Attention Small Business Owners - You May Need to File a Beneficial Ownership Information Report This Year!
Effective January 1, 2024, the Corporate Transparency Act (CTA) final rule is a little-known but important requirement for most small businesses operating in the United States.
Known as the Beneficial Ownership Information (BOI) Rule, it requires most small businesses, both domestic and foreign, to file a BOI Report with the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN). Even though the CTA is one of the broadest-reaching federal business entity laws ever enacted and impacts millions of American businesses, many business owners are completely unaware of it.
Bottom Line:
“If you think the BOI Rule just applies to large businesses, think again. Most small business entities are required to report.”
Purpose of the Corporate Transparency Act (CTA)
The aim of the CTA, enacted in 2021 as part of the Anti-Money Laundering Act of 2020, is to counteract illegal activities in the U.S. financial market, such as money-laundering, tax fraud and the financing of terrorism, that are conducted through shell companies. It requires businesses not already subject to Federal or State regulation to disclose personal identifying information about their “Beneficial Owners” to FinCEN. FinCEN will use the information to create a secure, non-public database accessible by government agencies and certain financial institutions when authorized.
Most Businesses Are Required to File a BOI Report
If you think the BOI Rule just applies to large businesses, think again. Most small business entities are required to report. The BOI Rule refers to a business that is required to file a BOI Report as a “Reporting Company.” Reporting Companies are either domestic or foreign.
A “domestic” Reporting Company is a corporation, limited liability company or other business entity created by filing a document with the Secretary of State (or similar office) of a state or Indian tribe under state or Indian tribal law. In Kentucky, the following domestic business entities are created by filing a document with the Secretary of State’s office – business corporations (including professional service corporations), cooperatives and associations, limited liability companies (including professional LLCs), limited partnerships, limited liability partnerships, and statutory trusts.
A “foreign” Reporting Company is any non-exempt corporation, limited liability company or other entity formed under the laws of a foreign country that is registered to do business in a state or Indian tribal jurisdiction by filing a document with the Secretary of State or Indian tribal authority. With certain exceptions, Kentucky law requires business entities formed outside the Commonwealth to register as foreign entities with the Secretary of State and have a registered agent for service of process in Kentucky in order to lawfully transact business here. [1]
Any company that meets the BOI Rule’s definition of a “large operating company” is exempt from reporting, as are 501(c)(3) non-profit organizations and other entities that fall under one of twenty-three exemptions specified in the BOI Rule [2]. Most of the exemptions do not apply to small businesses. An exempt “large operating company” is any business entity that:
Employs more than 20 full time employees in the U.S. [3]
Regularly conducts business at a physical location in the U.S., and
Filed a federal income tax return in the previous tax year showing more than $5 million in gross receipts or sales (net of returns and allowances) from sources in the U.S.
Examples of other exempt entities include certain issuers of securities registered with the SEC; federal, state and Indian tribal governments and their political subdivisions, federally insured and/or regulated banks and credit unions, SEC registered securities brokers, dealers, investment companies and advisors; venture capital funds; insurance companies, commodities brokers/dealers, public accounting firms registered under the Sarbanes-Oxley Act, public utilities; subsidiaries of most exempt entities; and inactive entities that existed before January 1, 2020. [4]
Beneficial Owners
A Beneficial Owner is any individual who currently, directly, or indirectly exercises substantial control over the Reporting Company or owns or controls at least 25 percent of the ownership interests of the company. The BOI Rule defines “ownership interest” and “direct or indirect exercise of substantial control” in great detail. [5] If you are unsure whether you are a Beneficial Owner of a Reporting Company, it is important that the company consult an attorney experienced in business law to determine whether it is obligated to include you as a Beneficial Owner on the initial BOI Report.
Initial Reporting Company and Beneficial Ownership Information
Reporting Company Information. The initial BOI Report must provide the full legal name of the company, all assumed names or d/b/a’s, the U.S. street address of the company’s principal place of business; the U.S. street address (P.O. Box unacceptable) where it primarily does business if different than the principal place of business address; and the state, tribal or foreign jurisdiction where the company was formed. A “foreign” Reporting Company must provide the state or tribal jurisdiction where it first registered; the company’s IRS-issued TIN/EIN, or if a foreign Reporting Company with no TIN/EIN, the tax ID number issued by the foreign jurisdiction and jurisdiction’s name.
Beneficial Owner Information. The initial BOI Report must also contain each Beneficial Owner’s full legal name, date of birth, complete current residential address, a unique identifying number for the Beneficial Owner from one of the following government-issued documents, and an image of that document – which in most cases will have a photograph of the individual:
The individual’s unexpired U.S. passport
State, local government, or Indian tribe issued identification card or document
Unexpired state issued driver’s license, or
If the Beneficial Owner possesses none of the above, FinCEN will accept an unexpired passport issued to them by a foreign government.
Company Applicants / Reporting Company Applicant Information
Duty to Report a Company Applicant’s Information. For Reporting Companies created or registered on or after January 1, 2024, the same information reported for Beneficial Owners must also be reported for Company Applicants. If a Company Applicant is a business rather than an individual, the Company Applicant’s business address must be provided.
