New Federal Reporting Requirement for Beneficial Ownership Information- You Probably Have to Comply and You Probably Haven’t

By Adam B. Edgecombe June 26, 2024 Posted in Business Litigation Share

All Florida business owners should be aware of new rules under the federal Corporate Transparency Act (CTA), which, as of January 1, 2024, require most corporations, limited liability companies, and other business entities to report information to the Financial Crimes Enforcement Network (FinCEN) regarding the company’s “beneficial” owners.  While there are some companies that are exempt from beneficial ownership reporting, those businesses are already highly regulated and subject to significant governmental oversight.

The CTA was enacted as part of the federal Anti-Money Laundering Act, which was part of the 2021 National Defense Authorization Act, in order to combat money laundering, terrorism financing, organized crime, and other financial crimes.  One of the ways the CTA works to accomplish this goal is by now requiring most business formed or registered in the United States to timely report information about their beneficial owners to FinCEN.

Florida companies that are subject to beneficial ownership reporting, and which were registered to do business before January 1, 2024, have until January 1, 2025, to file their beneficial ownership reports with FinCEN.  Florida companies created or registered after January 1, 2024, must file their beneficial ownership reports within 30 days of registration becoming effective.

Who is a “Beneficial” Owner?

An individual is a “beneficial” owner of a business if the individual either directly or indirectly: (1) exercises substantial control over the company, or (2) owns or controls at least 25 percent of the company.

An individual can exercise substantial control over a company in four different ways. If the individual falls into any of the categories below, the individual exercises substantial control over the business and must be reported to FinCEN as a beneficial owner:

• The individual is a senior officer (the company’s president, chief financial officer, general counsel, chief executive office, chief operating officer, or any other officer who performs a similar function);
• The individual has authority to appoint or remove certain officers or a majority of directors (or similar body) of the company;
• The individual is an important decision-maker for the business; or
• The individual has any other form of substantial control over the company as explained further in FinCEN’s Small Entity Compliance Guide

An individual can exercise substantial control, directly or indirectly, over a company through contracts, arrangements, understandings, intermediary entities, or other relationships.  There is also no limit on the number of individuals who may exercise substantial control of a company. However, because beneficial owners must be individuals (i.e., natural persons), trusts, corporations, and other legal entities are not considered to be beneficial owners.

Due to the complexity and expansiveness of the definitions and terms governing who may qualify as a beneficial owner, companies may require legal advice and guidance in determining their beneficial owners, such as organizations with complicated capital or governance structures, or companies owned indirectly through one or more tiers of entities or through trusts.

Once a company files it initial report of beneficial ownership information, it must report any change to the beneficial ownership information within thirty days of such change.

Penalties

 As specified in the CTA, a person who willfully violates the beneficial ownership reporting requirements may be subject to civil penalties of up to $500.00 for each day that the violation continues.  A person who willfully violates the beneficial ownership reporting requirements may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000.00.  Potential violations include willfully failing to file a beneficial ownership information report, willfully filing false beneficial ownership information, or willfully failing to correct or update previously reported beneficial ownership information.

Both individuals and corporate entities can be held liable for willful violations. This can include not only an individual who actually files (or attempts to file) false information with FinCEN, but also anyone who willfully provides the filer with false information to report. Both individuals and corporate entities may also be liable for willfully failing to report complete or updated beneficial ownership information; in such circumstances, individuals can be held liable if they either cause the failure or are a senior officer at the company at the time of the failure.

 The Need for Counsel

This is new legislation, involving complicated definitions and interpretations.  Florida businesses that are uncertain as to whether they must report beneficial ownership information, and/or are unsure who in their company qualifies as a beneficial owner, should consult with counsel to ensure they properly report this information and avoid the civil and criminal penalties for noncompliance.