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A civil fine of up to $591 per day. A criminal fine of up to $10,000 and imprisonment for up to two years. Or both.

On January 1, 2024, new federal reporting rules went into effect that affect millions of small businesses in the United States. In 2024, it is estimated that over 32 million business entities will be affected by these new rules and five million new companies with the same obligations each year thereafter. The overwhelming majority of manufacturers’ representative businesses, formed as corporations or limited liability companies, are affected by the new rules.

This article will highlight these new rules, which are described in greater detail, in the Small Equity Compliance Guide, Beneficial Ownership Information Reporting Requirements, published by the Financial Crimes Enforcement Network, U.S. Department of the Treasury, Version 1.1, December, 2023.

The new reporting rules are found in the Corporate Transparency Act (CTA). It was enacted as part of the Anti-Money Laundering Act, in the 2021 National Defense Authorization Act. The legislative intent of the CTA is to prevent financial crimes such as money laundering, terrorism financing, tax fraud, drug trafficking, and organized crime. The vast majority of small businesses, created by the filing of a document (e.g., articles of incorporation, articles of organization) with a Secretary of State, or other similar office are subject to these rules and are defined by the rules as a “reporting company.”

Prior to the Anti-Money Laundering Act, there was no national law requiring small business entities to identify in their filings with the Secretary of State, the ownership or beneficial ownership, of these entities. As a result, the concern arose that shell corporations (corporations without significant assets or business activity) could be used to disguise business ownership from law enforcement. Such illegal activity affects the U.S. economy and the national security of the United States.

Under the CTA, unless there is a defined exception, a reporting company is required to report beneficial ownership and related information to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of the Treasury. The report itself is referred to as the Beneficial Ownership Interest Report (“BOI Report”).

A reporting company is obligated to file a BOI Report and must report all beneficial owners as defined in the CTA. “A beneficial owner” is any individual who owns or controls at least 25 percent of the ownership interests of a reporting company. A beneficial owner also includes an individual who directly or indirectly has any other form of substantial control over the reporting company. The definition of “substantial control” is broad and somewhat vague. It includes, but is not limited to, a person who has direction, substantial influence, or decision-making responsibility; or a senior officer or individual who has the authority over the appointment or removal of a senior officer.

The new rules also refer to a company applicant. A “company applicant” is (1) an individual who directly files incorporating or organizational documents; (2) the individual who is responsible for directing and controlling the filing of these documents; or (3) both. An example of a company applicant is the incorporator or organizer of a company. A company applicant may also be an attorney or accountant. Reporting companies existing and which filed for record before January 1, 2024, do not need to provide information as to a company applicant. However, reporting companies created on or after January 1, 2024, must include information about a company applicant(s) in a BOI Report.

There is specific information that must be included in a BOI Report. For a reporting company, information about the company, its beneficial owners and company applicants (company applicants only for reporting companies created on or after January 1, 2024), include the following:

• Full legal name of the reporting company, as well as any trade name or assumed name.
• Current U.S. address of the reporting company.
• State, tribal or international jurisdiction of formation.
• Internal Revenue Service Tax Identification Number, including Employer Identification Number.
• Full legal name and date of birth of each beneficial owner and company applicant.
• Residential address (except for company applicants, who may use their business street address).
• A photograph from a “unique identifying number” for each beneficial owner and company applicant, such as a non-expired U.S. passport, a non-expired government ID, a non-expired driver’s license, or a non-expired international passport (if the above-referenced documents do not exist).

All reporting companies that existed prior to January 1, 2024, must file a BOI Report before January 1, 2025. For companies that are created after January 1, 2024, the filing of the BOI Report is within 90 days of notice of its creation or registration with a Secretary of State or similar office. Beginning in 2025, that 90-day time period is reduced to 30 days. Once the initial BOI Report has been filed, both existing companies (existing before January 1, 2024, and new companies created on or after January 1, 2024) need to file an updated report within 30 days of a change of beneficial ownership. Filing is done online via the official FinCEN website: www.fincen.gov.

Beware of fraudulent websites or emails claiming to be from an official FinCEN website. There are a number of scams with the illegal intent of obtaining personal information related to a reporting company and its beneficial owners.

The penalties for not complying with the filing requirements of a BOI Report are substantial. There is a civil fine of up to $591 for each day of non-compliance (the fine is subject to inflation adjustments); a potential criminal fine of $10,000 and imprisonment for up to two years, or both. There are real concerns that small business entities subject to these rules will not become aware of these penalties until it is too late, and fines are assessed. As of May 1, 2024, there is litigation challenging the new BOI reporting rules. However, until the litigation and appeals are resolved or the reporting requirements are stayed, the reporting rules still apply, and a reporting company should continue to comply with its obligations under the reporting rules.

It is important for small business owners to know and understand their respective obligations to timely file a BOI Report. Companies subject to the new rules are encouraged to retain an attorney or other professional who has the experience and expertise to assist and provide guidance in complying with
these requirements.

Disclaimer: This article does not render any legal or other professional advice. Any person seeking such advice should hire an attorney who practices in this area of law.

MANA welcomes your comments on this article. Write to us at [email protected].