transparency Act (CTA) has introduced new requirements for reporting beneficial ownership information (BOI), aiming to enhance transparency and combat financial crimes. A critical aspect that professionals must consider, especially those operating in or with entities based in community property states, is how these laws intersect with the CTA’s reporting requirements. The unique treatment of marital property in these states can significantly impact the determination of beneficial ownership, presenting a nuanced challenge for compliance.

Do Community Property Laws in CTA Reporting Impact Compliance?

Community property states, including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, operate under a legal framework where assets acquired during the marriage are considered jointly owned by both spouses. This principle may effect the reporting of beneficial ownership under the CTA. For example, if a husband owns 100% of a reporting company established and operating within a community property state, his wife may also need to be reported as a beneficial owner, given that she is considered to own an equal share of the company under community property laws. This scenario underscores the importance of understanding the implications of community property laws on CTA reporting. The assumption of equal ownership in these states means that identifying beneficial owners is not as straightforward as examining the names on the business documents or the percentage of shares directly held by an individual. Instead, professionals must consider the broader legal context of ownership, including the effects of marriage and community property laws on the perceived ownership structure. 

Are You Prepared to File?

Given the complexities involved and the potential for significant legal implications, professionals dealing with entities in community property states are strongly advised to seek legal counsel. An attorney with expertise in both community property law and the CTA can provide essential guidance, helping to navigate the intricacies of reporting requirements and ensuring that all relevant beneficial owners are accurately identified and reported.

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Power of Attorney in CTA Reporting: Introduction

A critical aspect of the Corporate Transparency Act (CTA) is the requirement for certain entities to report their beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN). This reporting is vital for revealing the individuals who ultimately own or control legal entities, thereby preventing misuse of the financial system. However, the inclusion of individuals holding a Power of Attorney (POA) for a beneficial owner presents a nuanced challenge that professionals must carefully navigate. Under the CTA, the definition of a beneficial owner includes those who reach ownership interest requirements or have substantial control over significant aspects of a reporting company. This definition raises questions about the status of POA holders, who may have the authority to make decisions on behalf of a beneficial owner. The complexity lies in determining when a POA holder’s authority translates into “beneficial ownership” over a company, necessitating their inclusion in the BOI report (BOIR). The final regulations issued by FinCEN provide some clarity on this matter. According to the regulations: “FinCEN does not envision that the performance of ordinary, arms-length advisory or other third-party professional services to a reporting company would provide an individual with the power to direct or determine, or have substantial influence over, important decisions of a reporting company. In such a case, the senior officers or board members of a reporting company would remain primarily responsible for making the decisions based on the external input provided by such third-party service providers,” stated on page 30 of the Reporting Rule.

This statement underscores that not all POA holders or third-party service providers will meet the criteria for being reported as beneficial owners, especially if their role is limited to providing advisory services without the power to influence key decisions. Furthermore, the regulations specify an exception for tax or legal professionals designated as agents of the reporting company. According to 31 CFR 1010.380(d)(3)(ii), the exception to the ‘beneficial owner’ definition with respect to nominees, intermediaries, custodians, and agents would apply in these cases. This means that if a tax or legal professional is acting merely as an agent within the scope of providing professional services, without substantial control or ownership interest, they are not considered beneficial owners under the CTA. For professionals navigating these regulations, it’s important to analyze the nature of the POA or agency relationship with the reporting company. The key factors to consider include the extent of authority granted to the POA holder or agent and whether this authority includes the power to make significant decisions affecting the company’s operations or finances. This analysis is not straightforward and requires a deep understanding of both the legal framework surrounding POAs and the specific operational dynamics of the reporting company. Given the complexities and potential legal implications, professionals are advised to consult with legal experts when determining the necessity of reporting a POA holder or agent as a beneficial owner. Legal counsel can provide invaluable guidance on interpreting the regulations and applying them to specific cases, ensuring compliance while accurately reflecting the ownership and control structure of the reporting company.

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Single-Member LLCs Subject to CTA Requirements: An Overview

 The Corporate Transparency Act (CTA) and the subsequent Beneficial Ownership Information (BOI) Reporting Rule have ushered in a new era of compliance and transparency for businesses across the United States. These regulations, aimed at combating financial crimes and enhancing corporate accountability, mandate domestic and foreign reporting companies to disclose detailed information about their beneficial owners. Single-member limited liability companies (SMLLCs), often perceived as simpler entities due to their sole ownership, are not exempt from these requirements. This article delves into what the new rule means for SMLLCs, focusing on reporting timelines and identification requirements. 

CTA Reporting Timelines for Single-Member LLCs

The essence of the CTA’s impact on SMLLCs lies in its requirement for these entities to file BOI reports. These reports are crucial for disclosing information about the company, individuals with financial interests, and those with substantial control over the company. For SMLLCs in existence before 2024, December 31, 2024, marks the last day for filing their initial BOI report. Entities formed in 2024 have a 90-day window from the confirmation of formation to comply, while those established in 2025 and beyond are granted a shorter timeframe of 30 days post-formation. 

Handling the Absence of an EIN

A common scenario for SMLLCs is operating without an Employer Identification Number (EIN). The CTA accommodates this by allowing the owner to use their Social Security Number (SSN) in the company section of the BOI report, specifying it as the “Tax ID type” and providing the number accordingly. This provision ensures that the lack of an EIN does not hinder compliance. However, for owners reluctant to use their SSN, the solution is to apply for an EIN and enter it into the report. It is critical to note that the countdown to the reporting deadline for new companies begins from formation date, not from the EIN application date, emphasizing the importance of prompt action. 

