A new reporting requirement will take effect on January 1, 2024 that will particularly impact small businesses. It will require millions of small businesses to file a Beneficial Ownership Information (BOI) Report with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).
All U.S. businesses in existence before January 1 and not subject to an exemption must file a report by December 31, 2024. A U.S. business started during 2024 must file a BOI report within 90 days of receiving “actual or public notice” that the formation of the entity is effective. On January 1, 2025, that deadline will contract to 30 days.
Every small business owner needs to know about this new reporting requirement, which has not been particularly well publicized by the government. Moreover, FinCEN will not give individual small businesses notices that they need to file a BOI report. Non-compliance can, nevertheless, result in severe penalties since FinCEN has more powerful enforcement tools than state regulatory agencies. Small business owners outside of highly regulated industries could easily be caught unaware.
This article answers a few of the more common questions small business owners have been asking about BOI reporting.
Why is the government collecting information on who owns small businesses?
As the Treasury Department wrote in the rule implementing the program:
The Treasury Department, however, is acting at the behest of Congress, which imposed this requirement through a law titled the Corporate Transparency Act (CTA). The Treasury Department regulation then provided the details on who must file a report, when it has to be filed, and what information has to be reported. The CTA and the Treasury Department regulation are the framework for a nationwide anti-money laundering monitoring program operated by FinCEN.
What is FinCEN and how is it enforcing the program?
FinCEN is a law enforcement agency within the Treasury Department that follows money and shares information with other agencies, such as the FBI, ATF, IRS, and Customs Enforcement. Something of a regulatory bulldog, FinCEN monitors accounting firms and financial institutions and is known for levying large fines. For example, on November 21, 2023, it settled a case against the virtual currency exchange Binance for $3.4 billion in fines assessed for Binance’s alleged facilitation of money laundering by third parties.
The federal BOI reporting requirement are not satisfied by state ownership reporting requirements, such as the report D.C. businesses file every two years with the Department of Consumer and Regulatory Affairs. Nor are the penalties for non-compliance as lenient as those imposed in D.C. Small businesses that fail to report could face FinCEN fines up to $500 per day. False reporting could also get individual small business owners in trouble, with penalties to possibly include up to two years in federal prison (though a large fine is more likely unless the business owner is actively engaged in money laundering).
So who has to file a BOI report?
Every corporation, LLC, or other entity created by the filing of a document with a Secretary of State or similar office under the law of a state or Indian tribe is required to file a BOI report unless it qualifies for an exemption.
Certain entities created in foreign countries and registered to do business in the United States (“foreign reporting companies”) are also required to file a BOI report. The primary purpose of including foreign companies in this program is to share the BOI report information with the Office of Foreign Assets Control, which enforces U.S.-imposed sanctions.
Who is exempt from filing a BOI report?
There are 23 categories of entities that are exempt. The most sweeping exemption is for large operating companies that are privately owned. A “large operating company” is an entity that (1) employs more than 20 full-time employees in the United States, (2) has an operating presence at a physical office within the United States, and (3) has filed a federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales. If a business meets the revenue and domicile requirements and has more than 20 employees, including part time and seasonal, that company should not assume that it qualifies for this exemption. Rather, it must employ persons in positions comprising 20 full time equivalents (FTE).
Tax-exempt entities are also exempt from BOI reporting, which is mildly surprising because, even though nonprofits do not have owners, they can also be used to launder money by unscrupulous members or managers. Nevertheless, most tax-exempt entities are exempt from BOI reporting, at least for now.
The other exemptions are fundamentally for entities that are already subject to substantial federal or state regulation. These exempt entities include, for example, publicly traded companies and other entities that file reports with the SEC, banks, credit unions, money services businesses, securities brokers and dealers, insurance companies, state-licensed insurance producers, pooled investment vehicles, public utilities, and accounting firms.
Does a company have to apply for an exemption?
Apparently not. FinCEN does not have the resources that the IRS can bring to bear and the regulation does not provide for an on-the-record exemption recording processs. The message is for small businesses to report BOI or face penalties if caught non-compliant.
What information must be reported?
A domestic reporting company created before January 1, 2024 must provide information about the company and about its beneficial owners. A domestic reporting company created on or after January 1, 2024 has to provide information about the company, its beneficial owners, and the individuals who filed the articles that established the entity.
The report must set forth the following information about the reporting company:
- Its full legal name,
- any trade or “doing business as” names,
- complete current street address of the principal place of business,
- jurisdiction of formation, and
- taxpayer identification number.
The report must provide the following information about each “beneficial owner” (see the definition in the next answer below):
- Her full legal name,
- date of birth,
- complete current residential street address (except in the case of a company applicant who forms or registers an entity in the course of the company applicant’s business, who has to provide the street address of the business),
- unique identifying number and the issuing jurisdiction from either a current (i) U.S. passport, (ii) state or local ID document, (iii) driver’s license, or (iv) if the individual has none of those, a foreign passport, and
- an image of the document from which the unique identifying number was obtained.
The reporting requirements for foreign entities operating physically in the U.S. are different and more complicated. That topic is outside the scope of this article, which was written by an American law firm that represents businesses in Virginia, Maryland, and the District of Columbia.
