Corporate transparency and reporting
The Corporate Transparency Act (CTA) is the result of a bipartisan effort to crack down on financial crimes by business owners who form anonymous American shell companies and use them to disguise their identities as they engage in illicit activities like money laundering, drug trafficking, and human trafficking. According to the federal Financial Crimes Enforcement Network (FinCEN), these illegal enterprises pose threats to legitimate businesses, the U.S. economy, and national security.
The beneficial ownership information reporting rule requires foreign reporting companies operating in the U.S. to file a report providing information about the people who own and control the company. These reports introduce a new level of transparency that should make it harder for bad actors to hide behind American business structures.
Who is considered a 'reporting company' under the CTA?
Under the CTA, the beneficial ownership report is required for foreign reporting companies. A foreign reporting company is a business formed outside of the US that has registered to do business in a U.S. state or through a tribal government.
U.S.-formed businesses, including LLCs and corporations, are no longer considered “reporting companies” and have no BOI filing obligation. Sole proprietorships and general partnerships were never “reporting companies” under the CTA and don’t have to file a BOI Report.
How to file a BOI for an LLC
To prepare a BOI report, start by identifying the “beneficial owners” of your company. A beneficial owner is any individual who:
- Own at least 25 percent of the business.
- Exercises “substantial control” over the business. Examples include a senior officer of the company, anyone with authority to appoint and remove senior officers or members of the governing board, an important decision maker, or someone who exercises substantial control in some other way.
Under the current rule, a foreign reporting company only needs to report information for beneficial owners who are not U.S. persons (U.S. citizens, lawful permanent residents, and domestic entities are excluded from reporting, even if they meet the ownership or substantial control test above).
For each beneficial owner you must report, your BOI should include:
- Full legal name
- Current street address
- A copy of a foreign passport or other foreign government-issued ID
You'll provide information about your company in your BOI report:
- Its legal name and any DBAs
- The address of its principal place of business or primary U.S. location
- The foreign jurisdiction where the business was created
- The business’ tax ID number
Once you’ve gathered your beneficial ownership information, you can complete your free BOIR filing on the FinCEN website, either by filling out the form directly on the website or by completing a PDF form offline and then uploading it. You’ll receive an email confirmation when your BOI for an LLC has been accepted.
What is beneficial ownership?
Beneficial ownership is a concept that determines who controls and benefits from a business. Identifying beneficial owners in your business helps you to be transparent with stakeholders and financial institutions.
What beneficial ownership means
At its core, beneficial ownership is about understanding who really holds the power and financial interest in a business. It refers to the non-U.S. citizen or entity that ultimately benefits from the business, even if the business is in someone else’s name. This beneficial owner definition might sound straightforward, but the reality is often more complex, especially in businesses with layered ownership structures or those held in trusts.
For example, suppose a business is held in a trust. In that case, the trustee might hold legal ownership, but the beneficiaries are the beneficial owners because they enjoy the benefits of the assets within the trust. In a corporation, shareholders are often the beneficial owners, but their level of control and how much they actually benefit depends on the size of their shareholding and any other agreements in place.
The role of beneficial owners in business
Beneficial owners are often the driving force behind a company’s major decisions and strategic direction. They can be involved in all aspects of the business, from financial management to day-to-day operations. Some beneficial owners may be less hands-on than others, but the point is that they could exercise their power if they wanted to.
Identifying beneficial owners in your business can help you manage your affairs more effectively and make better decisions that benefit everyone.
Legal vs. beneficial ownership
One of the most important distinctions in business ownership is the difference between legal and beneficial owners. Legal ownership refers to the person or entity whose name appears on the title or official records of the business. Legal owners have the right to transfer or sell the business and are often considered the “official” owners in the eyes of the law.
Beneficial ownership applies to a non-U.S. citizen who enjoys the financial benefits and has the power to influence decisions related to the business. This owner may not have their name on the title, but they still hold a lot of power. Oftentimes, the beneficial owners of a business are the same as the legal owners, especially in smaller companies. But they don’t have to be.
Jane Haskins, Esq., and Allison DeSantis, J.D., contributed to this article.