Beneficial Ownership Information Reporting … Resistance is Futile

Beneficial Ownership Information Reporting

While you may have already started and faltered on your New Years Resolutions (present company included) … one thing that is here for good in 2024 is the new Beneficial Ownership Information (BOI) reporting. The Corporate Transparency Act (CTA) will require nearly all small business entities to file an initial report with the Financial Crimes Enforcement Network (FinCEN) to disclose the entity’s beneficial owners.

Man, the government sure does love acronyms!

This new requirement is directly targeted (my word) at “small” businesses. The CTA’s purpose is to prevent the use of anonymous shell companies for money laundering, tax evasion, and other illegal purposes. Just like any rule or law, it casts a wide net and generally inconveniences the vast majority to find a few bad actors.

So that means, if you are a small business owner, congratulations, you now have one more thing to do. This new federal filing requirement will encapsulate most corporations (“C” and “S”) and limited liability companies (LLCs) (regardless of tax classification) with very few exceptions. 99% of the small business owners out there must complete FinCEN’s Beneficial Ownership Information filing.

As is the standard course of action for interaction with the government, there is a guide to all this put out by our helpful bureaucratic friends, aptly titled – The “Small Entity Compliance Guide”. It is 57 pages! (if you have trouble sleeping on planes, book your cross-country flight now, nap time!)

After you digest that, to help you really wrap your arms around the nuance, they have provided a helpful FAQ section – as of this writing there are 74 questions and answers in the FAQs.

While I’ll admit to (occasionally) being long-winded… this time it’s not self-indulgent so please bear with me to the end. Also, it is important to note that this post/memo is not intended to make us all experts or even come close to answering all questions or covering all scenarios. Rather, please let it serve as notice and a head start to ensure that we are all in compliance – because failure to comply, or put more softly, non-compliance, comes with steep penalties.

How steep? 5 figures and prison steep! A word about the penalties…

Any person who willfully provides, or attempts to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, or fails to report complete or updated beneficial ownership information is liable for a civil penalty of no more than $500 per day ($10,000 maximum), no more than two years imprisonment, or both. See 31 U.S.C. §5336(h)(1).

The critical term here is willful; an action is willful if it is the “voluntary, intentional violation of a known legal duty.” See U.S. v. Pompanio, 429 U.S. 10 (1976).

Concerning the willful FBAR penalty, Internal Revenue Manual (06-24-2021) states that a willful violation is one in which a person knowingly violated a legal duty, recklessly violated a legal duty, or acted with “willful blindness” by making a conscious effort to avoid learning about a legal duty.

In the preamble to the final beneficial ownership information reporting requirements regulations, FinCEN stated the following with respect to penalties (emphasis added):

Any assessment as to whether false information was willfully filed would depend on all of the facts and circumstances surrounding the certification and reporting of the BOI, but as a general matter, FinCEN does not expect that an inadvertent mistake by a reporting company acting in good faith after diligent inquiry would constitute a willfully false or fraudulent violation.

Right now, you are probably thinking “I really hope I’m a 1%’er – does this apply to me?”

Drum roll please… the answer is… the same as all answers in my world – “it depends”, but in this case we should be operating with a “more likely than not” approach.

First, we must determine who is a Reporting Company.

A domestic reporting company is any entity that is a corporation, a limited liability company (LLC), or created by filing a document with a secretary of state or any similar office under the law of a State or Indian tribe. A foreign reporting company is any entity that is a corporation, LLC, or other entity formed under the law of a foreign country and registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe. See 31 C.F.R. §1010.380(c)(1).

There are 23 exemptions from the reporting entity definition – of course there are. Most exemptions apply to federally regulated entities, such as insurance companies and brokers or dealers in securities. There are two exemptions that small and medium-sized businesses need to know:

“Large” operating company. Any entity that employs more than 20 full-time employees in the United States, has an operating presence at a physical office in the United States, and filed a federal income tax return for the previous year showing more than $5 million in gross receipts or sales (net of returns and allowances). See 31 C.F.R. §1010.380(c)(2)(xxi).

 Inactive entity. Any entity that was in existence on or before January 1, 2020; is not engaged in active business; is not owned by a foreign person, whether directly or indirectly, wholly or partially; has not experienced any change in ownership in the preceding twelve-month period; has not sent or received any funds in an amount greater than $1,000 in the preceding twelve-month period; and does not otherwise hold any kind or type of assets*, whether in the United States or abroad. See 31 C.F.R. §1010.380(c)(2)(xxiii).

* Note, it is this clause that means that those who put their home or other property into an LLC for estate purposes and/or for privacy purposes, even if there is no business operation aspect, must file this report.

And because I know a handful of you fine folks sit on boards and such – also exempted…

Tax-exempt entity. Any §501(c) entity exempt from tax under §501(a), any §527(e)(1) political organization exempt from tax under §527(a), and any trust described in §4947(a)(1) or §4947(a)(2). See 31 C.F.R. §1010.380(c)(2)(xix).

FinCEN’s Small Entity Compliance Guide includes a table and checklists for each of the 23 exemptions that may help determine whether a company meets an exemption.  (see Chapter 1.2, “Is my company exempt from the reporting requirements?”).

Additionally important and of note to our readership…

A sole proprietorship is rarely a reporting company, if ever. According to FinCEN frequently asked question C.6:

Filing a document with a government agency to obtain (1) an IRS employer identification number, (2) a fictitious business name, or (3) a professional or occupational license does not create a new entity, and therefore does not make a sole proprietorship filing such a document a reporting company.

It is important to note that the business’s federal tax classification is irrelevant to determining if it is a reporting company. For example, a business activity conducted within a single-member LLC reported as a sole proprietorship on the owner’s tax return is a reporting company, even though the LLC is disregarded for federal tax purposes.

