The beneficial ownership rule requires companies to disclose their true owners to the Financial Crimes Enforcement Network (FinCEN). This rule is part of the Corporate Transparency Act, which was passed in 2020 to prevent money laundering and other financial crimes.
However, certain types of businesses are exempt from the beneficial ownership disclosure requirements. The key exemptions include:
Publicly traded companies
Companies that are required to file reports under the Securities Exchange Act of 1934 are exempt from the beneficial ownership rule. This includes companies listed on a stock exchange like the NYSE or NASDAQ. These companies already disclose substantial ownership information to regulators and the public.
Companies with over 20 full-time US employees
Domestic companies with more than 20 full-time employees in the US and over $5 million in gross receipts or sales are exempt. The number of employees and revenue threshold excludes small businesses from the disclosure requirements.
Certain regulated entities
Banks, credit unions, money transmitting businesses, broker-dealers, investment companies, and insurance companies do not have to file beneficial ownership reports. These entities are already closely regulated for anti-money laundering compliance.
Non-profits and religious organizations
Most tax-exempt non-profit organizations and religious institutions are not subject to the ownership disclosure rule. Some advocacy and political non-profits may still have to file if they meet certain activity thresholds.
Publicly Traded Companies Exemption
Companies that are subject to reporting requirements under the Securities Exchange Act of 1934 are exempt from filing beneficial ownership reports under the Corporate Transparency Act.
Required SEC Filings Provide Ownership Transparency
Public companies provide extensive disclosures about their ownership and structure through mandatory filings with the Securities and Exchange Commission (SEC).
Major filings include:
- Initial registration statements like the S-1 and F-1
- Quarterly and annual reports like the 10-Q and 10-K
- Beneficial ownership reports on Forms 3, 4, and 5
These documents are publicly available on the SEC’s EDGAR database. Investors can easily find information on who owns large chunks of public companies.
Ownership Thresholds for SEC Disclosure
The SEC has set clear thresholds for when major shareholders must disclose their ownership stakes.
Anyone who directly or indirectly owns over 5% of a public company’s class of shares must file a beneficial ownership report. As they cross 5% ownership levels, institutional investors and company insiders must promptly disclose their holdings.
Lower 1% thresholds apply for disclosure of changes in existing major shareholdings.
Information Required in SEC Filings
SEC filings must provide substantial details on major shareholders:
- Names and addresses of beneficial owners
- The number and class of shares owned
- Whether voting and investment powers are shared
- Ownership stakes in derivatives like options and warrants
The ongoing disclosure provides transparency around who ultimately controls public companies.
Exemption for Large Domestic Businesses
Under the Corporate Transparency Act rules, domestic companies with over 20 full-time US employees and over $5 million in revenue are exempt from filing beneficial ownership reports.
Reduces Burden for Larger Companies
This exemption limits the disclosure burden on medium and large-sized businesses. Companies with substantial domestic operations likely present lower money laundering risks.
Requiring beneficial ownership reporting from all companies could impose excessive compliance costs. The employee and revenue thresholds aim to avoid this by exempting thousands of larger firms.
Thresholds for Exemption
To qualify for the large domestic business exemption, companies must meet two tests:
- Have more than 20 full-time employees in the US
- Generate over $5 million in annual gross receipts or sales
The employees must be full-time and located in the US. Independent contractors do not count towards the 20 employee minimum.
Annual gross receipts include total revenues before any deductions or expenses.
Must File if Engaged in Higher Risk Activity
However, large domestic companies may still have to file if they engage in certain higher risk activities like:
- Owning real estate
- Dealing in luxury goods
- Transacting with offshore entities
- Operating unregulated financial businesses
So the exemption does not apply automatically based on size alone. Firms must evaluate whether they conduct higher risk activities necessitating beneficial ownership disclosure.
Exemption for Regulated Entities
Banks, credit unions, broker-dealers, investment advisors, insurance companies, and money transmitting businesses are exempt from filing beneficial ownership reports.
Already Subject to Anti-Money Laundering Rules
These financial sector firms are already subject to strong anti-money laundering and know-your-customer regulations.
Regulators like the SEC, CFTC, federal banking agencies, and state insurance/financial departments heavily scrutinize these entities.
The existing oversight includes requiring these companies to identify and verify beneficial owners during customer onboarding. So additional FinCEN reporting would be somewhat duplicative.
Must Maintain Beneficial Ownership Information
While exempt from filing, these regulated companies must still collect and maintain accurate beneficial ownership information on company founders, equity owners, and controlling parties.
If requested by law enforcement, this information must be immediately provided to authorities.
So regulators can still access ownership details for analysis and investigations.
Some Non-Financial Businesses May Get Designated
FinCEN can designate any entity, even outside the financial sector, for anti-money laundering compliance rules. For example, businesses like pawn shops,auto dealers, travel agencies, or art dealers may get designated.
If a business gets designated, it would then be required to maintain beneficial ownership information and potentially report as well.
Exemption for Most Non-Profits and Religious Institutions
Most non-profit organizations and religious institutions are exempt from filing beneficial ownership reports under the Corporate Transparency Act.
Reduces Burden on Non-Profits
Requiring non-profits to disclose controlling parties could divert resources away from charitable missions.
Since non-profits must file annual returns with the IRS, they already undergo scrutiny. The IRS Form 990 reporting provides transparency around governance, finances, and activities.
Exceptions for Certain Non-Profit Activities
However, some advocacy, political, and nonprofit entities may still have to file if they meet certain thresholds such as:
- Employing multiple paid board members
- Having a wide geographic reach
- Making substantial political expenditures
So bigger advocacy and political non-profits with greater money laundering risks cannot automatically claim exemption.
