As of January 1, 2024, a new rule requires millions of small-to-medium-sized businesses to report detailed personal information about their owners to the U.S. Treasury Department. The rule is expected to affect more than 30 million companies in the U.S., and failure to comply could lead to sizable fines or even jail time. Yet a recent survey shows a majority of the affected businesses were unaware of this new requirement.
The reporting requirement went into effect Jan. 1, 2024, but existing companies will have until Jan. 1, 2025 to submit their initial reports. That should be ample time for those with simple ownership structures, but now is not too soon for more complex organizations to determine whether the rule will apply to them and, if so, what they must do to comply.
The Rule at a Glance
The new Beneficial Ownership Reporting Rule is the result of the Corporate Transparency Act, which Congress passed in 2021. The goal was to help law enforcement agencies identify criminals who use anonymous shell companies to facilitate tax fraud, terrorism financing, money laundering, and other financial crimes.
Under the new rule, many types of U.S. businesses will be required to report information about their owners and top executives to the U.S. Financial Crimes Enforcement Network (FinCEN). The rule also applies to the U.S. operations of foreign companies.
Failure to file the report could trigger civil penalties of $591 per day and possible criminal penalties of up to two years’ imprisonment and a $10,000 fine.
Who is Covered and Who is Exempt
The new rule identifies two types of reporting companies: domestic and foreign. Domestic reporting companies are primarily corporations (both regular and S-corporations) and LLCs, but the term also applies to partnerships, trusts, and other businesses if they were created by filing a document with the secretary of state or a comparable office in a U.S. state, territory, or tribal government. Similarly, a foreign reporting company is a foreign-based entity that is registered to do business with the secretary of state’s office in a U.S. state or other jurisdiction.
Not all businesses that file with a secretary of state are included, however. The rule lists 23 specific exemptions. These include banks, credit unions, and other financial institutions; insurance companies; securities dealers and brokers; registered investment companies and advisers; some accounting firms; and certain other businesses that are already subject to government regulation. Tax-exempt entities and inactive businesses are also exempt.
The most far-reaching exemption is the “large operating company exemption.” A business qualifies for this exemption if it employs more than 20 full-time employees in the U.S., has a physical operating presence in the U.S., and reported more than $5 million in sales on its prior year tax return. Companies that meet all requirements will be exempt from the rule.
With large operating companies exempted, the compliance burden will fall on smaller corporations, LLCs, and state-registered partnerships. It is estimated about 33 million existing businesses will be required to file ownership reports by the end of 2024. There is no “small entity” exemption so this new requirement will apply even to taxpayers that establish single member LLCs to hold a rental or new business.
New businesses formed during 2024 will have 90 days after formation to file their initial reports. This is not an annual filing; only an initial filing is required, with future filings required only when the reported information changes.
What to Report and How
Companies subject to the rule will need to report personal information on their “beneficial owners,” which FinCEN defines as those who have at least 25 percent ownership of the business or who have “substantial control” over the company. This includes company officers and C-suite executives, the company’s general counsel, and any other decision-makers who have control over the company’s strategy, operations, finances, and structure.
For each of these beneficial owners, the reporting company will need to provide FinCEN with specific personal information including the individual’s full legal name, date of birth, and address, along with a copy of his or her driver’s license, passport, or other approved identification.
Companies need to submit these reports electronically using the BOI E-Filing System. To help answer questions and provide guidance, FinCEN published a 50-page Small Entity Compliance Guide and a list of frequently asked questions, complete with checklists and decision trees.
Preparing for Compliance
While existing companies have until Jan. 1, 2025 to submit their initial reports, it’s time to start thinking about compliance. For example, the 25 percent ownership threshold might be easy to determine in some companies, but things can get complicated when there are more complex ownership structures. It could be difficult for entities with multiple levels of ownership, several classes of stock, transferable shares, options, or other owner privileges and interests to determine who qualifies as a “beneficial owner.”
Finally, a word of warning: FinCEN has received reports of fraudulent attempts to solicit information from individuals and entities under the guise of the Corporate Transparency Act. Fraudsters send emails or letters titled “Important Compliance Notice,” asking recipients to click a link or scan a QR code. These notices are fraudulent—FinCEN never sends such unsolicited requests. Anyone receiving such a message should not reply and should never click any links or scan any QR codes they contain.
Please contact us if you have any questions regarding the Beneficial Ownership Reporting Rule to ensure your entity will be in compliance.