Beginning January 1, 2024, millions of entities registered to do business within the US will become subject to the new Beneficial Ownership Information (BOI) reporting requirements. The Financial Crimes Enforcement Network (FinCEN) has been tasked with developing this report aimed at increasing transparency around entity ownership to combat criminal money laundering for drug traffickers and terrorists. This pending change has received little publicity and may catch many business owners by surprise due to the far-reaching reporting requirements. This article will detail which businesses are required to file, exceptions to filing, the beneficial owners that must be disclosed, the due dates for filing BOI reports, the information required to be reported, and how to file.
Who Must File
Both domestic entities and foreign entities registered to do business within the US are subject to the new BOI reporting requirements. Domestic corporations, limited liability corporations (LLCs), or any other entity formed by filing an incorporating document with a Secretary of State or equivalent body will be considered subject to the BOI requirements. Foreign corporations, LLCs, or other entities registered to do business within the US are also subject to these rules.
Exceptions to the BOI Filing Requirement
The FinCEN has listed twenty-three exemptions for certain entities not required to file BOI reports. All but two of these exemptions relate to banks, credit unions, investment companies, insurance companies, publicly traded companies, or nonprofit entities, all of which are already heavily regulated, so this article will only discuss the exemptions potentially relevant to filers not in the above categories. There is a filing exemption for a “large operating company” that (1) employs 20 or more full-time employees in the United States, (2) has a physical operating presence within the United States, and (3) files a Federal tax return reporting more than $5 million of gross receipts, net of returns and allowances, and without including any foreign revenue. For consolidated return groups, these tests shall be applied at the consolidated level, meaning most consolidated entities will meet these requirements and be exempt from the BOI reporting requirements.
The other exemption is for inactive entities, and to qualify for this exemption the entity must have been in existence on or before January 1, 2020, not engaged in an active business, have no ownership by foreign persons or entities, has not changed ownership in the past 12 months, has not sent or received funds exceeding $1,000 for the past 12 months, and does not hold any assets, regardless of location in the United States or abroad.
Requirements for Disclosing Beneficial Owners
As part of the BOI filing, each reporting entity must disclose the entity’s beneficial owners. A beneficial owner is defined as an individual who, directly or indirectly, (1) exercises substantial control over a business, or (2) has at least 25% ownership interest in the reporting entity. Regarding the substantial control aspect, the following four categories are generally considered to include those who exercise substantial control over the reporting entity:
- Senior officers (President, CEO, CFO, COO, etc.).
- Individuals with authority to appoint or remove officers or directors of the reporting company.
- Individuals with the authority to make important company decisions, such as nature and scope of the business, selection of business lines, or geographic focus. Financial decisions such as budgeting or compensation, and company structure decisions are also included in this category.
- Individual with any other form of substantial control. This is a nebulous “catch-all” with no guidance currently provided by the FinCEN. It is currently recommended that reporting entities disclose beneficial owners using the first three substantial control categories for now and watch for updates regarding any required disclosures for this fourth category.
Below is a summary of the categories required for individuals to be disclosed on the BOI report based on the 25% ownership threshold:
- Equity, stock ownership, or voting rights.
- Capital or profit interest.
- Convertible instruments – any instrument convertible into equity, stock, or voting rights, or capital/profit interest, qualifies as an ownership interest.
- Option or privilege – this includes put/call options, and straddles. The notable exception to this item is that the option or privilege must be awarded directly by the reporting company; the option or privilege cannot be assigned to another party via a secondary market, without the reporting entity’s knowledge, and that recipient qualify for disclosure on the BOI report.
BOI Reporting Due Dates
There are two due dates for BOI reports, and the filing timeline depends on when an entity was established. For entities established prior to December 31, 2023, the filing deadline for the report is December 31, 2024. For newly formed companies established January 1, 2024 or later, the due date for the initial BOI report is 30 days from the date of incorporation/organization. Any reporting entity that must make changes or correct errors to a previously filed BOI report has 30 days to file a corrected report from the date the changes or errors were discovered.
As of November 7, 2023, the American Institute of Certified Public Accountants (AICPA) has submitted a request for a one-year extension on the effective date for BOI reporting to become effective. If passed, the reports would not begin to be required until 2025. We will monitor this request and provide updates. However, we recommend that companies continue to prepare to file BOI reports as required until a ruling is made on the AICPA’s request.
Information to be Reported
Each company required to file a BOI report must disclose the following:
- Full legal name of the company.
- Any trade names or “Doing Business As” names.
- Business address.
- State/jurisdiction of formation or registration.
- Federal Tax ID number.
Regarding any beneficial owners required to be listed on the report, the following information is required:
- The individual’s name, birthdate, and address.
- A unique identifying number (such as a driver’s license or passport number) and the issuing jurisdiction for this document.
- A scanned and uploaded image of the document described above.
Company Applicants
In addition to the information listed in the previous section, companies established January 1, 2024 or later must disclose their “company applicants”. Company applicants are defined as follows:
- The individual who directly files the document that creates the entity.
- The individual who controls or directs the filing of the document.
No reporting company will have more than two company applicants, and some companies will only report one applicant if the same individual filled both roles as described above. Companies formed prior to December 31, 2023, do not have to disclose their company applicants.
How to File
The BOI report must be filed directly with the FinCEN using their website. As of the date of this article, FinCEN is still developing this portion of their website, with the intention of the system going live no later than January 1, 2024.
Filing Fees and Penalties
There is no fee to file the annual BOI report. However, failure to file penalties can quickly become severe. The failure to file penalty is $500 per day until the filing is submitted.
There are also penalties for filing false or fraudulent information; those penalties levy up to $10,000 in fines, and up to a maximum of two years in prison. These penalties apply to the reporting entity, the beneficial owners, and the company applicant(s).
Conclusion
As outlined above, the new BOI reporting requirements apply to many entity types, with few exceptions outside of certain regulated industries. Business owners need to understand their obligations under these new requirements and work to compile the information necessary to file a BOI report. DHW will not be able to file these reports on behalf of clients, as doing so could be considered the practice of law. Regardless, DHW will be available to answer questions regarding these reporting requirements and serve as an informational resource. Please consult your CPA regarding questions concerning eligibility, information required to be disclosed, and similar matters.
About the Author
Matt McKinney is a tax manager in DHW’s Hickory office. Matt has been with the firm for over 10 years and assists business owners navigate the complex and ever-changing tax landscape. Matt can be reached by calling 828-322-2070 or via email at mattm@dhw.cpa