Beneficial Ownership Reporting: A New Regulatory Landscape for Small Businesses

ARTICLE | May 10, 2024

As we usher in the new year, there is a significant regulatory shift for small business owners across the United States. The Corporate Transparency Act (CTA), implemented on January 1, 2024, has introduced a new layer of accountability by requiring Beneficial Ownership Information (BOI) reports from certain business entities. 

The CTA, designed to combat illicit activities such as tax fraud, money laundering, and terrorism financing, demands transparency from corporations, limited liability companies (LLCs), and other business entities formed by a filing with a secretary of state or similar office under state or tribal law. These entities, referred to as “reporting companies,” are now obliged to submit a Beneficial Ownership Information Report (BOIR) unless they fall under one of the 23 exemptions. 

Exempt categories include heavily regulated organizations such as banks, credit unions, tax-exempt entities, public corporations, and large operating companies. The term "large operating company" refers to an entity with more than 20 full-time employees in the US, a physical presence, and at least $5M in US-sourced gross receipts reflected on its tax return from the prior year.

The BOIR, which must be submitted electronically via the Financial Crimes Enforcement Network’s (FinCEN) secure filing system, contains information about the reporting company and two categories of individuals: beneficial owners and company applicants. However, for entities formed before January 1, 2024, the company applicant information is not required.

Deadlines for submission vary depending on when the company was created or registered. Companies formed or registered to do business before January 1, 2024, have until January 1, 2025, to file their report. Reporting companies created or registered from January 1, 2024, to before January 1, 2025, must file their report within 90 calendar days after the company's creation. For entities created on or after January 1, 2025, the report must be submitted within 30 calendar days after creation.

While the CTA does not mandate annual reports, it does require updates when there are changes to previously reported information, or when inaccuracies are detected. Updated and corrected reports are due within 30 calendar days of the change or the discovery of the inaccuracy.

Non-compliance carries severe penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. It's important to note that senior officers of an entity failing to file a required BOI report may be held accountable.

Despite the straightforward guidelines, the implementation of the CTA has not been without controversy. A recent Federal District Court ruling in Alabama (NSBA v. Yellen), deemed the CTA unconstitutional, albeit only applicable to the plaintiffs. FinCEN has since appealed the ruling and insisted that reporting companies continue to comply with the BOI reporting requirements. Some organizations, including the Ohio Society of CPAs, are exploring whether the BOI reporting requirements could be considered the unauthorized practice of law (UPL).

In this challenging regulatory landscape, small business owners should seek professional advice to ensure they understand their obligations under the CTA. Failure to comply could result in significant penalties, so it's crucial to be proactive in understanding these new regulatory requirements.

Remember, this information should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. It's for general guidance only and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind.