FinCEN Explains, Refines Beneficial Ownership Reporting Requirements

By Maureen Leddy & Tim Shaw, Checkpoint

With the Corporate Transparency Act‘s beneficial ownership reporting deadline looming, the agency in charge of administering the law — Treasury’s Financial Crimes Enforcement Network (FinCEN) — is continuing its outreach to businesses and refining its FAQs.

The Corporate Transparency Act requires small businesses and other entities to report beneficial ownership information (BOI) about who ultimately controls or owns them. FinCEN began accepting reports in January, and most existing small businesses are required to submit reports by January 1, 2025 — earlier deadlines apply for newly established businesses. FinCEN intends to use the information to combat illicit activities involving shell companies.

Lawmakers on both sides of the aisle have urged FinCEN and Treasury to step up education efforts, noting that the vast majority of small businesses have yet to file reports, and many are unaware of the reporting requirement. The law includes stiff penalties for noncompliance — up to $10,000 in fines and two years’ imprisonment.

Local outreach events

FinCEN has been collaborating with lawmakers around the country on education events over the last few months — including an August 2 event in New York City with Representative Nydia Velázquez (D-NY). FinCEN Deputy Director Jimmy Kirby spoke to event attendees about the underlying reasons for the reporting requirements — to combat money laundering and terrorist financing, as well as to aid law enforcement and national security agencies in investigating “serious crimes like narcotrafficking, human trafficking, fraud, and identity theft.” To achieve these goals, said Kirby, “it’s important for small businesses across the country to do their part” and file beneficial ownership information reports.

Kirby said that FinCEN’s database is live and encouraged small businesses not to wait until the deadline to file. According to Kirby, for “companies with simple ownership structures,” filing should take about 20 minutes and can be completed “without the help of an attorney or accountant.”

Velázquez likewise emphasized that the filing process is “relatively simple.” She described FinCEN’s reporting page as “easy to use,” adding that it “only requires relatively basic information that most small business owners either already know or have readily accessible, such as tax and personal identification numbers, legal names, and addresses.”

FinCEN webinar

FinCEN delved into more detail on the reporting requirements during a July 24 webinar with the Small Business Administration (SBA). The event was moderated by SBA National Ombudsman Michele Schimpp, who was joined by two FinCEN officials: Beneficial Ownership and Innovation Chief Phil Lam and Senior Advisor Michael Dobson.

Schmipp asked Lam why BOI reporting is needed now, citing concerns from businesses that feel there are already substantial information reporting laws at both the federal and state levels. In response, Lam said, “For too long, criminals have used American shell companies to hide their illicit gains in our economy and by reporting your company’s beneficial owners to FinCEN, we will bring transparency to corporate ownership and help our law enforcement, national security, and intelligence partners keep our economy safe.”

Lam clarified the “first step” to confirming whether a company needs to file a BOI report is determining if the business was “created by filing with a secretary of state or similar office.” In “many states,” he continued, sole proprietors do not “have to file” such paperwork and therefore are not subject to BOI requirements. However, if a foreign entity registers “to do work here” in the United States with a secretary of state or similar office, “they would also have to comply,” Lam explained.

He advised businesses to refer to the list of 23 exemptions available on FinCEN’s website but assured that if a business is in scope of the BOI rules, “you do not need an accountant or lawyer to file.” Further, small business owners showing good-faith efforts to comply “should not lose sleep” over the new requirements.

“The Corporate Transparency Act only penalizes willful violations of the law, and that is where we plan on focusing our enforcement actions,” said Lam. “This is not a gotcha exercise. We are not looking to… burden America’s thriving small business community.”

Dobson walked through the specific details of the new BOI regime and stated it is “free of charge” to file and it is a “one and done” report, not an annual obligation. Subsequent filings are only necessary when there is either a change, such as with an address or a particular beneficial owner, or an error is detected. In both cases, there is a 30-day window to update the BOI report beginning when a company applicant knows or would have good reason to know of any reportable discrepancies from what is already on file, Dobson said.

Beneficial ownership means someone has at least 25% ownership interest (through equity, stock, voting rights, etc.) or exercises substantial control. Exceptions include minor children, nominees, intermediaries, custodians, agents, employees, inheritors, and creditors. An individual “automatically” has substantial control if they are a senior officer, like a chief executive or a chief investment officer, Dobson said. Beneficial owners exercising substantial control also include those with “the authority to appoint or remove certain key people,” he added. Moreso, “important decision-makers” like those with the ability to, for example, dispose of “big capital assets,” change lines of business, or shut down “one particular branch or another” also may be considered a beneficial owner.

Updated FAQs

Also on July 24, FinCEN issued revised BOI FAQs, including a new FAQ on “disregarded entities” and an updated FAQ for entities needing to obtain a tax identification number.

FinCEN clarified that entities that are “disregarded” for U.S. tax purposes — meaning the entity’s owner reports on its tax return the entity’s income and deductions — still must report BOI if they fall within the definition of a “reporting company.” Disregarded entities may report using different types of tax identification numbers depending on the circumstances, such as an Employer Identification Number, a Social Security Number, or an Individual Taxpayer Identification Number. Foreign reporting companies without a tax identification number may need to provide one issued by a foreign jurisdiction.

FinCEN also provided more detail on how new companies can obtain a tax identification number to ensure their BOI report is timely filed. Reporting companies may need to submit Form SS-4, Application for Employer Identification Number — and foreign person responsible parties may need to submit that form by mail or fax, rather than via the online portal.

In addition, FinCEN clarified that reporting companies will not be able to submit their BOI report without a tax identification number. They should, however, request “all necessary information as early as practicable” and “consider retaining documentation associated with [their] efforts to comply with the BOI reporting requirements in a timely manner.”

Notice to financial institution customers

On July 26, FinCEN issued yet another notice, this time clarifying that financial institution customers may be required to report BOI to FinCEN directly as well as to their financial institution as part of the federal customer due diligence requirements. The notice includes charts comparing reporting requirements under the Corporate Transparency Act and under the separate provision for financial institutions — and it specifies that the required information and the definition of a “beneficial owner” do not completely align under the two reporting schemes.

The notice also indicates that FinCEN is required to revise its customer due diligence requirements for financial institutions under the Corporate Transparency Act, so those reporting requirements are subject to change.