Beneficial Ownership

Information Reporting:

A Guide to the New Reporting Rule

There is a lot of hype swirling around a new law that took effect on January 1st, 2024. Beneficial ownership information reporting is a new rule issued by the Financial Crimes Enforcement Network (FinCEN) requiring business owners to provide personal identifiable information. As a result, there have been a multitude of predatory solicitors attempting to charge and scam business owners into paying for compliance. Threats of jail time and $500 per day fines for businesses not in compliance have ripped through social media creating an undue sense of urgency and confusion.

While the ravens are circling overhead, waiting to feast, we want to breathe some sanity into the situation. This post is designed to provide some basic facts and resources to help business owners make sound decisions and get registered if they are required to. Do not mistake this information as legal advice. If you are unsure about your eligibility for this new requirement, seek legal counsel from a reputable business lawyer. Having said that, here are the facts as we understand them…

What is Beneficial Ownership Information Reporting?

Illicit actors often use corporate structures to hide their identities and launder their ill-gotten gains through the U.S. financial system. This undermines not only national security, but also threatens the prosperity of the economy. Shell and front companies can shield the true identity of a company’s ownership, which can allow criminals to illegally access and transact in the U.S. economy. This type of illicit activity also creates an uneven playing field for small businesses engaged in legitimate activity.

Millions of small businesses are formed in the United States each year as corporations, LLCs, and other business structures. These businesses are the backbone of the U.S. economy, accounting for a large share of the economic activity in the country and driving innovation, competition, and job creation.

However, few state and local jurisdictions require legal entities to disclose information about their beneficial owners - the individuals who actually own or control an entity. Historically, this lack of transparency has been a major vulnerability in the government’s anti-money laundering and countering the financing of terrorism (AML/CFT) efforts. There are well documented cases over the past couple of decades that criminals have used business entities to purchase real estate, conduct wire transfers, masquerade as legitimate entities when dealing with counterparts (including financial institutions), and control legitimate businesses for ultimately illicit ends. This lack of transparency has paved the way for criminals, terrorists, and other bad actors to remain anonymous while facilitating fraud, drug and human trafficking, corruption, tax evasion, organized crime and much more.

In an effort to crack down on anonymous shell companies operated by these illicit actors, Congress passed the Corporate Transparency Act of 2021. Prior to this legislation, the burden of collecting beneficial ownership information fell on the financial institutions, which were required to verify owners through the Bank Secrecy Act’s customer due diligence requirements. The Corporate Transparency Act will shift the collection burden from financial institutions to the reporting companies and will impose stringent penalties for non-compliance and unauthorized disclosures.

While this legislation has been around for a couple of years now, the Financial Crimes Enforcement Network (FinCEN), a bureau within the U.S. Treasury Department, recently issued a final rule establishing the beneficial ownership information reporting requirements, which took effect on January 1, 2024.

Is My Company a “Reporting Company”?

A Reporting Company is a company that is required to report their beneficial owner information to FinCEN. The beneficial ownership information rule applies to two types of businesses:

• Domestic reporting companies – These are corporations, limited liability companies (LLCs) and other entities created by filing with a secretary of state or similar office under the law of a state or Indian tribe.
• Foreign reporting companies – These are corporations, LLCs and other entities formed under the law of a foreign country that are registered to do business in any U.S. state or Tribal jurisdiction.

So, the beneficial ownership rule applies to most businesses in the U.S. other than domestic sole proprietorships. Certain exemptions to beneficial ownership reporting requirements have been provided, including certain types of banks, credit unions, investment companies, insurance companies, publicly traded companies, and regulated public utilities.

You can find a complete list of exceptions in FinCEN’s Exemption List.

Who is a Beneficial Owner of a Reporting Company?

A beneficial owner is an individual who either directly or indirectly exercises substantial control over the reporting company or who owns or controls at least 25% of the reporting company’s ownership interests.

