A FinCEN Report Is Required In 2024 For Many Small Business Owners

January 29th, 2024 by Blake Pinyan

Overview

The 2021 Corporate Transparent Act has introduced new reporting requirements for many small to mid-size business owners. Beginning 01/01/2024, many corporations, limited liability companies (LLCs), limited partnerships, and other entities that file formation papers with a state’s Secretary of State’s office (or similar government agency) must file a report with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Who is FinCEN?

FinCEN, a bureau within the U.S. Department of the Treasury, is dedicated to safeguarding the financial system from unlawful activities, including but not limited to money laundering, criminal endeavors such as tax evasion and the use of shell companies, human trafficking, and fraud.

Recognizing the vital role businesses play in the economy, FinCEN is also aware of their susceptibility to illicit and corrupt activities. In response, a new requirement is being introduced to compel businesses to disclose information about their owners. The objective is to enhance the detection of criminals and terrorists who may exploit business entities.

The focus of this initiative is on small to mid-size businesses, as these are deemed more vulnerable to money laundering activities. FinCEN estimates that over 32 million businesses will be subject to these new disclosure requirements, with approximately 5 million mandated to submit annual reports.

Who must report?

As previously mentioned, domestic corporations, limited liability companies (LLCs), and other businesses formed through filing with the Secretary of State office, or its equivalent must submit the required filings. Similarly, foreign entities registered to conduct business in the U.S. are also obligated to comply.

Certain organizations, however, are exempt from this filing requirement. For instance, Sole Proprietors, who typically do not register their businesses with the state, fall under this exemption. Additionally, general partnerships, most trusts, large operating businesses, and highly regulated companies are also exempt.

There are over 20 types of businesses exempt from this requirement, including but not limited to:

• Large operating companies with 20 full-time U.S. employees, a U.S. office, and annual U.S. revenue exceeding $5 million.
• Inactive entities operational on or before January 1, 2020, not currently engaged in business (with funds not exceeding $1,000 in the past 12 months), not owned by a foreign person, unchanged ownership in the last 12 months, and holding no assets.
• Tax-exempt organizations.

Exempt businesses are not required to apply for an exemption; they simply refrain from filing the report. However, given the substantial penalties outlined later, it is advisable to report if there is any potential obligation.

What does the report require?

Beneficial Owners

The report will solicit information concerning the beneficial owners of the business. A beneficial owner is generally defined as the individual (or individuals) who directly or indirectly own more than 25% of the business or exert substantial control over the reporting company, even without an ownership interest.

While this primarily pertains to those with significant ownership, executive employees involved in substantial business decisions may also be subject to reporting. Given the broad scope of the “beneficial owner” designation, it is advisable to report for any individual in the business with a high level of control and/or ownership. There is no limit to the number of beneficial owners a business may have.

Ownership in this context may encompass, but is not limited to:

• Joint ownership with at least one other person.
• Ownership on behalf of another individual (as an agent).
• Through an Estate Plan (Trustee of Trust, beneficiary, grantor, etc.).

The actual interest in the business could take various forms, such as:

• Capital or profits interest.
• Equity stock or voting rights.
• Convertible instruments.
• Options.
• A contract or other legal document establishing ownership.

Substantial control, as defined, is broad, and individuals falling under this category could include:

• Senior executives (CEO, President, CFO, COO, etc.).
• Individuals with the authority to appoint or remove a senior executive or a majority of the board.
• Individuals controlling decisions significantly impacting the business, such as mergers, reorganizations, or dissolution of the company.
• Those determining capital deployment, major expenditure financing, target demographics, and large company initiatives.
• Those that influence incentive and/or employee benefit programs.
• Individuals that can amend governance documents.

Not considered beneficial owners are:

• Minor children.
• Non-officer employees.
• Individuals with a future interest through inheritance.
• Creditors.
• Individuals acting as nominees, intermediaries, custodians, or agents.

Report Questions

The report will request information about both the business and the designated beneficial owner.

For the business, the following details will be required:

• Legal/DBA (doing business as) name.
• Address.
• State of formation.
• Tax Identification number.

The beneficial owner, in turn, must provide the following information:

• Full legal name and date of birth.
• Address (which can be a business address if the applicant is a business).
• Unique identifier number from a nonexpired passport, driver’s license, or state identification card (an image must be provided for all beneficial owners).

In the event an individual or business prefers not to disclose personal information, an alternative option is available. Businesses or beneficial owners can apply for a FinCEN identifier number. Individuals can submit an application for this through an electronic web form, while companies can request the identifier number by checking a designated box on the report. The identifier number is issued immediately upon request.

