Corporate Transparency Act Disclosure of Beneficial Ownership Information Impact on Non-U.S. Residents

The Corporate Transparency Act (CTA) is a new federal law requiring most domestic and foreign business entities formed or registered to do business in the United States to disclose information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN).

Update from FinCEN (Nov. 2023): Alert: FinCEN has been notified of recent fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the Corporate Transparency Act. The fraudulent correspondence may be titled “Important Compliance Notice” and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests. Please do not respond to these fraudulent messages, click on any links, or scan any QR codes within them.

You may receive notifications from companies or firms that will provide a service to file your beneficial owner’s information (BOI) report on your behalf for a fee. That is acceptable and very different from a company that uses marketing to appear as a government-type agency, even though they may have a disclaimer in fine print at the bottom.

These companies are not affiliated with the government and may charge excessive fees for their services. It is important to be aware of these differences and to choose a reputable company if you decide to use a third-party service to file your BOI report.

It’s important to note that while the initial filing of beneficial ownership information with FinCEN under the Corporate Transparency Act is a one-time requirement in 2024, the real significance lies in the obligation to update this information whenever changes occur. Failing to update this information could lead to fines.

Think about how often you’ve moved or established new businesses. If you have any role in managing or controlling these entities and haven’t kept track of these changes, you could be subject to compliance penalties. It’s essential to thoroughly understand these regulations and ensure that all entities under your control comply with 2024 onwards.

Here is what you need to know.

The CTA is scheduled to take effect on January 1, 2024. The guidelines on how to fill out your beneficial owner’s statement will not be available until January 1, 2024, or soon after.

How will this impact U.S. and non-U.S. resident e-commerce sellers and other agencies selling through a U.S. LLC?

Before we get to that, let’s address what happened with disclosing ownership before this change:

Before the Corporate Transparency Act (CTA), U.S. residents were not required to disclose their ownership of 25% or more of a U.S. entity to any government agency. However, several other laws and regulations may require U.S. residents to disclose their ownership of U.S. entities, such as:

What is a beneficial owner?

A beneficial owner is an individual who exercises substantial control over an entity, either directly or indirectly, or who owns or controls 25% or more of the entity’s equity interests.

According to FinCEN’s BOI Small Compliance Guide – see at this link, your company can identify beneficial owners by taking the following steps:

Step 1: Identify individuals who exercise substantial control over the company.
Examples are provided below to help you identify those individuals.

Step 2: Identify the types of ownership interests in your company and the individuals that hold
those ownership interests. Examples are provided below to help with identification.

Step 3: Calculate the percentage of ownership interests held directly or indirectly by individuals
to identify individuals who own or control, directly or indirectly, at least 25 percent of the
ownership interests of the company.

How do you determine who has substantial control over a company? Here are the questions to ask provided by FinCEN’s BOI Small Compliance Guide (see page 26).

1. Does your company have a president, chief financial officer, general counsel, chief executive officer, or chief operating officer?

2. Does your company have any other officers that perform functions similar to those of a President, chief financial officer, general counsel, chief executive officer, or chief operating officer?
Note: One individual may perform one or more functions for a company, or a company may not have an individual who performs any of these functions. These are senior officers in your company.

3. Does your company have a board of directors or similar body, AND does any individual have the ability to appoint or remove a majority of that board or body?

4. Does any individual have the ability to appoint or remove a senior officer of your company?  Questions 3 and 4 are individuals with appointment or removal authority over your company.

5. Does any individual direct, determine, or have substantial influence over important decisions made by your company, including decisions regarding your company’s business, finances,
or structure? These are important decision-makers over your company.

Note: Certain employees who might fit this description are nevertheless exempt from the beneficial owner definition. See section 2.4 of the guide for more information.

6. Are there any other individuals who have substantial control over your company in ways other than those identified in 1-5 above? These are individuals to whom the catch-all would apply.

What entities are covered by the Corporate Transparency Act? Which are Exempt? 

The CTA covers most domestic and foreign business entities formed or registered to do business in the United States, including corporations, limited liability companies (LLCs), partnerships, and trusts. Exemptions are provided for certain entities, such as publicly traded companies, banks, and investment funds. “Large operating companies” are also exempt, which are entities that (i) have more than 20 full-time U.S. employees (not counting employees of affiliated entities), (ii) reported more than $5 million of revenue from U.S. sources on a consolidated basis to the IRS for the previous year and (iii) have an operating presence at a physical location in the United States. 

