Small Businesses Face FinCEN BOI Reporting Penalties

by Prof. Robert Bloink and Prof. William H. Byrnes

As it stands, the Corporate Transparency Act (CTA) currently remains in effect with respect to most taxpayers despite one court’s ruling that it is unconstitutional with respect to those plaintiffs.  Under the CTA, nearly all entities formed or registered to conduct business in the U.S. must report beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN).  The law is designed to limit taxpayers’ ability to use shell companies and ownership structures that can allow money laundering and other criminal activity to take place through those entities.  The reach of the CTA is incredibly broad.  Most small businesses are now subject to the new rules and failure to fully comply with the CTA beneficial ownership reporting requirements can result in significant civil and criminal penalties.  Now, FinCEN has recently updated its guidance to provide additional details on who is required to comply.

The CTA Mandate: Background

FinCEN’s new beneficial ownership reporting obligations apply to all domestic “reporting companies”.  That includes C corporations, S corporations, LLCs (including single-member LLCs), limited partnerships and any other entity formed by filing a document with a Secretary of State in the United States.

Reports must contain basic information about the individuals who hold ownership interests in the entity, such as the owner’s (1) full legal name, (2) date of birth, (3) address, (4) identifying number from the individual's ID (driver's license or passport) and (5) a copy of the ID used.

Entities created before January 1, 2024 are required to file their report containing required BOI before January 1, 2025.  Entities registered after January 1, 2024 will have 90 days from the date their registration becomes effective to report the required information (the 90-day deadline is reduced to 30 days starting in 2025).

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.  Large organizations can be exempt if they have more than 20 employees in the U.S., have filed a tax return showing more than $5 million in gross receipts or sales during the prior year and have an operating presence at a physical site within the U.S.  If the entity fluctuates above and below the 20-employee limit, they must file.

Penalties for failure to comply can be significant.  Civil penalties for willful failure to comply with the BOI reporting requirements equal up to $591 per day until the violation is corrected (in 2024, $500 base amount is adjusted for inflation each year).  Criminal penalties can include up to two years in prison and $10,000 in fines.  Penalties can be imposed for failure to file, willfully providing false information or willfully failure to correct or update previous filings.

Updated FinCEN Guidance

When a company ceased to exist before the CTA became effective January 1, 2024, the company is not subject to the reporting requirements.  However, if the company continued to exist as a legal entity for any period of time after January 1, 2024, they are subject to the new reporting regime.  That’s true even if the company had technically ceased operations prior to January 1, 2024.

The new FinCEN guidance also addresses situations where a new entity was created in 2024 or later, yet was dissolved or ceased to exist before the entity’s initial reporting deadline.  These entities are still required to submit their initial BOI via the new procedures.  Entities created in 2024 have 90 days from the date they receive actual or public notice of their registration or creation.  Entitles created in 2025 or later have 30 days.  That’s true even if the entity legally ceased to exist before the reporting deadline.

FinCEN did not provide any guidance on how to identify the relevant individuals when an entity formally ceases to exist before their reporting deadline.  A different FinCEN FAQ indicates that the report should include information about the beneficial owners at the time of filing.

FinCEN guidance makes it clear that an individual can control an entity through a trust structure.  It's possible that a trustee may be a beneficial owner of a reporting company by (1) exercising substantial control over the reporting company, or (2) owning or controlling at least 25 percent of the ownership interests in that company via the trust or structure.  Beneficiaries, grantors and trust settlors can also be beneficial owners for CTA purposes.  The terms of the trust itself will dictate whether the individual is subject to BOI reporting requirements.

For example, the requisite ownership or control can be obtained if the trustee has the authority to sell dispose of trust assets or a beneficiary is the sole recipient of income and principal from the trust itself.

Conclusion

This new guidance can significantly impact business owners who are contemplating winding down operations—and even newly created entities that are quickly dissolved.  Clients should pay close attention to rolling guidance from FinCEN for clarity on key issues.

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