Who Are Company Applicants? A Reporting Company can have up to two individuals who qualify as Company Applicants. The individual who directly files the document with the Secretary of State that creates a domestic Reporting Company or registers a foreign Reporting Company is a Company Applicant. When another individual is primarily responsible for directing or controlling the filing of the document, they are also a Company Applicant. As an example, if a member of a limited liability company prepares articles of organization this year and directs her assistant to electronically file them with the Secretary of State to form the LLC, both the member and her assistant are Company Applicants, and their personal information must be included on the Reporting Company’s initial BOI Report.
In recently issued Guidance, FinCEN has said that a Reporting Company’s accountant or attorney may be a Company Applicant if they file the document that creates or registers the company for a client. [6] Needless to say, some attorneys and accountants who previously provided business formation services, including filing business formation documents, may no longer be willing to file them to avoid providing their personal identifying information and documents to clients for BOI Reporting. Alternatively, they can opt to obtain a one-time unique FinCEN Identifier they can then provide to clients for BOI reporting purposes when acting as a Company Applicant for the client.
Deadlines For Filing an Initial BOI Report with FinCEN
Reporting Companies created or registered before January 1, 2024, have until January 1, 2025, to file an initial BOI Report.
Any Reporting Company created or registered in 2024 will have ninety (90) calendar days to file its initial BOI report, from the first to occur of the date the company receives actual or public notice from the Secretary of State that its creation and/or registration is effective. Public notice is the date the registered document is publicly available, e.g., the first date a corporation’s articles are available on the Secretary of State’s website.
A Reporting Company created or registered on or after January 1, 2025, will have only thirty (30) calendar days to file its initial BOI Report from the first to occur of the date it receives actual or public notice from the Secretary of State that its creation and/or registration is effective.
Duty To Update Reported Information
A Reporting Company must file updates to the information in the initial BOI Report when any of that reported information changes. Examples of reportable changes include a change in the Reporting Company’s name, business address, or the name, address or other identifying information of a Beneficial Owner, including a new identifying document (new passport, driver’s license or other ID), or any change in Beneficial Owners of the Reporting Company.
Duty To Correct A BOI Report Containing Inaccurate Information
The Reporting Company must file a corrected BOI Report within thirty (30) calendar days of learning or having reason to know of an inaccuracy in the information reported, but in any event, within ninety (90) calendar days of when the inaccurate report was filed.
Legal Consequences of Non-Compliance
If your business is a Reporting Company, compliance with the BOI Rule is mandatory. Any willful violation may subject a person to civil penalties of up to $500 for each day the violation continues, as well as to criminal penalties including a fine of up to $10,000 and up to two years in prison per violation. For the purpose of imposing penalties, the term “person” includes any Beneficial Owner or other individual, Reporting Company or other entity. Violations include willfully failing to file a BOI Report, willfully filing false or fraudulent information in a BOI Report, willfully failing to update previously reported Beneficial Ownership information or to timely correct inaccurately reported Beneficial Ownership information.
In addition to civil and criminal penalties, Beneficial Owners and other persons in director or officer or other control positions with a Reporting Company who decide not to report or to provide partial or inaccurate information in a BOI Report expose themselves to not only termination, but to actionable claims for breach of fiduciary duty, willful misconduct, gross negligence, fraud and other causes of action. Violations may also void the company’s directors and officers liability coverage and any legal or contractual right the director or officer would otherwise have to indemnification by the Company. [7]
Filing A BOI Report
BOI Reports can only be filed electronically with FinCEN through the BOI filing website at https://boiefiling.fincen.gov. FinCEN has a statutory duty to maintain this as a non-public, secure website. FinCEN began accepting BOI Reports on January 1, 2024. Filers can obtain the Reporting form on the website by selecting “File BOIR.” According to FAQs issued by FinCEN, most Reporting Companies should be able to file their BOI Report without the aid of an attorney or accountant. [8] The Report can be filed by any individual the Reporting Company authorizes to act on its behalf. The person filing the BOI Report will be asked to provide their own contact information to FinCEN at the time of filing.
Sarah Charles Wright is a corporate and healthcare law attorney with Sturgill, Turner, Barker & Moloney, PLLC. She can be reached at swright@sturgillturner.com or (859) 255-8581.
This article is intended as a summary of state and/or federal law and does not constitute legal advice.
[1] See K.R.S. S§ 14A.1-070 and 14A.9-010.
[2] A business entity organized as a non-profit, but not determined tax-exempt by the IRS is not exempt from filing a BOI Report.
[3] The definition of full-time employee used in the ACA amendments to the Tax Code, i.e., works at least 30 hours a week, or at least 130 hours in a calendar month applies. FTEs do not count.
[4] See 31 C.F.R. § 1010.380(c)(2) which describes all twenty-three exempt entities.
[5] A Beneficial Owner does not include a minor child, a creditor of the Company, a person whose only interest is a future interest by right of inheritance, a Company employee acting solely as an employee and who isn’t a senior Company officer, an individual acting as a nominee, intermediary, custodian or agent of a Beneficial Owner.
[6] FinCen Beneficial Ownership Information Reporting – FAQ E.3., https://fincen.gov/boi-faqs#E_3 (last accessed 01/23/2024).
[7] https://www.americanbar.org/groups/business_law/resources/business-law-today/2023-july/the-corporate-transparency-act-deniers-beware/ (last accessed 01/23/2024).
[8] https://fincen.gov/boi-faqs (last accessed 01/22/2024).
