Unveiling Beneficial Ownership Reporting

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Starting in January 2024, a new federal law requires entities like Corporations, Limited Liability Companies, and other similar entities that are created by a filing with the secretary of a state or foreign country, to file and continually update a Beneficial Ownership Information (“BOI”) Form with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). While existing companies created before January 1, 2024, have until the end of January 1, 2025, to file the report, companies formed after January 1, 2024, will have just 30 days after creation or registration to comply. Thereafter, entities will have just 30 days to report any change in the reported information. All this filing is under the threat of civil and criminal fines, including jail time, if you mess up.

Scope and Complexity of the BOI Form

The BOI Form filed with FinCEN is in addition to forms you already file with the IRS for income taxes or the annual forms you file with a secretary of state to maintain your entity’s existence. President Trump vetoed the law in December 2020, but Congress overrode the veto in January 2021. After a few reiterations, the most current version was issued in September 2022. It has been largely ignored by professionals who will be tasked with helping to file this, wishfully hoping for a delay in implementation which may not be happening. The public is largely unaware of the scope and complexity of the new rule. While a casual viewer would ask what the big deal is, on inspection you find it is much more than just listing some owners and some information on your business.

The entity will now need to gather copies of the driver’s license or passport of all persons who are Beneficial Owners as defined by the following rule: 25% or more individual owners and everyone with Substantial Control. You will need information on directors, officers, shareholders, or owners of 25% or more, and individuals exercising Substantial Control. When your entity is owned by a trust or another entity, you will need to look through that entity for information on the ultimate owners.

Any change in the identity of a Beneficial Owner or changed information reported for any particular Beneficial Owner triggers a 30-day duty to file an updated report. The death of an owner will require a report when the estate of the deceased is settled through intestacy or testamentary deposition. A Beneficial Owner reaching the age of majority can trigger a duty to update. A name change resulting from a marriage or divorce will trigger a duty to update the report. 

Penalties for Non-Compliance: Civil and Criminal Consequences

With both civil penalties of up to $500 a day for late filing and criminal penalties with jail time, this filing requirement may turn a normally law-abiding, but unwitting, entity owner into a criminal or seriously harm an otherwise lawful and legitimate business. Thus, timely and accurate FinCEN reporting needs to be taken seriously.

FinCEN estimates that 32,556,929 entities will need to submit initial BOI reports in 2024 and the filing of initial BOI reports will result in approximately 118,572,335 hours for reporting companies. This is a staggering amount of time. The FinCEN cost estimate of filing the initial BOI reports is $21.7 billion dollars based on using hourly labor cost of $56.76 (for skills typically offered by CPAs and lawyers) and indicates this fallacious assumption in its report. There are no non-labor costs associated with these collections of information because FinCEN assumes that reporting companies already have the necessary equipment and tools to comply with the regulatory requirements.

Exemptions and Small Businesses

While there are 23 exceptions for having to file, the most benefit regulated entities are banks, publicly traded companies, public utilities, or larger businesses. They are already up to their necks with reporting requirements and may not be too sympathetic to the smaller entities getting their turn. The large operating company exemption applies to entities with more than 20 full-time employees in the United States and more than $5 million in gross receipts or sales from sources inside the United States. How a company with 20 employees is less likely to be engaged in money laundering or fraud than one with 19 employees is lost on the author.

You have thirty days to file a report should you no longer meet the criteria for the exemption. So, if sales revenue slips below $5 million for United States sales or the staff drops to 20, you will have to file. Conversely, meeting an exemption once the initial report is filed requires an updated report.

If you file a corrected report within 90 days of the report that contained the error, it will be deemed to be filed timely. Otherwise, you have 30 days from when you would have had reason to know of the inaccuracy.

FinCEN anticipates that the majority of reporting companies will have simple ownership structures, but those with complex structures may have difficulty determining who has Substantial Control. Individuals who exercise Substantial Control may be hard to identify as the definition is very broad and seems subjective. Their official title is not controlling for those who perform certain functions or who have substantial influence over important business decisions including contractual matters. The description of Substantial Influence includes the indirect, informal influence over an intermediary involving the reporting entity.

The net for Substantial Control is cast wide and will require subjective determinations when the complexities of relationships and immeasurable indirect influence and other forms of substantial control and circumstances come into play.  The individual tasked with making these judgments will have to rely on the statements of those who themselves may not know the full extent of these relationships.

This law is designed to catch the bad guys, the improperly using shell corporations, and illegitimate businesses. To get the bad guys, they impose a burden on millions of honest American businesses, owners, and employees.

This law is aimed directly at small businesses and investment entities like LLCs owning even a single piece of real estate or portfolio investments.

If your entity is not a trade or business, you probably will not be able to deduct the cost of preparation of the BOI Form on your tax return.

Filing Methods: Online, Paper, or Professional Assistance

Many people are involved with more than one entity. To deal with this, FinCEN provides a registration process for such individuals to register all their information individually and be assigned an identifying personal number instead of having each entity supply your personal information on their entity form. The breadth of information this will provide the government should be considered by the individual filer before requesting a number. FinCEN will eventually be able to link every business activity you may be directly or indirectly involved with. Just how the information will be used by the government beyond the initial purpose could evolve and the constitutional protections are not well defined. It is also not clear to what extent the entity filer will be responsible for the omissions and mistakes made by the individual filers.

With the accounting profession suffering from a staff shortage, many firms may not want to provide this service. In many respects, the BOI Form will have the tedium of the initial Sarbanes–Oxley Act of 2002 reporting for staff preparing the reports and certainly the need for more senior review due to the complexities of some of the definitions of who needs to file.

Whether you will need to file on a FinCEN website, paper file, or have your lawyer or CPA file electronically using a tax filing service is not clear. Oh, and by the way, do not forget your obligation to safeguard all the personal information you collect from those involved with your business.

You need to speak with your CPA or lawyer now to be sure you are prepared to meet the deadlines.

You might also wish to speak to your Congressional Representative to see if they fully understand the burden they have unleashed on you.

This article was co-authored by Robert Scharar, JD, CPA, MBA, President and CEO of FCA Corp, and William LeVay, JD, CPA, Chief Compliance Officer at FCA Corp in Houston, Texas.