Substantial Control

An individual can exercise substantial control over a reporting company in four different ways. If the individual falls into any of the categories below, the individual is exercising substantial control:

• The individual is a senior officer (the company’s president, chief financial officer, general counsel, chief executive office, chief operating officer, or any other officer who performs a similar function).
• The individual has authority to appoint or remove certain officers or a majority of directors (or similar body) of the reporting company.
• The individual is an important decision-maker for the reporting company. Important decisions include decisions about a reporting company’s business, finances, and structure. An individual that directs, determines, or has substantial influence over these important decisions exercises substantial control over a reporting company.
• The individual has any other form of substantial control over the reporting company as explained further in FinCEN’s Small Entity Compliance Guide (see Chapter 2.1, “What is substantial control?”).

Ownership Interest

An ownership interest is generally an arrangement that establishes ownership rights in the reporting company. Examples of ownership interests include shares of equity, stock, voting rights, or any other mechanism used to establish ownership.

• Equity, Stock, or Voting Rights - Any interest classified as stock or anything similar, regardless of whether it confers voting power or voting rights, even if the interest is transferrable.
• Capital or Profit Interest - Any interest in the assets or profits of a company.
• Convertible Instruments - Any instrument convertible into equity, stock, or voting rights OR capital or profit interest, whether or not anything needs to be paid to exercise the conversion.
• Option or Privilege - Any put, call, straddle, or other option or privilege of buying or selling equity, stock, or voting rights; capital or profit interest; or convertible instruments; EXCEPT if the option or privilege is created and held by others without the knowledge or involvement of the reporting company.
• Catch-All - Any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.

When Does My Company Need to File our BOI Report?

The deadline for initially filing the report depends on when the company initially registered with the state. Companies created or registered to do business before January 1, 2024, will have until January 1, 2025, to file their initial beneficial ownership report. Companies created or registered after January 1, 2024, have 90 days to file a beneficial ownership report. That 90-day window starts when the company receives notice from the secretary of state or another office that its creation or registration is effective. Reporting companies created or registered on or after January 1, 2025, will have 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their initial BOI reports with FinCEN.

There are other circumstances which may require you to file an update with FinCEN. The following are some examples of the changes that would require an updated beneficial ownership information report:

• Any change to the information reported for the reporting company, such as registering a new business name.
• A change in beneficial owners, such as a new CEO, or a sale that changes who meets the ownership interest threshold of 25 percent.
• Any change to a beneficial owner’s name, address, or unique identifying number previously provided to FinCEN. If a beneficial owner obtained a new driver’s license or other identifying document that includes a changed name, address, or identifying number, the reporting company also would have to file an updated beneficial ownership information report with FinCEN, including an image of the new identifying document.

What Are the Penalties for Non-Compliance?

Businesses not complying with beneficial ownership information reporting requirements can face stiff penalties. Any company that fails to file a required beneficial ownership report or amendment by its filing deadline is subject to a fine of $500 per day, up to a maximum of $10,000.

Willful failures or intentionally filing inaccurate information is a felony, punishable by up to two years in prison. When combined with anti-money laundering violations, the penalty is up to 10 years in prison.

Who Has Access to My Information?

FinCEN will permit Federal, State, local, and Tribal officials, as well as certain foreign officials who submit a request through a U.S. Federal government agency, to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement. Financial institutions will have access to beneficial ownership information in certain circumstances, with the consent of the reporting company. Those financial institutions’ regulators will also have access to beneficial ownership information when they supervise the financial institutions.

Beneficial ownership information reported to FinCEN will be stored in a secure, non-public database using rigorous information security methods and controls typically used in the Federal government to protect non-classified yet sensitive information systems at the highest security level. FinCEN will work closely with those authorized to access beneficial ownership information to ensure that they understand their roles and responsibilities in using the reported information only for authorized purposes and handling in a way that protects its security and confidentiality.

How and Where Do I File?

