How to avoid $500 per day penalties and 2 years imprisonment

You may have heard that the Corporate Transparency Act (CTA) has created the new Beneficial Ownership Information (BOI) reporting requirements that go into effect starting soon – January 1, 2024.  While the law is intended to prevent financial crimes, it has the unfortunate result of placing more burden on small businesses.  This law means more onerous reporting and compliance requirements for most all corporations and limited liability companies (LLCs).

If you own a corporation or limited liability company, you are most likely required to file these reports, even if the company is not required to file a tax return.

There are some exemptions available, but those exemptions don’t apply to the vast majority of small businesses.  The exemptions that are most likely to apply are for those that qualify as either an “inactive entity” or as a “large operating company”.  To qualify as an inactive entity, (among several other things) the company can’t be engaged in an active business or have any assets.  To qualify as a large operating company, the company would have to meet all of the criteria listed below:

  • Has an operating presence in the United States
  • Employs more than 20 full-time employees in the United States
  • Filed a tax return in the previous year with $5 million or more in gross receipts from US sources

The BOI reports are required to be submitted to the Financial Crimes Enforcement Network (FinCEN) and include information about the reporting company, as well as the “beneficial owners” of the reporting company.  Beneficial owners include individuals who – directly or indirectly – own 25% or more of the company.  Oddly, beneficial owners also include individuals who exercise “substantial control” over a reporting company even if those individuals don’t have any ownership interest in the company.  For entities created on or after January 1, 2024 – those who assisted with the filings to create the entities are considered “company applicants” and have the same reporting requirements as the beneficial owners.

The following information is required to be included for each reporting company:

  • Name and, if applicable, a trade name or assumed business name
  • Current street address
  • Jurisdiction of its formation or registration (usually the state in which the company was incorporated/organized)
  • Employer Identification Number (EIN) or foreign TIN

The following information is required to be included in the report for each beneficial owner:

  • Name
  • Date of birth
  • Residential address (not the company address)
  • An identifying number and the issuing jurisdiction (usually a driver’s license number or a passport number)
  • An image of the identifying document used to obtain the identifying number above

The initial annual report due date depends on when the company was formed.  For those that were formed prior to 2024, they have until January 1, 2025 to file their initial report.  Companies formed on or after January 1, 2024 have 30 days from formation to file the BOI report (though there is a proposal to increase that to 90 days).

Not only does each reporting company have to file an annual report, they also have to provide updates within 30 days if there are changes to the previously filed information.

The civil penalty for failing to comply with these reporting requirements is $500 per day.  The criminal penalties can include imprisonment for up to two years and/or a fine of up to $10,000.  Note that the penalty applies for each entity.

Since the potential penalty is so significant, it’s really important that those most likely to be affected – small business owners and those who control small businesses – be made aware of this requirement and how to comply with it.

FinCEN plans to open up a secure electronic filing portal on January 1 2024 that should allow for reporting companies to submit their reports.  There will not be any fee to submit the reports through their portal.

Since their system is not yet operational, it’s difficult to know just how user-friendly that system will be.  It seems unlikely that it would support simple updates for when a beneficial owner changes their home address or renews their driver’s license or passport.  Another potential issue with reporting directly through the FinCEN portal is that whoever is submitting the report would have to collect all the personal information for each beneficial owner.  Some beneficial owners may not be comfortable with sharing that information.

For those who do not want to attempt to file the reports on their own, there are paid third-party service providers who can step in and help, including

Some of the potential advantages of using include the following:

  • A tool to help determine if the company has a filing requirement
  • Allows you to enter all the information for reporting now and they will securely submit the report to FinCEN after the reporting window opens after the start of the year
  • Intuitive interface for entering the required information
  • Separate login capability for beneficial owners who don’t want to share their personal information with whoever is doing the company reporting
  • A beneficial owner’s information can be added to multiple companies (when applicable) without having to be re-entered repeatedly
  • Easy updates to the report for any information that changes (company address, beneficial owner address, driver’s license or passport renewal, etc.)

For our clients that choose to use before the end of the year, use the following promo code to get 50% off the cost of filing: TRNWEBINAR.

Whichever method you use to comply with the new BOI reporting requirements, just make sure that you do comply.  Otherwise, the penalties could make your wallet become a lot lighter and the two years of imprisonment could make visiting hours become the highlight of your day.

Use this link to see updates in Part II.

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