Overall, there are 23 exempt categories, and your first step is to determine if you have a reporting requirement. Of course, you should check to see if the list or definitions change by January 1st, 2024, or soon after.

The big category is #23, called “Inactive entity.” What does that mean?

Here is what FinCEN says about an inactive entity qualification: 

An entity qualifies for the inactive entity exemption if all six of the following criteria apply:

FinCEN’s Small Entity Compliance Guide includes checklists for this exemption (see exemption #23) and for the additional exemptions to the reporting requirements (see Chapter 1.2, “Is my company exempt from the reporting requirements?”).

Is the reporting requirement applicable to foreign companies registered for business operations in the U.S.?

It is important to note that the Corporate Transparency Act applies to domestic and foreign companies registered to do business in a U.S. state. While foreign registration was previously required in some states for obtaining a sales tax permit, this requirement has been eliminated in most cases.

However, the Corporate Transparency Act now requires all companies registered to do business in a U.S. state to disclose their beneficial ownership information, regardless of their origin.

Additionally, in the past, some states, such as Florida, required foreign entities to register with the secretary of state before opening a U.S. bank account.

What information must be disclosed?

Entities covered by the CTA must disclose the following information about their beneficial owners to FinCEN:

• Full name
• Date of birth
• Address
• Social Security number or taxpayer identification number

If you don’t want to give your SSN as the owner, don’t be the owner. What if another entity is the owner?

Does that mean you provide the EIN, likely, but what about the second entity who is the owner? What if you own that entity? Doesn’t that mean you would provide your SSN (assuming you have one) for the second entity? Yes.

Does that help at all? It might depend upon the nature of the company, and keep in mind the 23 exemptions, of which one is whether you have 20 or more employees or report over $5 million in revenues.

What about non-residents who do not have an SSN or a TIN (taxpayer identification number)?

The ITIN is the most common for non-residents. What does that trigger regarding your U.S. filing responsibilities, and how do you even obtain an ITIN if you don’t have a U.S. filing requirement?

At NCP, our CEO, Scott Letourneau, is a certified tax advisor and consults often on these and other subjects and works with a mastermind group of tax attorneys and other legal professionals for support. Learn more at this link.

How will the CTA impact new entity formations?

The CTA will add a new step to the new entity formation process. Entities formed or registered to do business in the United States on or after January 1, 2024, must file a report with FinCEN disclosing information about their beneficial owners within 30 days of formation or registration. If you have active entities with the secretary of state but are not active for any business or holding assets, it would be best to clean them up and dissolve them before January 1st, 2024.

But on Sept. 28, 2023, FinCEN proposed extending this deadline to 90 days for entities formed in the calendar year 2024.

After the initial report, there is no annual or quarterly filing requirement. However, reporting companies must file an amendment within 30 days after any change to their reported information.

Entities already formed or registered to do business in the United States on January 1, 2024, will have until January 1, 2025, to file a report with FinCEN disclosing information about their beneficial owners.

New Entity Strategy: If you are starting a new business entity in January 2024, it is best to file the entity formation documents before January 1st, and when applying for the EIN (Employer Identification Number) through Form SS-4, use a start date of January 1st, 2024. This will give you the full 12 months to file your beneficial owner form instead of only 90 days in 2024.

What are the consequences of failing to comply with the CTA?

Entities that fail to comply with the CTA’s reporting requirements may be subject to civil penalties of up to $500 per day. Individuals who knowingly and willfully fail to comply with the CTA’s reporting requirements may be subject to criminal penalties of up to five years in prison and a fine of up to $250,000.

What should businesses do to prepare for the CTA?

Businesses should start preparing for the CTA by identifying their beneficial owners and gathering the required information about them. Businesses should also develop a plan for complying with the CTA’s reporting requirements.

The public will not have direct access to the beneficial ownership information reported due to the Corporate Transparency Act (CTA).

The CTA requires FinCEN to maintain the information in a secure, nonpublic database. However, FinCEN may disclose the information to law enforcement and other government agencies for authorized purposes.

FinCEN has not yet announced any plans to make beneficial ownership information available publicly. However, some experts believe that it is likely that FinCEN will eventually make the information publicly available, at least in a limited way. Even if no information is public, it goes to the IRS. We foresee where FinCEN will scrape the list of all entities that apply who are registered with the secretary of state and compare that to the list of companies that file with FinCEN by the end of 2024, and cross-reference with the IRS to go after companies in 2025, that are not in compliance. Your address will be important because it may have changed since you formed the LLC and obtained the EIN. So, you may never see the fine mailed directly to you due to an address change.

