New Beneficial Ownership Reporting Rules for Small Business

Update: On March 1, 2024, a federal judge declared the Corporate Transparency Act (CTA), which mandates most private entities in the U.S. to report ownership details to FinCEN, unconstitutional. As it stands, the ruling affects only the plaintiffs, with FinCEN asserting the CTA is still in force for all others. With further legal developments anticipated, the current situation regarding the CTA remains uncertain.

Beginning in January 2024, most small businesses in the US will be required to disclose beneficial ownership information (BOI) to the federal government through the Financial Crimes Enforcement Network (FinCEN), an agency of the Treasury Department. This reporting requirement originates from the Corporate Transparency Act as a means to equip government agencies with enhanced information to investigate and prosecute financial crimes.

Failure to report beneficial ownership information to FinCEN may result in civil or criminal penalties, including civil penalties 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.

Due to these onerous penalties, this new BOI reporting requirement is generating widespread consternation within the business community.

Which small businesses are impacted?

Affected companies are corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.  Foreign entities are also impacted if that entity has registered to do business in the US by filing documents with a secretary of state or similar office.

There is an exception to ownership reporting if a company qualifies as a large operating business, defined as a company that meets these three tests:

1. Employs more than 20 full time employees based in the US,
2. Maintains physical office within the US, and
3. Filed a federal income tax return in the prior year reporting more than $5m of gross receipts.  This $5m threshold excludes any foreign source gross receipts.

The law also exempts specific types of entities from this reporting, including:

• Any company reporting under the Securities and Exchange Commission
• Governmental authority
• Bank or credit union
• Investment company or advisor
• Insurance company
• Accounting firm
• Public utility
• Tax exempt entity

Who are beneficial owners?

A beneficial owner is an individual who either directly or indirectly:

• Exercises substantial control over the reporting company, or
• Owns or controls at least 25% of the reporting company’s ownership interests.

An individual is able to exercise substantial control over an entity (regardless of whether that individual has any actual legal ownership in the company) if they fall in any of these categories:

1. Maintains title of a senior officer (President, CEO, COO, CFO, general counsel, or any similar officer)
2. Has authority to appoint or remove senior officers or a majority of directors
3. Has substantial influence over important decisions made by the company.  Examples include:
   • Anyone able to select or terminate a business line or geographic focus
   • Anyone able to enter into / terminate significant contractsAnyone able to sell or lease significant assets
   • Anyone able to approve major expenditures, issuance of new equity, or incurrence of new debt.
4. Has any other form of substantial control over the company (i.e. catchall provision for anyone else who may have control but falls outside the above categories).

What information will be disclosed?

The company itself will disclose its full legal name, any trade name or DBA name, a current street address, the jurisdiction where the business was formed or registered, and the Taxpayer Identification Number of the business.

Beneficial owners will need to disclose their:

• full legal name;
• date of birth;
• current residential address, and
• an image of one of four acceptable documents:
• a non-expired US passport;
• a non-expired state, local, or tribal identification document;
• a non-expired state-issued driver’s license;
• a non-expired foreign passport.

When do I need to disclose?

If your company existed before January 1, 2024, it must file its initial beneficial ownership information report by January 1, 2025.

If your company is created between January 1, 2024 and December 31, 2024, then it must file its initial beneficial ownership information report within 90 days.

If your company is created after January 1, 2025, then it must file its initial beneficial ownership information report within 30 days.

If there are any changes to the reporting company or any of its beneficial owners, the company has 30 days to file an updated BOI report with FinCEN.  Examples of changes that would require updated BOI reports:

1. Any change to the reporting company itself (new address or DBA name)
2. Appointment / termination of any senior officers
3. Any change to a beneficial owner’s demographic information such as:
   • Change in residential address
   • Change in legal name from marriage / divorce
   • Updated driver’s license or passport
4. When an owner who is a minor child attains the age of majority.

How will companies file their BOI report?

Companies will need to efile their BOI report directly on the FinCEN website.  Note that FinCEN has announced it will not have its efiling system operational before 1/1/2024.

There are no fees for filing a BOI report on the FinCEN website.

Who do I contact with questions?

BOI reporting is not a part of the tax code. Instead, it is a part of the Bank Secrecy Act, a set of federal laws on certain types of financial transactions.  As such, providing BOI advice may constitute providing legal advice, and as such, there is uncertainty whether non-attorneys can provide BOI reporting services.  Until further guidance is issued, we recommend that you consult your legal counsel on BOI reporting requirements.