On January 1, 2024, the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) launched the online BOI E-Filing System and began accepting Beneficial Owner Information Reports pursuant to a new compliance regime under the Corporate Transparency Act.

1. Who needs to file?

Starting January 1, 2024, all non-exempt entities formed or registered to do business in the United States are required report Beneficial Owner Information (“BOI”) to FinCEN by January 1, 2025. This includes all corporations, LLCs, limited partnerships or similar entities created by filing a document with any US state, territory or Indian tribe as well as foreign non-US entities that are registered to do business with any US state, territory or Indian tribe.

2.  Who is a beneficial owner?

A beneficial owner is any individual who, directly or indirectly:

• exercises “substantial control” over a reporting entity; or
• owns or controls 25% or more of the ownership interests (equity, stock, voting rights, convertible instruments or any other instrument, contract or other mechanism used to establish ownership) of a reporting entity.

An individual exercises “substantial control” of a reporting entity if such individual:

• serves as a senior officer (for example, president, CEO, COO, CFO, general counsel and any other key officer position of a reporting entity);
• has authority over the appointment or removal of any senior officer or a majority of the board of directors; or
• directs, determines or has substantial influence over important decisions made by a reporting entity.

3.  What information needs to be provided?

A reporting entity is required to provide the following information about Beneficial Owners:

• full legal name;
• date of birth;
• current address; and
• unique identifying number and an image of government-issued identification (US passport, state-issued driver’s license, or a foreign passport).

4.  Who is exempt from the Beneficial Ownership Information filings?

There are 23 exemptions, which are listed in greater detail in the Small Entity Compliance Guide by FinCen.

One of the key exemptions is for “large operating companies” that: (1) employ 20 full time employees in the US; (2) has a physical presence in the US; and (3) filed federal income tax for the previous year demonstrating more than $5,000,000 in gross receipts or sales.

Other key exemptions are for inactive entities that are not engaged in active business and for subsidiaries of any other exempt entities.

5.  What does this mean for you?

If you are a beneficial owner of a US entity and not exempt from the filing requirements, failure to maintain and file a BOI Report by January 1, 2025 may result in fines up to $500 per day per violation and potential imprisonment.

Please reach out to the Voyer Law team to discuss your Beneficial Ownership Information filing requirements and whether your entity qualifies as an exempt entity.

We frequently work with Canadian startups operating a U.S. (usually Delaware) company incorporated on their behalf by Stripe Atlas.  On the surface, Stripe’s assistance with incorporating this U.S. company seems convenient and an easy way to meet the U.S. entity requirements to use the Stripe payment processing platform.  However, a number of material issues are generated by Stripe when it incorporates a U.S. company on behalf of a Canadian startup.

Problem #1

It’s critical to understand that a U.S. company cannot operate out of Canada without registering as doing business in Canada (thus exposing the company to unnecessarily complicated Canadian/US dual taxation), which Stripe does not address in its standard documentation.

The common solution to this is to treat the U.S. company as a parent to (or as a subsidiary of) a new Canadian company and isolate each company’s tax obligations in their respective countries.

Problem #2

Your U.S. company formed by Stripe needs to transact with your Canadian company on an arm’s length basis, taking into account tax transfer pricing rules.  If you don’t engage in tax planning around the flow of cash and assets between the two companies, expect expensive tax problems in the future

These tax issues can typically be addressed through cross-border tax planning as documented in an Intercompany Agreement in which we address the flow of cash and assets between the two companies.  For example, in the agreement we can address which company books sales in which countries and how the cash from these sales moves between the companies.

While Stripe Atlas touts the ease and speed with which a U.S. company can be incorporated, it neglects the massive cross-border legal and accounting issues that forming a U.S. company abroad generates.  If these issues are understood before incorporating, Stripe Atlas can be a valuable tool but, if not understood and planned for, expect it to generate more problems than it solves for.

Many founders I speak with are concerned about where their startup is incorporated and how this could impact fundraising opportunities in the United States.  In reality, this concern is unfounded.

Any sophisticated investor considers the product/service, team, market potential and other commercialization factors before, if at all, considering where a startup is incorporated.  In some circumstances, an investor may request that the startup alter its jurisdiction of incorporation but whether or not they proceed with the investment is determined 90% by quality of the company over jurisdiction of incorporation.  As relayed to me by Canadian founders, “if an investor passes because you’re a Canadian company, that’s not the real reason for passing“.

Where an investor requires your startup to be incorporated in the U.S. there is a simple process for creating this structure that I discussed in a previous blog post – The Canadian-U.S. Swap: Moving an Early-Stage Startup to the U.S.

Canadian founders should focus on building a compelling product/service and not waste energy worrying about minutia of incorporation.  Sell investors on your company and any issues concerning where your company is incorporated can be worked out between your legal counsel and investors.

It seems Canadians are still wrestling with whether to incorporate their startup in Delaware.  I wrote about this question back in September 2014  and since then the post has racked up over 1,000 views.  Back then, I concluded with this piece of advice, which I still stand by:

Don’t lock yourself into Delaware before you know where your investment comes from.  Based upon the cost and complexity of operating a Delaware startup from Canada, I recommend that you incorporate in Canada at the start.  Where a future U.S. investor requires you to incorporate in Delaware (or another state) your legal advisors can assist with this transition.  Conversely, Canadian investors may prefer to invest in a Canadian company!

Tip:  your product/service is important, not the place of incorporation.

In addition to the legal, accounting and immigration reasons I raised in support of initially incorporating in Canada, I wanted to revisit this question and point out the various incentive programs only available to Canadian companies:

1.  BC EBC Tax Credit.  This tax credit grants investors in eligible business corporations (EBC) a 30% refundable tax credit for their investment (up to $60,000 annually).  This program is only available to BC or federally incorporated companies.  BC angel investors quite like this program and it can often serve as an incentive for investment – an incentive that is lost should you incorporate in Delaware.

2.  Industrial Research Assistance Program.  Otherwise known as IRAP, the program provides companies with non-refundable funding under 4 different arms, including grants that can cover substantial portions of your company’s labour or R&D costs.  This program is only available to provincial or federally incorporated companies.  Again, if you incorporate in Delaware you lose access to IRAP funding.

The above are two examples among many programs, both federal and provincial, that require recipients to be Canadian companies.  When choosing where to incorporate, consider the benefits that are available to Canadian companies that are lost if you incorporate a Delaware company.  While I’m not averse to incorporating in Delaware, I am averse to incorporating in Delaware for the sake of emulating other successful U.S. startups without considering the costs/benefits of this decision.

As I concluded two years ago:  incorporate in Canada first.  If your jurisdiction of incorporation needs to change this can be easily accommodated in the future.