Non-residents need to be aware of a complete U.S. LLC formation strategy and the best address service that is detailed and reliable so they can stay in compliance with FinCEN. Remember, if you make any changes to your ownership of your LLC, the manager, the responsible party, or the owner’s home address…, you must update your account with FinCEN or face a potential civil penalty of up to $500 for each day that the violation continues, or criminal penalties, including imprisonment for up to two years and/or a fine of up to $10,000.

Will your Amazon brand competitors finally discover the “true owner” of the Amazon account? 

Remember, on your Amazon account, your “brand name,” which is the same as your “display name,” will rarely have your LLC name. Your “sold by name,” also known as your “storefront name,” is separate. In the big picture, if your LLC name is not your “brand name,” it will be only the legal entity on your account and not show up on your Amazon page with your products.

Anyone can search the USPTO database to determine who owns a trademark. This includes trademarks owned by Amazon businesses, but the CTA is not expected to make beneficial ownership information public now.

Your privacy from other competitors should be safe. At the end of the day, most competitors don’t need to know who the owner is to compete; they need to know their competition. In litigation, privacy and asset discovery are much more important when looking for leverage to fast-track a case.

What about the IRS as a non-resident individual or company owning a U.S. LLC operating a U.S. business on Amazon? 

That could be a real issue for many sellers who have taken a strong stance that they are not engaged in a U.S. trade or business and do not have any effectively connected income with that U.S. trade or business. Determining whether a seller is engaged in a U.S. trade or business is a complex process that requires carefully analyzing all relevant facts and circumstances.

Did you or your foreign company file a protective return? If not, perhaps now is the time before the IRS has all the ownership information. 

Tax Form 5472 requires reporting corporations to disclose information about their 25% or more foreign shareholders to the IRS, and now the Corporate Transparency Act (CTA) will also require reporting companies to disclose information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). FinCEN may then share this information with the IRS, as well as with other law enforcement agencies. The key for non-residents becomes what U.S. tax returns the owners file, if any. Remember, you may not have had any responsibility to file a return by the owner.

What sellers can do

Non-resident sellers who form a U.S. single-member LLC owned by themselves as a non-resident individual or a foreign corporation may want to consider filing a protective U.S. tax return.

There are a few benefits for U.S. LLCs owned by foreign companies to file a protective US tax return:

• Preserve the right to deduct expenses. If a U.S. LLC owned by a foreign company does not file a tax return, it will lose the right to deduct any expenses incurred, even if those expenses are related to business activities that generate income in the United States. Filing a protective tax return preserves the right to deduct these expenses, even if no income is reported on the return.
• Establish a tax filing history. Filing a protective tax return for a U.S. LLC owned by a foreign company can help establish a tax filing history for the entity. This can be beneficial if the company later starts reporting income in the United States. A good tax filing history can make it easier to obtain a U.S. tax identification number and to open bank accounts and other financial accounts in the United States.
• Avoid penalties and interest. If a U.S. LLC owned by a foreign company fails to file a tax return, even if it has no income to report, it may be subject to penalties and interest. Filing a protective tax return can help to avoid these penalties and interest.

It is important to note that filing a protective tax return does not mean the U.S. LLC owned by a foreign company must pay taxes in the United States. The company will only be required to pay taxes if it has income effectively connected with a U.S. trade or business.

Here are some specific examples of how filing a protective tax return can benefit a U.S. LLC owned by a foreign company:

• A U.S. LLC owned by a foreign company is engaged in limited business activities in the United States, such as maintaining a bank account and attending trade shows. The company does not have any income from these activities. However, the company wants to preserve the right to deduct any expenses incurred with these activities. The company can file a protective tax return to preserve this right.
• A U.S. LLC owned by a foreign company is starting a new business there. The company does not expect any income in the first year of operation. However, the company wants to establish a tax filing history and avoid any penalties and interest. The company can file a protective tax return to achieve these goals.
• A U.S. LLC owned by a foreign company has been inactive for several years. The company now wants to start reporting income in the United States. The company can file a protective tax return to re-establish its tax filing history and avoid any penalties and interest.

If you are considering filing a protective tax return for a U.S. LLC owned by a foreign company, you should consult with a tax advisor to ensure that you comply with all US tax laws.

Are all the owners disclosed? 

The Corporate Transparency Act (CTA) requires reporting companies to identify all beneficial owners, regardless of their ownership percentage. A beneficial owner is an individual who exercises substantial control over an entity, either directly or indirectly, or who owns or controls 25% or more of the entity’s equity interests.

