New Federal Filing Requirements May Subject Business Owners to Hefty Fines

New legislation, a long time in the works, will finally take effect starting January 1, 2024, and it will impact the vast majority of business owners in the United States. The Corporate Transparency Act, enacted in 2021, mandates additional Federal reporting requirements for most small businesses. Specifically, any new business entity that was formed after 1/1/24 as a result of filing a document with a secretary of state office or similar official, will be required to file a two part report with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) within 90 days of the entity being formed. 

Entities that are already in existence as of 12/31/23 will not need to report in 2024, but will be required to in 2025. While there are certain exceptions to the filing requirement, those are mostly for very large corporations, financial institutions and tax-exempt organizations. The vast majority of small businesses – for example, any entity formed as a LLC, corporation or limited partnership – are going to be subject to the new filing requirements. While this will likely be a one-time filing, you won’t want to mess it up. Non-compliance will result in civil penalties of up to $500 per day the violation continues (capped at $10,000), and there are potentially criminal penalties of imprisonment for up to two years.

Let that sink in for a few minutes. 

There are an estimated 5 million small businesses formed every year in the United States that will be subject to these requirements. Even if you’re just opening up an LLC to host a newly purchased rental property – not exactly a ‘business’ in most people’s eyes – that LLC will be subject to these requirements. Same thing goes for that small side hustle of your spouse that he or she operates out of an LLC – doesn’t matter if it only generates a few thousand dollars of revenue, since it’s an LLC it will be subject to the requirements. 

The only ‘common’ small business entities that will be exempt are sole proprietors and general partnerships, since typically neither of those need to file any sort of document at the state level to form the entity.  Additionally, any business with both $5 million in revenue on the prior year tax return AND 20+ full-time employees will be exempt. There are some other exemptions, but the ones mentioned here will be the most common ones for small business owners.

So, what’s the story with these new filings? What’s the reason behind them and what do the filings entail? Keep reading for the details.

The purpose of the Corporate Transparency Act is to prevent the use of anonymous ‘shell companies’ for money laundering or tax evasion. Unfortunately, regular, honest, run of the mill business owners will also fall under its purview. 

The filing requirements are essentially two parts to a single report, known as the Beneficial Owner Information (BOI) report. And again, the following filings will be a one time only filing for each new business entity formed, unless there are updates to the information reported, in which case an updated filing will need to be done.

The first part of the BOI report has to do with the “beneficial owners” of the entity. The first step will be identifying who the beneficial owners are for the business entity.   A beneficial owner is essentially the actual human being(s) that own or maintain control over the business entity. The emphasis is getting to the actual human. So if a business entity is owned by another business, then the owners of that secondary entity would be reported (or continue up the chain until you reach the actual human owner). 

Who is considered a beneficial owner of an entity?

  • Any person that owns or controls at least 25% of the ownership interest of an entity, OR 
  • Any person who exercises substantial control over the company

While the first qualification of a 25% ownership interest will be relatively straightforward for most business owners, it could get quite complex for multi-layered entities with complex ownership structures. 

The second qualification – any person with substantial control over the company – is extremely broad and will pull in many individuals. The definition of substantial control includes:

  • Senior officers (President, CFO, CEO, COO, general counsel etc)
  • Individuals with authority to appoint or remove senior officers/directors or members/managers
  • Individuals who direct, determine or have substantial influence over important decisions
  • Any other person with substantial control over the company

There are some exceptions for individuals that would otherwise qualify as a beneficial owner (for example, minor children or employees other than senior officers), but you can get the idea of how many people may need to be included on the BOI report, particularly for entities with complex ownership or management structures. 

Once you’ve identified who the beneficial owners are for the business entity, then you’ll need to obtain the following information and documents for each beneficial owner to be filed with the BOI report:

  • Full legal name
  • Date of birth
  • Current residential address
  • A unique identifying number (either from a current US passport, state or local ID, driver’s license, or potentially a foreign passport)
  • An image of the document with the unique identifying number

The second report (or really, second part of the BOI report) focuses on the “company applicants” instead of the beneficial owner. A company applicant is the individual (or maximum of two individuals) that actually filed the entity formation documents with the secretary of state. For example, if you hire a law firm or accounting firm to file the formation documents, then the specific individual at the law or accounting firm would be the company applicant. You would gather and report the same information for that individual as indicated above for the beneficial owners (with the exception of using a business address instead of their residential address). 

In regards to the timing of the BOI report, it must be filed within 90 days of the entity being formed with the state. The report will be filed online with the FinCEN website. It can not be filed before 1/1/24. While the filing itself will not have any fee or cost, keep in mind the steep penalties mentioned above for non-compliance.

And again, just to emphasize, the good news is that these reports should be one-time only filings. The BOI report will essentially just become part of the initial entity formation process, similar to the filings with the secretary of state and/or obtaining an EIN. The only need to file an additional report for an entity will be in the case that there is an update to any of the information in the BOI report (for example, if a new beneficial owner is brought in to the entity or there is an address change). In that case, an updated report will be required to be filed within 30 days of the update taking place. 

In addition to the information and documents collected on beneficial owners and company applicants, the BOI report will also ask for the following basic information regarding the entity itself:

  • Legal name
  • Address of principal place of business
  • State of formation
  • IRS taxpayer identification number (EIN)

So again, if you’re planning on opening a new business in 2024 and beyond (or even just opening an LLC to own a rental property), you need to be aware of these new FinCEN filing requirements. And all current small business owners should keep this info in the back of their heads since as of 1/1/25 they also will need to complete the filings. Be sure to talk to your lawyer or accountant to make sure the filings will be taken care of, so you’re not subject to those $500 per day fines!

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