Starting last January, the U.S. Department of Treasury’s Financial Crimes Enforcement Network has opened a portal for businesses to file their beneficial ownership information reports (BOI). The BOI is the U.S. Treasury’s efforts to prevent illegal activities and financial crimes tied to business entities that may be formed to hide personal liability and owner information—specifically, business owners and individuals who use shell companies to launder money, avoid taxes, and hide wealth. Most importantly, this helps to identify business owners who may defraud customers and employees. The U.S. Treasury is also undertaking an ambitious role to attempting to catch and curb sex traffickers who use shell companies to hide their identities.
Here’s a closer look at what you should know about filing BOI reports for clients and how to determine whether a client’s business falls under the BOI exclusion list.
The Filing System for BOI Reports
The U.S. Treasury Department uses FinCEN, a secure filing system, for BOI reports. FinCEN stores BOI reports in a centralized database and only shares BOI information with authorized users for purposes specified by law. The Treasuring Department has assured businesses that the database will use rigorous information security methods and controls typically used in the federal government to protect non-classified yet sensitive information. Attorneys and business owners will use FinCEN to file their BOI Reports.
Which Companies Must File BOI Reports
The reporting rule (found at 1010.380 in title 31 of the Code of Federal Regulations) requires that all “reporting companies” file BOI reports with FinCEN within the provided specified timeframes. If your business entity was formed prior to before Jan. 1, 2024, you have until the end of Jan. 1, 2025, to complete the filing. If your business entity is formed any time within 2024, you have 90 days to complete the filing. Any business formed after 2025 will require a filing to be completed with FinCEN within 30 days of formation.
A reporting company is any entity that meets the “reporting company” definition and does not qualify for an exemption. There are two categories of reporting companies: a “domestic reporting company” and a “foreign reporting company.” If your company is neither a “domestic reporting company” nor “foreign reporting company” because it does not meet either definition or it qualifies for an exemption, then it is not required to file a BOI report with FinCEN.
There are 23 company types that are exempt from reporting requirements. They include:
- securities reporting issuers
governmental authorities
banks
credit unions
depository institution holding companies
money services businesses
broker or dealer in securities
Securities exchange or clearing agencies
other Exchange Act registered entities
investment companies/investment advisers
venture capital fund advisers
insurance companies
state-licensed insurance producers
Commodity Exchange Act registered entities
accounting firms
public utilities
financial market utilities
pooled investment vehicles
tax-exempt entities
entity assisting tax-exempt entities
large operating companies
subsidiaries of certain exempt entities
inactive entities
The U.S. Treasury provides questions that offer to assist in the decision of whether a company or business is exempt. Note that if a business owner realizes a company is exempt from filing after a report, you may file an updated BOI report indicating the company is newly exempt from reporting requirements.
Who Are Beneficial Owners?
The Treasury Department defines a “beneficial owner” as an individual who owns at least 25 percent of a company or who has “substantial control” over the company. When filing the report, the department does not require you identify which of these two roles the filing party plays within the company. It also doesn’t require naming every owner—identifying one owner who fits the required definition is sufficient for the filing. There is also no maximum number of beneficial owners who must report. Therefore, if the rule applies for several members of the company, the company need not list them all.
Although it’s not required to name all the parties, naming one and including his or her their social security number and a photo id as a part of the process may deter illegal activity as there is an identifiable person to connect to the business should legal action be needed. As simple as it seems to identify an owner, that wasn’t always the case or requirement to form a business entity prior to this rule.
There are different outlined criteria for defining a person with “ownership” interest and with “substantial control”. The Treasury Department gives some examples of owners who are exempt and do not qualify:
- minor children
- nominees, intermediaries, custodians, and agents
- employees (who are hired/fired and subject to will and control by employer)
- inheritors of companies
- creditors
Other Filing Requirements
If the reporting company is filing the report for an entity created on or after Jan. 1, 2024, the report must name a company applicant. A company applicant is an individual who directly files or is primarily responsible for the filing of the document that creates or registers the business entity. For example, if a law firm is retained to register a business, the filing party within the law firm who created the entity would be listed. (Business entities created before Jan. 1, 2024 are exempt from this requirement.)
Penalties for Failing to File
FinCEN will eventually be issuing notices to companies formed that have not complied with the BOI filing requirements. This may come in the form of an email from the Secretary of State where the business was formed, instructing the parties to file the BOI. If a person, persons, or companies willfully fail to report or complete or update beneficial owner information, FinCEN will determine appropriate enforcement response in the form of civil or criminal penalties. Those penalties are stiff: they can include civil penalties of up to $500.00 for each day that the violation continues or criminal penalties of imprisonment for up to two years and a fine or up to $10,000. Senior officers of any entity that fails to file a required BOI report may be held accountable for that failure.
What Attorneys Should Keep in Mind
Small, uncomplicated businesses may not require the assistance of an attorney or accountant to complete their BOI filings. More complex business structures will benefit from the advice of an attorney or accountant. The U.S. Department of Treasury issued a 57-page Small Entity Compliance Guide that includes rules, explanations, and examples for attorneys, accountants, and business owners.
A thorough review of this guide and an understanding of the BOI process will help you determine whether a BOI report is required and necessary for your clients. If you represent businesses, ensure that your clients are aware of the penalties outlined by the U.S. Department of Treasury and you, or your clients, meet the filing requirements in a timely manner to avoid any penalties.
*Originally published in the Daily Business Review and reprinted with permission.