IRS Can Request Ownership Information
Also, the IRS can request beneficial ownership details from exempt non-profits if needed for an investigation.
So the exemption provides reporting relief but nonprofit ownership information is still accessible.
Which Small Businesses Must File Beneficial Ownership Reports?
While larger and regulated companies have exemptions, most small US businesses must file beneficial ownership reports with FinCEN after January 2024.
No Exemption for Smaller Private Companies
Unlike public companies, private companies face no size or revenue exemptions from the ownership rule. This includes the millions of small businesses with under $5 million in annual receipts.
Even small partnerships, sole proprietors, holding companies, and domestic trusts must disclose controlling owners.
Examples of Small Businesses Required to File
Here are some examples of smaller private entities likely needing to submit ownership reports:
- Local restaurants, retail stores, auto repair shops
- Professional services like law, accounting, real estate offices
- Farmers, manufacturers, construction companies
- Family businesses and trusts under $5 million revenue
Pretty much any domestic small business entity must file unless meeting a specific exemption.
Required Information
These smaller private companies will report details like:
- Name, birthdate, address, and TIN of beneficial owners
- Name, business address, and TIN of the reporting company
- A description of how each beneficial owner exercises control
There are no fees or thresholds – reporting applies equally to all ownership stakes.
What Information Must Be Disclosed in Beneficial Ownership Reports?
Beneficial ownership reports require identifying details on three key groups:
- Reporting company itself
- Entity owners with 25%+ equity
- Natural person owners with 25%+ equity/voting power
Details on the Reporting Company
Every report starts by identifying the company submitting it. This includes:
- Full legal name
- Business street address
- Taxpayer ID number (EIN or SSN)
If the company has a FinCEN identifier number, that is reported too.
Information on 25%+ Equity Owners
For any corporations, LLCs, partnerships, or trusts owning 25% or more equity stake, the report must include:
- Full legal name
- Business street address
- Taxpayer identification number
- Ownership percentage
This looks through any entity ownership layers to actual people.
Details on 25%+ Control Persons
For individuals meeting 25%+ ownership or control thresholds, reporting covers:
- Full legal name
- Residential street address
- Date of birth
- Taxpayer ID number
- Ownership/control percentage
The individual’s US passport number or other government ID may substitute for the street address.
Describing Control Mechanisms
The reports must describe how each reported individual exercises control over the company, such as through:
- Equity ownership
- Voting rights
- Management authority
- Trust arrangements
This clarifies whether control flows from ownership, voting power, or serving as an executive.
What Are the Ownership Thresholds for Beneficial Ownership Reporting?
The key ownership thresholds triggering beneficial ownership reporting are:
- Owning 25%+ equity stake in a company
- Controlling 25%+ of voting power
Hitting either threshold requires identifying the substantial owners.
25% Equity Ownership Threshold
Reaching 25%+ direct or indirect ownership of a company’s total equity requires reporting the owner’s details.
This looks through multiple entity layers at actual people owning 25% equity.
25% Voting Power Threshold
Separately, controlling 25%+ of total voting power for a company also triggers reporting.
Some individuals may control voting blocs greater than their equityownership through super-voting shares or voting agreements.
No Minimum Ownership Threshold
Importantly, there is no minimum ownership percentage for reporting beneficial owners.
Even 1% owners must be disclosed – the 25% thresholds just ensure controlling owners are identified.
What Penalties Apply for Not Filing Beneficial Ownership Reports?
Strict civil and criminal penalties apply under the Corporate Transparency Act for companies that fail to disclose their beneficial owners.
Initial $500 Per Day Late Filing Penalty
There is an initial penalty of $500 per day for late filing of ownership reports after the deadline.
Increasing Penalties Based on Duration
If the failure to disclose beneficial owners continues for over 90 days after notification, penalties increase to $1,000 per day.
Beyond 180 days delinquent, penalties rise to $2,000 per day with a cap at $10,000 per report.
Criminal Liability for Willful Disclosure Violations
Knowingly providing falsified or fraudulent beneficial ownership information carries criminal liability.
Willfully failing to report complete beneficial ownership as required can result in fines up to $10,000 or imprisonment up to 2 years – or both.
Obstructing investigators seeking ownership information could mean fines up to $500,000 and 5 years imprisonment.
Restricted Access to US Financial System
Financial institutions may be prohibited from opening or maintaining accounts for companies not complying with the disclosure law.
So lack of beneficial ownership reporting could restrict access to banking services and capital markets.
How Will the Implementation of Beneficial Ownership Reporting Proceed?
The beneficial ownership reporting law will be phased in over time, with the first reporting deadlines nearly a year away.
Final Rule Expected in Early 2023
FinCEN is expected to issue the final implementation rule in early 2023.
This will provide any additional details and clarifications around meeting the reporting requirements.
Initial Reporting Starting in January 2024
Newly formed companies will have to start filing ownership reports beginning on January 1, 2024.
This means providing beneficial owner information at company formation time to FinCEN.
Existing Companies File in 2025
For companies created before the law’s enactment, initial reporting will start on January 1, 2025.
So there will be a one year transition period before existing entities must disclose beneficial owners.
Ongoing Reporting of Changes
Once an initial filing is completed, companies will need to update the reports within 30 days whenever there is an ownership change.
This includes any transfers resulting in a new beneficial owner needing disclosure.
Conclusion
Requiring disclosure of company owners marks a major change to promote corporate transparency.
While certain large, regulated, or publicly traded companies have exemptions, most small and mid-sized private businesses will need to report beneficial owners starting in 2024-2025.
Strict civil and criminal penalties will incentivize full compliance with the new rules.
Implementing beneficial ownership reporting will improve visibility into who ultimately controls companies and prevent financial crimes.