So, if you’re still with me at this point, you have either come to the conclusion that this probably pertains to you, and/or you are hanging on to see if I say something inappropriate.

Next step, who are Beneficial Owners?

A beneficial owner is any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25% of the ownership interests of such reporting company. See 31 C.F.R. §1010.380(d).

Note that the above refers to individuals – this means that if you have series LLCs, i.e. an LLC that is owned by an LLC, you must keep going until you get to the individuals.

There are no constructive ownership or attribution rules for spouses, children, or other relatives; the guidance does not address ownership interests held as community property under state law. If one spouse does not exercise substantial control but owns at least 25% under community property law, it is advisable to report that spouse as a beneficial owner.

An individual exercises substantial control over a reporting company if the individual serves as a senior officer of the reporting company; has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); directs, determines, or has substantial influence over important decisions made by the reporting company; or has any other form of substantial control over the reporting company. See 31 C.F.R. §1010.380(d)(1)(i).

A senior officer is any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function, regardless of official title. See 31 C.F.R. §1010.380(f)(8).

FinCEN frequently asked question D.2, provides criteria to inform as to who is an important decision maker.

Beneficial Owners are covered in section D of the FAQs and chapter 2 of the BOI Small Business Compliance guide.

If you’ve made it this far, I’m assuming that you are rightly convinced that your company is subject to this new reporting. So, the next item to cover is when is this due?

Can you guess the answer? … you got it! “it depends”

  • A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file their initial beneficial ownership information form.
  • A reporting company created or registered to do business after January 1, 2024, has 90 calendar days to file their Initial Beneficial Ownership Information Form.
  • A reporting company that has a change in beneficial owner, has 30 calendar days to file their Updated Beneficial Ownership Information Form.

The Treasury Department estimates that 32.6 million initial and 6.6 million updated reports will be filed in 2024; in 2025 and forward, 5 million initial and 14.5 million updated reports will be filed yearly.

Having fun yet? Next questions…

Do I have to do this every year?

  • At this time, all reporting companies will be required to submit an initial BOI report.  However, reporting companies are required to update their BOI report within 30 calendar days if there are any changes such as changes in ownership, change of address for a beneficial owner or company applicant, new beneficial owners that meet the requirements, etc. Additionally, reporting companies will have 30 calendar days to make any corrections after they become aware of, or have reason to know of, any inaccuracy in a prior report.

Is this reoccurring?

  • The initial BOI report is a one-time requirement. However, reporting companies will have to remain in compliance and are required to update or correct their reports as new developments may arise.

What if there are changes?

  • Reporting companies will have 30 days to report any changes to reported information.

Is FinCen charging a fee?

  • There will be no fee charged by FinCen to file your BOI report.

What information does my reporting company need to have and report about its beneficial owners and company applicants? (note the latter only applies to companies formed after January 1, 2024)

  • The individual’s name, date of birth, and address, a unique identifying number from an acceptable identification document, and the name of the state or jurisdiction that issued the identification document (and picture/copy thereof).
    • In lieu of providing the information required of individual beneficial owners and company applicants to reporting companies, individuals can apply for a FinCEN identifier.  Individuals must submit an application to FinCEN directly for a FinCEN identifier. They will be required to provide the same information required by a BOI report. The individual would then receive a unique identifier number that they can provide to any reporting company that requests their information.

That’s a lot of personal information, (I agree)… who will have access to my information?

  • The Corporate Transparency Act authorizes FinCEN to disclose beneficial ownership information in certain circumstances to six types of requestors: (1) U.S. federal agencies engaged in national security, intelligence, and law enforcement activities; (2) State, local, and Tribal law enforcement agencies with court authorization; (3) the U.S. Department of Treasury; (4) financial institutions using beneficial ownership information to conduct legally required customer due diligence with customer’s consent; (5) Federal and state regulators assessing financial institutions for compliance with legally required customer due diligence obligations; and (6) foreign law enforcement agencies and certain other foreign authorities who submit qualifying requests for the information through a U.S. federal agency.

Rightfully worked up yet? Me too. But hey… “you can’t fight city hall”.

Maybe at this point you are excited and can’t wait to file, or maybe you’ve completely glossed over and you’re just still reading because you are a glutton for punishment – well, either way, FinCEN and BOI reporting is coming for you.

What is our role, as your (a’hem) trusted advisor, in all of this?

As small businesses face increased complexities, we, as the tax professionals, are often the first stop for assistance, which is a badge we wear proudly. While BOI reporting is only tax-adjacent, we completely welcome the fact that we are the primary advisor for many of our business clients and recognize that the tax professional is essential in helping our clients with BOI compliance.

Not helping business owners, hiding a disclaimer in an engagement letter, or simply ducking the question and saying “consult an attorney” without further information would be a huge disservice to the business community we serve.

The Department of the Treasury broke down the time burden into three categories, based on the complexity of the company structure, as follows: Simple = 90 minutes; Intermediate = 370 minutes; and Complex = 650 minutes.

We feel that about 90% of our client base will fall into the “simple structure” category; about 9% will fall into the “intermediate structure” category; and about 1% will fall into the “complex structure” category.

Our fees for assistance and filing the initial filing would be:  $500 for simple; $1,500 for intermediate; and $2,500 for complex (note that “complex” may quite likely require additional counsel from a qualified attorney).

These fees are estimates under the assumption that the information necessary is readily provided and limited follow-up is required.

Upon engaging us to perform these services we will provide an engagement letter, with the fee estimate based upon our knowledge of your company structure, and a worksheet to get us started.

To the good times ahead,

Stephan P McMahon & Company

Resources:  FinCEN BOI website; BOI Compliance Guide; BOI FAQs; MA Sec of State notification.