A beneficial ownership reporting rule that takes effect January 1, 2024 may add another critical item to your compliance to-do list.
An estimated 32.6 million LLCs and corporations that will be subject to the rule must complete a Beneficial Ownership Information (BOI) report online and submit it to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) via a filing system on the agency’s website, which is currently being developed.
“They haven’t given the final word on exactly which filing methods they’re going to accept at this point,” noted George May, the vice president and segment leader of small business for CT Corporation, a Wolters Kluwer business.
Reporting companies in existence before Jan. 1, 2024 have until Jan. 1, 2025 to file their BOI report. Meanwhile, business entities that are formed starting Jan. 1, 2024 have 90 days from their date of registration to file.
This beneficial ownership reporting rule is part of the Corporate Transparency Act, which passed with bipartisan support in 2021 and is intended to prevent illegal activities like money laundering, financing of terrorist organizations and tax fraud.
But if you’re like a lot of small businesses, this fast-approaching requirement comes as an unwelcome surprise because of the new administrative burden that comes with it. Forty-three percent of webinar participants surveyed by CT Corporation in mid-November indicated they were 25% to 50% prepared to comply with the beneficial ownership reporting requirements. The next largest group, 38%, said they were not prepared at all.
Who has to report beneficial ownership?
The beneficial ownership reporting rule is so broad that it’s easier to tell you who doesn’t have to report. Most notably, this includes companies that employ at least 20 full-time employees in the U.S., have an operating and physical presence in the U.S., have filed a federal tax return for the previous year and reported gross receipts or sales of more than $5 million.
In an interview, May said the “vast majority” of small businesses won’t meet every requirement to qualify for that exemption or either of the other exemptions, such as:
- Publicly traded companies and other entities that file reports under the Securities Exchange Act
- Financial institutions
- Money services businesses
- Securities brokers and dealers
- Accounting firms
- Insurance companies
- State-licensed insurance producers
- Investment advisors of pooled investments
- Public utilities
- Tax-exempt entities, and
- Inactive entities (which has a six-prong test).
For an eligibility quiz to find out if you need to start preparing for the new requirements, click here.
What information needs to be reported?
Under the rule, a beneficial owner is defined as someone who, either directly or indirectly, owns or controls at least 25% of the company or exercises substantial control over the company.
“That could be a senior officer, like a company president, a CFO, general counsel, the chief executive officer, as well as anyone who has the authority to appoint or remove officers such as a board of directors,” May said.
Entities required to report must not only identify who their beneficial owners are, they must also disclose certain information about the company (including any “doing business as” names and Taxpayer Identification Numbers) and personal information about the beneficial owners (or the company applicant/applicants).
What kind of personal information? Unless you or your other beneficial owners already have a unique identifying number from FinCEN, this is what the feds need:
- Full legal name
- Date of birth
- Current residential street address (except for company applicants acting in the course of their business, who must give their business address), and
- An identifying number from a current U.S. passport, driver’s license or other state or local ID, Indian tribe ID, or a foreign passport (an image of the foreign passport is required).
If you’re having privacy and data security concerns, you’re not alone. The National Small Business Association is taking the Treasury Department to court to challenge the constitutionality of the Corporate Transparency Act.
Security, IT and staff resource concerns are one set of reasons why Wolters Kluwer CT Corporation is offering a self-service beneficial ownership filing application.
Consequences and enforcement
For now, the penalty for noncompliance is $500 per day up to a maximum of $10,000 and up to two years in prison.
How the feds will issue warnings or carry out enforcement remains unclear. “It’s hard for us to imagine FinCEN choosing to get this out in front of people in a more visible way by perp walking some poor person who owns a one-person LLC in Connecticut and saying, ‘You didn’t take care of your nail salon filing.’ We don’t think that’s going to happen.” May said.
Preparing to meet reporting requirements
FinCEN estimates that it’ll take approximately three hours to complete a BOI filing, which is why many small businesses are likely to turn over the responsibility to either their law firm or accountant.
But according to May, some lawyers or CPAs may not be comfortable with handling the client personal identifiable information that’s involved. “There are a variety of ways for getting the obligation taken care of. Which one is right for you depends on how complex your organization is, whether you’re willing to spend a little bit of money to get the problem taken care of … and just how often you think (beneficial ownership data) will change,” he said.