For those initiating businesses in 2024, information must be provided about the individual responsible for filing the formation/registration papers and directing/controlling document filings. In such cases, the business can use a business address for the company applicant, provided the applicant reports on behalf of the reporting company during the application process. Additionally, updates to the information related to the applicant are unnecessary unless they also qualify as a beneficial owner of the business.

Deadlines

For businesses established before 01/01/2024, the deadline for filing the report is 01/01/2025.

New businesses in 2024, however, must file within 90 days from the earlier of:

• The business being notified of its active or registered status.
• Notification from the Secretary of State or equivalent office indicating the business’s active or registered status.

In the event of inaccuracies in the submitted report, a new filing must be made within 30 days of the business becoming aware of the inaccuracy. Additionally, companies are obligated to submit an updated report within 30 days of any changes to the information on the original report concerning beneficial owner(s) or the business itself. Failure to do so within the stipulated time frame may result in penalties.

Changes requiring an updated report include reporting a beneficial owner’s change of address or name, updating passport information upon renewal, or providing a copy of a renewed driver’s license. Other instances include changes due to a beneficial owner’s marriage, reaching the age of majority, death, or divorce. Moreover, if the ownership interest is sold or transferred, such as through changes in employment or personnel, or if the entity transitions from non-exempt to exempt, an updated report is necessary.

It is crucial to emphasize that beneficial owners must submit a new report for even minor changes, such as an expiring driver’s license. Keeping track of these documents and ensuring timely renewals and filings is essential for compliance.

Will businesses be notified or reminded?

Businesses may anticipate receiving notifications regarding this new requirement from firms offering services to prepare the report on their behalf. Additionally, they may receive notices from the Secretary of State office or an equivalent entity after the formation of their business.

The filing requirement for the first report is a lower barrier – as far as timeframe – for both existing and new entities. Existing entities have a full year, and new entities have a 90-day window to fulfill this obligation. However, the notable concern arises with the requirement for business owners to submit new reports following any changes, as the timeframe for compliance is considerably shorter at 30 days. Unlike the initial filing, there is no standardized method for businesses to receive reminders about the filing requirement. The nature of these changes is personal to the business and/or the beneficial owner, unlike the first filing requirement that applies to millions of organizations this year. Unfortunately, despite the difference in circumstances, the penalties for non-compliance remain consistent.

Penalties For Non-Compliance

Ensuring the completion of the report before the deadline is crucial, as a willful failure to submit information and promptly update any changes may result in significant fines, reaching up to $500 per day with no maximum limit. In cases where criminal charges are pursued, businesses could face penalties of up to $10,000 and/or two years of imprisonment.

Penalties are applicable to the beneficial owner, the business itself, and/or the responsible person (such as a senior executive) overseeing the report filing but failing to execute it. Moreover, incorrect or incomplete information in the report may lead to penalties. However, these penalties can be mitigated if a corrected report is submitted within 90 days of the original report deadline.

As per FinCEN commentary, claiming ignorance of the requirement or citing difficulties in obtaining the necessary information is not considered a valid excuse. Strict adherence to the reporting obligations is essential to avoid the potential consequences outlined above.

How and where to file

Businesses can submit their reports directly on the FinCen BOI website at www.fincen.gov/boi starting from 01/01/2024.

Upon navigating to this website, there is a comprehensive Frequently Asked Questions (FAQ) page that offers detailed instructions on the filing process, addressing various questions business owners may have. Additionally, an automated FinCEN BOI chatbot is available for users to ask questions. For those seeking to stay informed about FinCEN updates, a newsletter subscription option is provided.

To initiate the filing process on the portal, simply click the “File a report using the BOI E-Filing System” button, where you can then proceed to “Get Started” with your Beneficial Ownership Reporting.

How Anchor Bay Can Help

In summary, for existing business owners, the deadline to file reports is January 1, 2025, while those launching a business in 2024 have a 90-day window from their business’s official formation/registration. Additionally, any changes to the business or the beneficial owner require a new report to be filed within 30 days of the change.

It is crucial for beneficial owners to strictly adhere to the filing requirements of this report to avoid subjecting themselves or their businesses to steep, uncapped penalties.

While we cannot assume responsibility for the preparation, accuracy, and timely submission of our clients’ reports, we are available, upon request, to review and provide a second set of eyes on the information they input. We are happy to serve as a sounding board for any questions during the filing process and/or offer affirmation that the entered information is accurate to the best of collective knowledge.