This means that reporting companies must identify all individuals who meet any of the following criteria:

• They are a senior officer of the entity.
• They have authority over the entity’s management or finances.
• They have the ability to make important decisions about the entity’s business.
• They have a significant financial interest in the entity.

Reporting companies must also identify any individual who controls one or more intermediary entities that control the reporting company.

The CTA does not provide a specific definition of “substantial control.” However, FinCEN has issued guidance that provides some examples of activities that may constitute substantial control. These activities include:

• Appointing or removing senior officers of the entity.
• Approving major transactions or investments.
• Setting the entity’s budget or financial goals.
• Approving the entity’s strategic plan.
• Having the ability to veto important decisions made by the entity.

Reporting companies must file a report with FinCEN identifying their beneficial owners within 30 days of formation or registration (but 90 days for those entities formed in 2024). The report must include the following information for each beneficial owner:

• Full name
• Date of birth
• Address
• Social Security number or taxpayer identification number (TIN). Don’t want to disclose your SSN as a U.S. resident? What about a non-resident entity registered to do business in the U.S.? Here is what FinCEN advises: If a foreign reporting company has not been issued a TIN, report a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.

If the beneficial owner is a foreign individual, the reporting company must also provide the beneficial owner’s passport number and country of citizenship.

The CTA is a significant new law requiring reporting companies to disclose more information about their beneficial owners. FinCEN and other law enforcement agencies will use this information to investigate and prevent financial crimes.

Are there other areas where U.S. residents must disclose their ownership in a U.S. entity formation?

Schedule G of Form 1120 requires corporations to disclose ownership details of any individual or entity that owns, directly or indirectly, 20% or more of the corporation’s voting stock. The IRS uses this information to identify and track large shareholders of corporations.

Schedule G requires corporations to report the following information about their large shareholders:

• Name
• Taxpayer identification number (TIN)
• Country of citizenship
• Percentage of voting stock owned

Corporations are also required to report any changes in ownership of 20% or more of their voting stock to the IRS within 30 days of the change.

The ownership disclosure requirements on Schedule G are different from the CTA’s reporting requirements in a few key ways:

• Schedule G only applies to large shareholders who own 20% or more of a corporation’s voting stock, while the CTA applies to all beneficial owners of domestic reporting companies.
• Schedule G only applies to U.S. corporations, while the CTA applies to both U.S. and foreign reporting companies.
• Schedule G is filed with the IRS, while the CTA report is filed with FinCEN.

Despite these differences, both Schedule G and the CTA are important tools for the IRS and FinCEN to combat money laundering, terrorist financing, and other financial crimes.

If you file Form 2553 to make the S election, you will be required to disclose the ownership percentage of each shareholder. This information is reported in Part I of Form 2553.

In addition to disclosing the ownership percentage of each shareholder, you must also obtain the consent of all shareholders who own stock on the date the election is filed. The consent of shareholders is obtained by having each shareholder sign the Shareholder’s Consent Statement in Part I of Form 2553.

The ownership disclosure requirements on Form 2553 are similar to the ownership disclosure requirements on Schedule G of Form 1120. However, there are a few key differences:

• Form 2553 requires disclosure of the ownership percentage of all shareholders, regardless of whether they own 20% or more of the corporation’s stock.
• Form 2553 requires the consent of all shareholders who own stock on the date the election is filed.
• Form 2553 is filed with the IRS at the same time that you file your corporation’s federal income tax return.

The ownership disclosure requirements on Form 2553 are important for the IRS to administer the S corporation election. The IRS uses this information to ensure that all shareholders know the election and consent to it.

Conclusion

The Corporate Transparency Act is a significant new law that will majorly impact new entity formations for U.S. and non-U.S. residents. Businesses should start preparing for the Corporate Transparency Act by identifying their beneficial owners and gathering the required information about them. Businesses should also develop a plan for complying with the CTA’s reporting requirements.

Remember, existing entities required to report have until the end of 2024 to submit their filings. It’s important to note that any updates or clarifications to the instructions or guidelines will likely occur within the first 30-60 days of the new year. Therefore, delaying your report submissions for a few months can be strategic.

Additional tips for new businesses 

Consider forming your new business in 2023 to take advantage of the extended January 1, 2025, deadline for filing a report with FinCEN. NCP can help with your new filing with a January 2024 start date AND your beneficial owners report in 2024 before the end of the year. We work with a law firm partner who will file your FinCEN beneficial owner report, annual minutes and meetings, and state annual report for one low fee when we form your new LLC.