New Ownership Reporting Rules Probably Apply to Your Small-Business Clients

Owners of existing businesses, including LLCs, must disclose ownership to FinCEN by Jan. 1.

Many small-business clients have recently been surprised to learn that they will now be subject to federal information reporting requirements.

Under the Corporate Transparency Act, passed in January 2021, nearly all entities formed or registered to conduct business in the United States must report beneficial ownership information to the Treasury’s Financial Crimes Enforcement Network (FinCEN). The law created a federal database to store information about an entity’s ownership structure. 

The legislation is intended to limit taxpayers’ ability to use shell companies and ownership structures that can allow money laundering and other criminal activity to take place. The rules are now effective — and the exemptions are limited — so nearly every small-business client must prepare to report basic ownership information in the coming months.

Beneficial Ownership Reporting Obligations: The Basics

FinCEN’s beneficial ownership reporting obligations apply to all domestic “reporting companies,” including corporations, LLCs, limited partnerships and any other entity formed by filing a document with a secretary of state in the United States. Certain foreign corporations that are registered to conduct business in the United States must also report. 

Both foreign and domestic reporting companies must identify and provide information about beneficial owners to the federal database.

A “beneficial owner” is a natural person who either: 

When making the determination of whether an individual owns or controls 25% of the business, the individual’s options, convertible instrument and other similar equity rights are treated as though they have been exercised. 

Individuals are deemed to exercise “substantial control” over a company if they:

For new entities, information about a “company applicant” must also be provided. If the entity was created on or after Jan. 1, information about a maximum of two company applicants will be required. A company applicant is:

In many cases, a corporate formation agent or attorney who is responsible for filing formation documents with the secretary of state (or similar office) will be the company applicant. FinCEN provides examples outlining various scenarios to help companies determine who is primarily responsible for their filings.

What Needs Reporting

The reporting company must report the entity’s legal name, any trade names or dba names,  principal place of business, state of formation and unique taxpayer ID number. 

For each beneficial owner, the company must disclose full legal name, date of birth, address, identifying number from the individual’s ID (driver’s license or passport) and a copy of the ID used. 

For each company applicant, the following information is required: the individual’s name, date of birth, address and information from the individual’s ID, including the document number and jurisdiction.

Entities created before Jan. 1 must file their report before Jan. 1, 2025. Entities registered after Jan. 1 have 90 days from the date their registration becomes effective to report the required information. The registration portal opened Jan. 1 and is available at https://boiefiling.fincen.gov/.

That said, these are not annual reporting requirements. Companies must update their filings only if there are any changes with respect to the information that has already been filed. They must also update reports to fix any inaccuracies within 30 days of learning of the error.

Exemptions to the Requirements

Most small-business clients will not qualify under the exemptions that FinCEN has created. The law does create exemptions for tax-exempt entities, certain political organizations and inactive organizations that are no longer conducting business.

Other exempt entities include banks, credit unions, money services businesses, securities brokers, securities exchanges, accounting firms, pooled investment vehicles, public utilities, financial market utilities, state-licensed insurance producers, venture capital fund advisors and Exchange Act-registered entities. Subsidiaries of certain exempt entities may also be exempt.

Broadly speaking, most entities that are exempt are classified as such only because they’re already subject to regulatory reporting obligations under a separate regime.

Conclusion

Most business entities will be classified as reporting companies under the FinCEN reporting structure if they filed any formal paperwork with a state to create the entities. Sole proprietors are not subject to the reporting rules. However, advisors should check to see whether a business client qualifies for an exemption sooner rather than later.

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