The Anti-Money Laundering Act of 2020 included provisions for the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) to create and maintain a database of beneficial owners of U.S. companies. The purpose was to give law enforcement access to information to use in investigating tax fraud or other financial crimes. This anti-corruption rule became effective as of January 1, 2024, and is known as the Corporate Transparency Act (CTA).
Understanding if and how your company is required to report under the beneficial ownership information rule (BOI) can be confusing. The CTA is explicit in defining the types of companies not required to disclose information about their beneficial owners, yet remains vague and broad in defining the companies that must report.
This high-level overview is meant to provide answers to basic questions, but it's prudent to consult with an ESOP expert when navigating CTA complexities.
BOI Basics
BOI reporting requirements trigger around Reporting Company status and exemptions to that status.
What’s a Reporting Company?
Any U.S. corporation, limited liability company, or similar entity — including foreign companies registered to operate in the U.S. — that is registered with the state secretary of any U.S. state or territory is considered a Reporting Company. Most organizations fall into this category, unless covered under one of the 23 Corporate Transparency Act exemptions (see Chapter 1.2, FinCEN Small Entity Compliance Guide).
Reporting Companies must provide information to FinCEN about their beneficial owners, provided the beneficial owners meet one of FinCEN’s two defining criteria:
- Anyone holding at least 25% of the organization’s ownership
- Anyone exercising substantial control over the company
Ownership interest in a company isn’t necessary for an individual to have substantial control. However, they must fall into at least one of the four categories delineated by FinCEN:
- Senior officer: The company president, chief financial officer, general counsel, chief executive officer, chief operating officer, or other similarly situated employee.
- Appointment or removal: An individual with the authority to appoint or remove the company’s senior officers or the majority of the board of directors.
- Important decision-maker: An individual who directs, determines, or substantially influences important decisions about the company’s business, finances, and structure.
- Any other form of substantial control: An individual exercising new and unique control over the company, as defined in Chapter 2.1 of the FinCEN Small Entity Compliance Guide.
Internal and external trustees and officers of an ESOP may meet one of these definitions, thereby making them a beneficial owner and subject to BOI reporting.
Entities already subject to substantial federal or state regulation, such as banks and other financial institutions, are completely exempted from BOI reporting. The same holds true for organizations established before January 1, 2020, but subsequently have been fully inactive.
What Information is Disclosed?
There are four pieces of information collected on each beneficial owner for BOI reporting purposes:
- Full name
- Birthdate
- Address
- Unique Identifying Number and issuing jurisdiction from a recognized and acceptable identification document (e.g., driver’s license) or FinCEN ID, along with an image of the document
The Large Operating Company Exemption
Of the 23 Corporate Transparency Act exemptions, the “large operating company” exemption may impact the most U.S. companies, including ESOPs.
The large operating company exemption states that a company meeting the following criteria does not have to report BOI:
- More than 20 full-time employees
- More than $5 million in gross receipts or sales
- A physical office and operating presence within the United States
Reporting Requirements for ESOPs
ESOPs are governed by the CTA in much the same way as non-ESOP companies, with some caveats.
ESOP companies might fall under one of the 23 Corporate Transparency Act exemptions, with the large operating company exemption probably being applicable to the majority.
But, it’s not always quite that black and white.
Depending on the structure of the ESOP, an investment holding company may own all ownership interests in the ESOP company. The ESOP’s Trust likely owns all shares of the holding company, and the holding company functions as the Plan Sponsor.
In this scenario, the number of employees the holding company has dictates BOI reporting. Fewer than 20 employees triggers mandatory Reporting Company status since it’s not considered a large operating company, unless one of the exemptions apply.
Key CTA Dates and Details
There are specific requirements to be aware of to get and stay in compliance with the CTA BOI reporting rule.
Filing Deadlines
The rule’s effective date is January 1, 2024 and reporting dates cascade from there:
- Reporting Companies created or registered before January 1, 2024, have until January 1, 2025, to file their initial reports
- Reporting Companies created or registered after January 1, 2024, have 30 days after receiving official notice of their creation or registration to file their initial reports
- Reporting Companies regardless of establishment date have 30 days to report changes to previously filed reports, and 30 days from becoming aware of inaccuracies in earlier reports to make corrections
Penalties for Non-Compliance
Non-compliance with BOI reporting can result in both civil and criminal penalties:
- Civil fines may be assessed at up to $500 per day for each day a company remains in violation
- Criminal fines may be assessed at up to $10,000 and imprisonment of up to two years for willful violations
The Corporate Transparency Act represents a significant shift in the regulatory landscape for U.S. organizations, including ESOP-owned companies. The BOI reporting requirements, exemptions, and compliance processes are comprehensive — and occasionally convoluted. Reach out to ESOP Partners with any questions or for guidance on next steps to keep your ESOP company compliant.