Who is a “beneficial owner”?
A beneficial owner is an individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls at least 25 percent of its ownership interests.
“Substantial control” is a somewhat ambiguous term, but the Treasury Department thinks that it includes directors of a corporation (or managing members of an LLC) and senior officers with authority over companywide decisions. Whether it includes the head of a major division is a fact-based question that it might be best to ask a lawyer. An individual can also exercise substantial control over a reporting company by holding authority to appoint or remove certain officers or a majority of directors (or whatever the operating document calls them).
Though this program is new, there is precedent that the ownership and control language establishes independent tests. Therefore, a 30 percent owner who only holds non-voting preferred stock in a corporation is a beneficial owner and must report. So must a 15 percent owner of a corporation whom the board of directors appointed as CEO of the company. Where things get more interesting is where stock is held in trust for a beneficiary who takes no active part in the corporation. In that case, the trustee(s) would be the individual(s) reporting, but the beneficiary might also need to report if the trust instrument gives that beneficiary the power to withdraw the stock or to require the distribution of income.
What if there are changes to the reported information?
If there is any change in the information reported about the reporting company or its beneficial owners, the reporting company must file an updated report within 30 calendar days after the date on which the change occurs. If the company becomes ineligible for an exemption (for example, because the company contracts in revenue or employees to a level beneath the “large operating company” thresholds), it must file a BOI report within 30 days. However, there is no requirement for a reporting company to update information about the company applicant(s) after the initial report.
What if a filed BOI report contains an error?
If a report was inaccurate when filed, a corrected report must be filed within 30 calendar days after the reporting company becomes aware of or has reason to know of the inaccuracy.
How are BOI reports, updates, and corrections filed?
The Treasury Department is continuing its inexorable march toward mandatory e-filing. Small businesses must file the initial BOI report, as well as all updates and corrections, electronically with FinCEN through a system that will be available via FinCEN’s website. There is no fee for filing the reports.
Can a BOI report be filed before January 1, 2024?
No. The portal will not launch until January 1, 2024 and there is no way to file in advance.
Do all subsidiaries have to file a report or just the parent corporation?
Only subsidiaries of companies exempt from reporting adopt the parent company’s reporting status. Each subsidiary of a domestic reporting company is a domestic reporting company unless it qualifies for its own exemption.
Can an individual beneficial owner or company applicant provide their information directly to FinCEN instead of the reporting company?
The Treasury Department promulgated a rule creating a system so one individual need not submit confidential information to every small business with which they are affiliated every time they move or get a new ID. Individuals can apply to FinCEN for a unique number called a FinCEN Identifier by submitting all the information required of a beneficial owner. Once approved, the individual can provide her FinCEN Identifier to the reporting company, which can then include the FinCEN Identifier on its BOI report. An individual obtaining a FinCEN Identifier will have to file an updated application within 30 days of any change in the required information, but the reporting company will not need to file an updated report since the FinCEN Identifier for that individual will be the same.
Companies can also apply for FinCEN identifiers and may want to if they own interests in other companies that are or may become subject to the BOI reporting requirements.
Who will have access to the information contained in the BOI report?
In addition to federal agencies engaged in national security, intelligence, and law enforcement, FinCEN is authorized to disclose BOI to a limited group of requestors including state law enforcement agencies with a court order, financial institutions with the company’s consent, government regulators of financial institutions, and certain foreign authorities requesting information through a U.S. agency.
Will reporting my information trigger an audit?
The IRS is one of the automatic recipients of the BOI reporting data. However, the Biden Administration has pledged not to increase auditing for individuals making less than $400,000 per year. That being said, the IRS has an interest in detecting tax evasion. The IRS enforcement authorities could easily use the BOI reports to cross-reference the corporate tax returns of an entity with that of its owners. If the corporation is making gobs of money and one Beneficial Owner is not reporting income from it, then yes, that owner might get audited.
What should small businesses do now to prepare for BOI reporting?
The owners and managers of small businesses should determine now whether their business is a reporting company and will, therefore, be subject to the CTA’s BOI reporting requirement. If so, they should gather the required information and ensure it remains current by the time the company files the initial report. Owners or managers who want to apply for a FinCEN Identifier should do that early in 2024 so the numbers will be issued long before the company’s reporting is due.
Because this is an ongoing requirement, reporting companies with more than a few Beneficial Owners (remember, this includes individuals who may hold no ownership interest but have “substantial control” over the company) should adopt a system to keep track of the reported information so that they know when updates must be filed.
Can the accountant who files periodic reports for my company file the BOI report?
Many accounting firms are planning to decline requests to prepare initial BOI reports because the very act of determining whether an exemption exists could constitute the unauthorized practice of law. Consider consulting an attorney for this task, especially if
- the ownership and/or management structure of the company is complex;
- the company is owned by other entities, including trusts or estates;
- the company is arguably a privately-held “large operating company”; or
- management suspects it might prove difficult to obtain or keep current information about one or more beneficial owners.
Meeting the requirements of a new federal regulation can be challenging and even overwhelming for small business owners and managers, but BOI reporting will not go away if you ignore the mandate. Waiting until the fall of 2024 to begin addressing the report might result in a costly mistake. Consult a business attorney today.