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Beginning on January 1, 2024, the Financial Crimes Enforcement Network (FinCEN) will require many small businesses to report beneficial ownership information. Your business may need to send a Beneficial Ownership Information (BOI) report to stay compliant.
To know whether these requirements apply to your company, you need to understand what a beneficial owner is and what the beneficial ownership information report contains.
BOI Key Takeaways
- As of January 1, 2024, entities with 20 or fewer employees or less than $5 million in annual gross sales may be required to submit a Beneficial Ownership Information (BOI) report.
- The Financial Crimes Enforcement Network (FinCEN) uses BOI reports to monitor and enforce legal compliance, supporting ethical business practices.
- Willfully failing to submit a BOI report can result in severe penalties, including fines and potential imprisonment.
What Is Beneficial Ownership?
FinCEN defines a beneficial owner in two ways:
- Somebody who controls or owns at least a 25% stake in a company’s ownership interests.
- A person who exercises “substantial control” over a business entity, even if they don’t own 25% of it.
Examples of people who have “substantial control” are senior officers, people who can hire and fire directors, and key decision-makers inside the business.
Some business owners set up a shell corporation. Underneath it are several other business entities and investments, all with potentially different legal owners and ownership structures, that generate money.
That’s where beneficial ownership information comes in. FinCEN has identified these types of shell companies as being at high risk of fraud. Some malicious individuals use them to hide their identities and launder money, thus paying no taxes. Tracking beneficial ownership will help resolve that issue and ensure that all company owners pay their fair share.
Beneficial ownership itself isn’t illegal. People can be beneficial owners if they report their stakes and income from their companies. The problem is that many don’t, so FinCEN intends to use BOI reporting to create beneficial ownership transparency.
Business Owner Vs. Beneficial Owner
The main difference between a beneficial owner and the other business owners is the owner’s interest and/or control of the business. A beneficial owner owns at least 25% of a company either directly or indirectly or has substantial control of the business. We will talk more about this later.
Do I Need to File a BOI report?
BOI reporting is an anti-money laundering safeguard. You should understand the reporting requirements to know if your small business needs to file a Beneficial Ownership Information report.
According to FinCEN, its rules for BOI reporting identify two types of potential reporting companies:
It describes a domestic reporting company as any business that is created by filing organizing documents with a secretary of state or equivalent office. Examples of domestic reporting companies are limited liability companies (LLCs) or corporations. Foreign companies are similar. The big difference is that they’re created outside the United States. However, they still file with relevant state authorities to operate within the U.S.
If you’ve filed business formation documents, you’ll likely need to be aware of BOI reporting requirements.
These new filing rules apply to many small businesses. Companies that have more than 20 employees and report more than $5 million in gross sales or receipts from U.S. sources during the prior financial year are NOT considered reporting companies. There are other exceptions that are discussed later.
FinCEN goes further by pointing out that the following business entities, beyond LLCs and corporations, may also need to complete the filing:
- Limited liability partnerships (LLPs)
- Business trusts
- The majority of limited partnerships
- Limited liability limited partnerships
Again, the general rule is that if you have a small business that files formation documents with a secretary of state (or equivalent), you must complete a BOI report. That covers most business types.
As a small business owner, you can see how this new report may create an extra filing with which you need to concern yourself. That’s where Block Advisors, a part of H&R Block, comes in. Our BOI Reporting service helps your company stay in good standing with the U.S. government by compiling the required information into a report we submit on your behalf.
I need to file a BOI report – now what?
Corporate Transparency Act
Filing a BOI report is a requirement by the Corporate Transparency Act (CTA). The act and the new BOI reporting requirements went into effect on January 1, 2024.
The act exists because FinCEN, as a government agency, is responsible for curtailing financial crimes wherever they might occur. Such crimes include the previously mentioned money laundering, as well as tax evasion and financing terrorism. By requiring businesses to make their ownership structures known to FinCEN, BOI reporting creates transparency in companies where none may have existed.
All reporting companies formed before 2024 have until January 1, 2025, to file their initial BOI reports. Any created on or after January 1, 2024, and before January 1, 2025, have 90 calendar days starting from receiving their company’s registration. Those created on or after January 1, 2025, will have 30 calendar days from receiving notice of their company’s registration.
The CTA also clarifies that the information you submit won’t be placed on the public record. It’ll only be accessible to FinCEN and other government agencies, such as the Internal Revenue Service (IRS), in cases where issues arise.
Who Is Exempt from the Corporate Transparency Act?
The Corporate Transparency Act carries several exemptions, the most obvious being larger companies mentioned earlier.
However, there are many other types of businesses that FinCEN exempts from reporting:
- Certain financial institutions, such as banks and credit unions
- Investment companies
- Accounting firms
- All government agencies
- Any tax-exempt entities
- Insurance companies
- Broker-dealerships
- Business subsidiaries whose ownership stake in a company is controlled by a tax-exempt organization
- Business entities formed either on or before January 1, 2020
- Any entity that sends reports to the Securities and Exchange Commission (SEC)
The act also exempts any foreign investment vehicles that a relevant financial institution, such as a bank or public accounting firm, operates.