If you are required to report your company’s beneficial ownership information to FinCEN, you will do so electronically through a secure filing system available via FinCEN’s BOI E-Filing website (https://boiefiling.fincen.gov). Once you have accessed the website, select “File BOIR.” You will then have the option to file the BOIR electronically or to download a pdf form, fill it out and then upload it back to the site.

FinCEN expects that many, if not most, reporting companies will be able to submit their beneficial ownership information to FinCEN on their own using the guidance FinCEN has issued. Reporting companies that need help meeting their reporting obligations can consult with professional service providers such as lawyers or accountants.

How Much Does it Cost to File?

There is absolutely no fee to file your beneficial ownership information report yourself. If you have a complicated ownership structure or are generally uncomfortable filing the report on your own, you may seek professional guidance to assist you. This would come a fee as determined by the professional.

What Information Do I Need to Report?

The information that needs to be reported depends on when the company was created:

• If a reporting company is created or registered on or after January 1, 2024, the reporting company will need to report information about itself, its beneficial owners, and its company applicants. For more information about company applicants, see FinCEN’s FAQs on Applicants.
• If a reporting company was created or registered before January 1, 2024, the reporting company only needs to provide information about itself and its beneficial owners. The reporting company does not need to provide information about its company applicants.

A Reporting Company will have to report the following information about itself:

1. It’s legal name.
2. Any trade names, “doing business as” (dba), or “trading as” names.
3. The current street address of its principal place of business if that address is in the United States (for example, a U.S. reporting company’s headquarters), or, for reporting companies whose principal place of business is outside the United States, the current address from which the company conducts business in the United States (for example, a foreign reporting company’s U.S. headquarters).
4. It’s jurisdiction of formation or registration.
5. It’s Taxpayer Identification Number (or, if a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of the jurisdiction).
6. A reporting company will also have to indicate whether it is filing an initial report, or a correction or an update of a prior report.

For each Individual who is a beneficial owner, a reporting company will have to provide:

1. The individual’s name.
2. Date of birth.
3. Residential address.
4. An identifying number from an acceptable identification document such as a passport or U.S. driver’s license, and the name of the issuing state or jurisdiction of identification document.
5. The reporting company will also have to report an image of the identification document used to obtain the identifying number in item 4.

For each individual who is a Company Applicant, a reporting company will have to provide:

1. The individual’s name.
2. Date of birth.
3. Address - If the company applicant works in corporate formation—for example, as an attorney or corporate formation agent—then the reporting company must report the company applicant’s business address. Otherwise, the reporting company must report the company applicant’s residential address.
4. An identifying number from an acceptable identification document such as a passport or U.S. driver’s license, and the name of the issuing state or jurisdiction of identification document.
5. The reporting company will also have to report an image of the identification document used to obtain the identifying number in item 4.

What Forms of ID are Accepted?

The only acceptable forms of identification are:

• A non-expired U.S. driver’s license (including any driver’s licenses issued by a commonwealth, territory, or possession of the United States).
• A non-expired identification document issued by a U.S. state or local government, or Indian Tribe.
• A non-expired passport issued by the U.S. government.
• A non-expired passport issued by a foreign government (only when an individual does not have one of the other three forms of identification listed above).

This new Beneficial Ownership Information Reporting rule is a big change for small businesses. Our advice is to do your own research, thoroughly, and determine what it means for you and your business. There is no rush, so don’t be pressured by predatory offers to get it filed fast! Take your time, learn about the new requirements, and make sure you file before your deadline.

There are a wealth of resources to help guide you, but if you feel unsure about reporting for any reason, we encourage you to seek legal counsel from a reputable business lawyer.

• Small Entity Compliance Guide
• Beneficial Ownership Information Reporting FAQs
• FinCEN Small Business Resources
• Beneficial Ownership Information Brochure (pdf)
• Corporate Transparency Act
• 31 U.S.C. 5336 (Beneficial ownership information reporting requirements)

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or legal advice. Consult with a qualified professional for personalized guidance tailored to your specific situation.