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New Requirements for Reporting Beneficial Owners to FinCEN

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Many Small Businesses Must Now Report Beneficial Owners to FinCEN

Starting in 2024, many entities, including small businesses created in the US or registered to do business in the US, will be required to report information about their beneficial owners to Treasury’s Financial Crimes Enforcement Network (FinCEN). Beneficial owners are individuals who own or control a company. The reporting requirement, enacted as part of the 2021 bipartisan Corporate Transparency Act, is designed to help FinCEN and other agencies identify fraudulent use of the US financial system and prevent money laundering and hiding money or other assets in the US.

Who Is a Beneficial Owner?

According to FinCEN FAQs, a beneficial owner is an individual who either directly or indirectly:

(1) exercises “substantial control” over the reporting company, or

(2) owns or controls at least 25% of the reporting company’s ownership interests. Examples of ownership interests include shares of equity, stock, voting rights or any other mechanism used to establish ownership.

Four Measures of Substantial Control

An individual can exercise substantial control over a reporting company in the following four ways:

  • The individual is a senior officer, such as the company president, chief financial officer, general counsel, chief executive office, chief operating officer or other officer who performs similar functions.
  • The individual has authority to appoint or remove officers or a majority of directors of the reporting company.
  • The individual is an “important decision-maker” for the reporting company.
  • The individual has any other form of substantial control over the reporting company as explained further in FinCEN’s Small Entity Compliance Guide.

Entities required to report beneficial ownership information to FinCEN may use a unique FinCEN identifier to report beneficial ownership information on an individual or entity after the reporting company first provides personal information on the owner. FinCEN has issued final rules to clarify the circumstances in which a FinCEN identifier can be used.

Who Has to File?

Nearly every legal entity formed or operating in the US is subject to reporting if they have to file papers to achieve their status. There are two types of “reporting companies”:

  • Domestic reporting companies are corporations, limited liability companies and any other entities created by the filing of a document with a secretary of state or any similar office in the US.
  • Foreign reporting companies are entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the US by filing a document with a secretary of state or any similar office.

FinCEN has indicated in a fact sheet that reporting companies include limited liability partnerships, limited liability limited partnerships, business trusts and most limited partnerships, in addition to corporations and LLCs, because these entities are created by filing with a government agency. Sole proprietorships and general partnerships do not have to file, so are likely exempt from reporting. Additionally, there are 23 types of entities that are specifically identified as exempt, including banks, brokers or dealers in securities, investment companies, insurance companies, accounting firms and tax-exempt entities. The 23 exempt entities are shown in a table in the FinCEN FAQs.

Failure to comply can subject businesses and responsible individuals to civil and criminal penalties.

Information Required and How to File

For each individual who is a beneficial owner, a reporting company will have to provide the name, date of birth, residential address and number from a government-issued identification document. Filing will be done through an online portal on the Beneficial Ownership Information Report (BOIR) form, which is still under development. There is no filing fee, but FinCEN estimates it will cost reporting companies with “simple management and ownership structures” $85 each to prepare and submit an initial BOI report. FinCEN expects small businesses will be the majority of reporting companies.

Report Filing Dates

FinCEN will begin accepting reports on January 1, 2024. Companies existing before January 1, 2024 have a due date of January 1, 2025 for their initial report. Companies created or registered on or after January 1, 2024 must report within 30 calendar days of receiving notice that their registration is effective. FinCEN has indicated that it will extend the requirement for new companies to 90 days for the first reporting year.

Companies are required to update reports when there is a change about the company itself or its beneficial owners; these reports are due within 30 calendar days after a change occurs. Corrected reports must be filed when previously reported information was inaccurate, and are due within 30 calendar days after the company becomes aware of an inaccuracy.

What Happens with the Info?

The database of beneficial ownership will not be made public. Only federal, state, local and foreign officials may request the information for authorized purposes related to national security, intelligence and law enforcement. Financial institutions also will have access to beneficial ownership information.

Observations

The new FinCEN beneficial ownership filing requirement covers many businesses in the US and imposes a completely new reporting regime. It is important for all reporting companies to begin planning now for submission after the first of the year. The final details are still being worked out, and FD will be monitoring FinCEN’s progress on the online submission portal and the exact method to ensure compliance.

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