Mid-Atlantic Health Law TOPICS

The United States Congress passed the Corporate Transparency Act (CTA) in 2021 to help prevent and combat money laundering, terrorist financing, tax fraud and other illicit activity. Among other things, the CTA requires private companies operating in the United States to report information regarding their beneficial owners and key decision makers to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Treasury Department.

The CTA’s reporting rules (Reporting Rules) go into effect on January 1, 2024. Unless exempt, a legal entity that was formed by virtue of filing a document with a state government—including limited liability companies and professional corporations — must file a Beneficial Ownership Information Report (BOI Report) by a certain deadline. 

Accordingly, every non-exempt private company in the United States, including medical practices and other health care providers, should become aware of, and take steps to comply with, the new Reporting Rules.

Which Companies Must File?

The general rule is that a company is a “reporting company”—and is therefore required to file a BOI Report—if it is a corporation, limited liability company, or “other similar entity” that is created when a document is filed with a state’s secretary of state or similar office.

By contrast, other business arrangements, such as sole proprietorships and general partnerships, are not “reporting companies” because they operate according to common law principles, and are not created by filing a document with a state agency, so they are not subject to the Reporting Rules.

Exemptions

The CTA expressly excludes 23 categories of relatively large or highly regulated businesses from the definition of a “reporting company.”  

The exemptions most applicable to private health care providers are (1) insurance companies; (2) tax-exempt entities; (3) entities assisting tax-exempt entities; (4) subsidiaries of tax-exempt entities; and (5) so-called “large operating companies.”

A “large operating company” is a business which: (1) employs more than 20 full-time employees in the United States; (2) has an operating presence at a physical office in the United States; and (3) has filed a federal income tax return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales, excluding from sources outside of the United States.

Which Individuals Must Be Identified?

If a health care provider is a reporting company, it must file a BOI Report with information about its (a) beneficial owners and (b) company applicant. An individual is considered a “beneficial owner” if the individual exercises “substantial control” over the company, directly or indirectly, or if an individual owns at least 25% of the ownership interests in the reporting company.

A newly formed reporting company must also include information about its “company applicant.” A “company applicant” is the individual who directly files the reporting company’s formation documents with the applicable state agency, as well as a person who is primarily responsible for directing or controlling that filing. Only companies that are formed after January 1, 2024 must include information about the company applicant.

What Information Must be Reported?

A reporting company’s BOI Report must include:  (1) the full legal name of the reporting company; (2) any trade names or “doing business as” names; (3) The company’s complete current physical address; (4) the state, tribal or foreign jurisdiction of formation; and (5) the company’s taxpayer and employer identification numbers.

Congress passed the CTA because of a lack of transparency with respect to who owns and controls entities operating within the United States.  Therefore, the Reporting Rules require a reporting company to include the following information for each of its beneficial owners and company applicant on its BOI Report: (1) the individual’s full legal name; (2) the individual’s date of birth; (3) the individual’s complete current address; (4) a unique identifying number from the individual’s state-issued driver’s license, passport or similar document; and (5) a scanned image of the individual’s driver’s license, passport or whichever document contains the unique identifying number used on the BOI Report.

FinCEN will keep this information in a private database, accessible only by the U.S. Treasury Department and certain law enforcement agencies on a need-to-know basis.

When Must Reports be Filed?

Non-exempt legal entities that were formed prior to January 1, 2024, have until January 1, 2025, to file their initial BOI Reports.  

 A new, non-exempt health care provider with an incorporation or formation date which is on or after January 1, 2024, has 30 days to file its initial BOI Report. The 30-day period begins on the date the applicable state agency accepts the filing.  

If a reporting company’s beneficial ownership information changes, it has 30 days from the date the ownership change occurred to file an updated BOI Report. An updated BOI Report is only required if there is a change to information reported about a reporting company or its beneficial owners. A reporting company is not required to file updated or corrected BOI Reports if one of its beneficial owners undergoes a change of address.

Also, corrected BOI Reports must be filed within 30 days of the reporting company becoming aware of or having reason to know that a correction is needed.  However, to avoid penalties, reporting companies must file corrected BOI Reports within 90 days of the date the inaccurate report was filed.

Further, if a previously exempt legal entity is no longer exempt, or if a reporting company becomes exempt from the Reporting Rules after filing a BOI Report, for example, if sales fluctuate above or below five million dollars, then the company will need to file an updated BOI Report explaining the reason why it lost or gained its exemption.

BOI Reports are filed electronically with FinCEN and then stored in a secure nonpublic database, referred to as the Beneficial Ownership Secure System (BOSS).

Penalties

The CTA provides civil and criminal penalties, including a fine of $500 per day up to $10,000, imprisonment or both.

For more information on the Corporate Transparency Act, check out these resources:

FinCEN’s Small Entity Compliance Guide

An Introduction to Beneficial Ownership Information Reporting

James J. McKittrick
410-576-4134 • jmckittrick@gfrlaw.com

A version of this article was published  by The Daily Record on December 20, 2023.