Potential Penalties
Failing to meet your BOI reporting requirements may subject you to FinCEN penalties. Remember that the reports, and the CTA in general, exist to quash crimes, including money laundering, tax evasion, and terrorist financing.
The potential penalties include the following for reporting violations:
- A civil penalty of $500 per day for every day that a reporting violation occurs or continues, up to $10,000.
- Imprisonment of up to two years for continued reporting violations.
There are also penalties for use violations and the unauthorized disclosure of information in a BOI report, as follows:
- Payment of a fine up to $250,000.
- Imprisonment of up to five years.
Furthermore, if a violation accompanies the breaking of other laws and establishes a pattern of illegal activity involving $100,000 or more within 12 months, you could be in bigger trouble. In that case, you may receive an enhanced financial penalty of up to $500,000 and imprisonment of up to 10 years.
The new BOI Reporting guidelines should be taken seriously. The penalties for willfully incorrectly filing — or completely failing to file — a BOI report are severe.
What Does a BOI Report Consist Of?
With such strict penalties tied to the CTA, it’s crucial that you fully understand the reporting requirements for the Beneficial Ownership Information Report. Below we cover the required information for the report, broken down into sections.
Step 1 — Provide Company Information
Your BOI report starts with providing the same company information you likely supplied in your formation documents. This includes your company’s full legal name, trade names, and the street address of your primary business headquarters. You’ll also need to provide information about the state in which the company was formed and your taxpayer identification number.
Step 2 — List Beneficial Owners
This is the meat of the BOI report. You must specifically name any beneficial owners, providing their legal name and date of birth. You should also provide a home address for each beneficial owner and identification documents — such as a driver’s license or passport — along with an image of the document to prove the owner’s identity.
When creating this list, remember that a beneficial owner owns or controls at least 25% of the business or exercises substantial control over its operations. That said, five types of individuals could meet those requirements but are exempt from being classed as beneficial owners or special rules apply:
- Any individual classified as a minor under the laws of your company’s host state (the minor’s parents or legal guardians must report instead).
- People who may inherit the business in the future but don’t have a controlling stake yet.
- Any agent, intermediary, custodian, or nominee that acts on behalf of the beneficial owner.
- Creditors who’ve received an ownership stake or substantial control due to an unpaid loan or debt.
- Any employee who receives monetary benefits or control is like a beneficial owner but isn’t a senior office or similarly high-powered individual.
Step 3 — List Company Applicants
A company applicant is somebody who filed the relevant documents to form a legal entity — such as your business — on your behalf or the person who directs the filing of documents pertinent to the company.
You only need to provide a company applicant’s information if you formed your company on or after January 1, 2024. According to FinCEN’s regulatory requirements, no company formed before this date needs to name their company applicants.
As for details, you’ll provide each applicant’s name, address, date of birth, and a government-approved or issued form of ID along with an image of the document.
Step 4 — Filing for a FinCEN Identifier
Once you’ve completed your initial filing, each beneficial owner named on your BOI report can apply for a FinCEN identifier. This unique number can be used in place of the beneficial owners’ full details for future documentation.
When Should I File My Beneficial Ownership Information Report?
Any company formed before January 1, 2024, must file its BOI report by January 1, 2025. However, FinCEN is stricter with new business entities. Any company formed on or after January 1, 2024, but before January 1, 2025, has 90 calendar days from receiving their formation approval to complete their report. Companies created or registered on or after January 1, 2025, have 30 calendar days from receipt of their creation or registration approval.
Ensure your small business is CTA compliant
Prepare Your BOI Report Today
As a small business owner, you may need to share your company’s beneficial owner(s) via a BOI report. Don’t ignore this duty. Instead, add it to the list of other compliance activities you already track. Remaining compliant is a key part of managing your small business and avoiding costly penalties. Consider seeking the advice of an attorney who can review your specific circumstances and guide your decisions to confirm that you are doing what’s right for you.
Block Advisors Beneficial Ownership Information Reporting service helps relieve the stress of this new task to protect your company’s good standing.
Learn more about our Beneficial Ownership Information Reporting service.
FAQs
Is filing for a BOI Report required to stay compliant with the law?
A BOI report is often required to comply with the CTA. Anyone who is a beneficial owner of a business needs to be listed in a BOI report.
How do I file a BOI Report for my business?
You can file your BOI Report for your business on the FinCEN online portal. Alternatively, a third-party tool, such as Block Advisors BOI Reporting service, can help guide you through the process.
What are the benefits of beneficial ownership?
A beneficial owner can receive profits or other income from a company along with a greater ownership interest and/or control of the business. This ownership structure generally provides some liability protection since you only attain it by forming an entity.
What is the difference between a business owner and a beneficial owner?
A business owner is an owner with a less than 25% stake in the company and doesn’t have substantial control of the business. In contrast, a beneficial owner has a controlling stake, 25% or more, or has substantial control of the business.
Where do I send my BOI Report?
Your BOI report must be sent to FinCEN, either directly using their online portal or through a third-party tool such as Block Advisors BOI Reporting service
This article is for informational purposes only and should not be construed as legal advice. You may want to seek the advice of an attorney to evaluate all relevant considerations.
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