Reporting Beneficial Owners

In the context of SMLLCs, the single member is inherently a beneficial owner and must be reported as such. The CTA provides flexibility in identification requirements; the member does not need to disclose their SSN in the beneficial owner section. Instead, an identification number from a state-issued license, a U.S. passport, or a foreign passport suffices. This measure respects privacy concerns while ensuring the transparency objectives of the CTA are met. Moreover, the Act casts a wider net by considering individuals with “substantial control” over the LLC as potential beneficial owners. Substantial control within a reporting company refers to the significant influence certain individuals can have over its operations and decisions, as outlined by FinCEN. This influence can be exerted in three main ways: 

• Senior Officer Role: Individuals in high-ranking positions (e.g., CEO, CFO) who have decision-making authority affecting the company’s direction.
• Authority over Appointments: Those who can appoint or remove senior officers or directors, significantly influencing the company’s governance.
• Decision-Making Power: Individuals with the ability to make or influence key business decisions, regardless of their formal position or ownership stake.

 Understanding these nuances is critical for SMLLCs to ensure compliance with the CTA. It underscores the importance of evaluating the roles and authorities within the company, beyond ownership interest, to identify who might qualify as a beneficial owner.

Are You Prepared to File?

The CTA and its BOI Reporting Rule represent significant strides towards transparency and accountability in the business landscape. For single-member LLCs, these regulations necessitate a proactive approach to compliance, from timely and accurate reporting to the careful handling of identification requirements. By understanding and adhering to these obligations, SMLLCs can navigate the complexities of the CTA and avoid any civil or criminal penalties that result from non-compliance.

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Corporate Transparency Act Exemption for Tax-Exempt Entities

The Corporate Transparency Act (CTA), a landmark piece of legislation in the United States, was enacted to bring about a new era of transparency in the ownership structures of legal entities.

While its primary goal is to uncover and mitigate illicit activities such as money laundering and fraud, it recognizes the diverse nature of entities operating within the U.S. economy. One such recognition is the provision for exemptions, with the “tax-exempt entity” exemption being a notable category among the 23 types identified.

Understanding the Tax-Exempt Entity Exemption

Entities eligible for the tax-exempt exemption under the CTA are those that hold at least one of the special status under the United States Internal Revenue Code (IRC), specifically:

• Entities described in Section 501(c) that are exempt from tax under Section 501(a), regardless of their consideration under Section 508(a). This broad category includes various types of nonprofit organizations, from charitable and educational institutions to social welfare organizations and more.
• Organizations that have recently lost their tax-exempt status, under the conditions in the sections above, provided the revocation occurred less than 180 days prior to the assessment for CTA compliance. This provision allows a grace period for organizations navigating the complexities of tax-exempt status reinstatement.
• Political organizations defined under Section 527(e)(1) and are exempt from tax under Section 572(a). These include entities organized and operated primarily for influencing the selection, nomination, election, or appointment of individuals to federal, state, or local public office.
• Trusts described in either paragraph (1) or (2) of Section 4947(a) of the IRC. This encompasses charitable trusts that meet certain conditions of the tax code, along with split-interest trusts that donate a portion of their income to charitable endeavors while still benefiting non-charitable interests.

Rationale and Implications

The rationale behind a Corporate Transparency Act exemption for tax-exempt entities from beneficial ownership information (BOI) reporting requirements is rooted in the nature of these organizations. Given their non-profit motives, regulatory compliance burdens, and the public benefit they provide, these entities are less likely to be vehicles for financial crimes targeted by the CTA. Furthermore, these organizations are already subject to a degree of scrutiny and transparency through the IRS, including requirements for public disclosure of certain tax forms that detail their financial activities and governance structures. By exempting tax-exempt entities, the CTA aims to avoid duplicative regulatory burdens that could detract from the resources dedicated to their charitable, educational, or political activities.

However, the exemption is conditional upon maintaining the specific statuses outlined by the CTA, necessitating ongoing compliance with both the IRS regulations, and the evolving landscape of financial transparency laws.

Is Your Entity Exempt? Or Are You Prepared to File?

Organizations qualifying under the Corporate Transparency Act exemption for tax-exempt entities must remain vigilant in their compliance with both tax and transparency laws, ensuring that they continue to operate in a manner consistent with their exempt status. For organizations navigating these waters, professional advice and diligent record-keeping will be key to maintaining compliance.

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The Corporate Transparency Act (CTA) mandates that many businesses file a Beneficial Ownership Information Report (BOIR) with the Financial Crimes Enforcement Network (FinCEN) starting in 2024. These reports disclose details about individuals who own or significantly influence the company. However, there are CTA exemptions: 23 types of entities that are exempt from complying to this filing requirement, one of which is the “large operating company.”This exemption is liable to be one of the most commonly applicable exemption test and is crucial to understand.

CTA Exemptions: Large Operating Company

For a company to qualify as a large operating company and benefit from this exemption, it must meet the following specific criteria:

Employee Count

The company must employ more than 20 full-time employees in the United States. Full-time employees, in this context, work an average of at least 30 hours per week. Parent companies are not allowed to count employees of subsidiaries (or vice versa).

Physical Presence in the US

The company should maintain a physical office within the United States. This means conducting regular business operations at a distinct owned or leased physical location in the US.

Gross Receipts or Sales

The company must have reported more than $5 million in gross receipts or sales in the previous year and reported on an applicable tax return filed in the United States. This threshold doesn’t include receipts or sales from sources outside the US.Notably, this exemption may also extend to certain subsidiaries of large operating companies, provided their ownership interests are controlled by the parent large operating company. Furthermore, if an individual’s ownership in a reporting company is held through exempt entities, the reporting company may report the exempt entities’ names instead of the individual’s personal information.

Are You Prepared to File?

It’s essential for businesses to understand these criteria and exemptions to determine whether they qualify for the large operating company exemption. If a company ceases to meet the criteria, it must file an initial report within 30 days of losing its exemption status.

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