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FinCEN's New 'Beneficial Ownership' Rule: Here's How Businesses Can Avoid Penalties

Published Aug. 21, 2023
Steven Porrello
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At the start of 2024, millions of companies will need to report information about its beneficial owners -- that is, those who have substantial control over a company or at least 25% ownership -- to the U.S. Department's Financial Crimes Enforcement Network, or FinCEN. The rule will mostly affect corporations and limited liability companies (LLCs), but certain small businesses could be required to report beneficial owners, too. To avoid penalties, here's what you should know about this new rule.

What is the beneficial ownership rule?

FinCEN's new beneficial ownership tax rule will require businesses to report information on any individuals who have substantial control over a company. This information will need to be reported on a beneficial ownership information (BOI) report, which FinCEN will start accepting on Jan. 1, 2024.

For existing businesses (those created or registered before Jan. 1, 2024), the deadline to submit their BOI will be January 1, 2025. Any businesses created or registered after Jan. 1, 2024 will need to submit its BOI within 30 calendar days of receiving official notice from a security of state (or similar office) that the business was registered or created.

The rule aims at making it more difficult for certain "bad actors" to launder money through U.S. corporations and hide illicit activities. Any information reported to FinCEN could be passed along to law enforcement, financial institutions, or other authorized government authorities to crack down on criminal activity.

What specific information do you need to report?

First, you'll have to report information on your company, including your company's:

  • Legal name, including trade names or DBAs ("doing business as")
  • Address
  • Jurisdiction where it was registered
  • Taxpayer Identification Number (TIN)

In addition to this, you also have to report information on the company's beneficial owners. This includes:

  • Legal name
  • Birthdate
  • Address
  • Identifying number from a driver's license, passport, or other approved document (this includes an image from whatever document is chosen)

Finally, your business may have to report information on its company applicants. These are the people who filed documents to create or register your company, as well as anyone responsible for direction or controlling the filing. You only have to report company applicants if your business was created or registered after Jan. 1, 2024.

When do you need to report this information?

FinCEN will not accept BOI reports until Jan. 1, 2024. Businesses that were created or registered before that date will then have until Jan. 1, 2025 to report their beneficial owners, while those created after will have 30 calendar days.

Once Jan. 1, 2024 arrives, you'll submit your BOI report electronically on FinCEN's website, which is currently being developed. Fortunately, you won't have to pay a fee to submit this information.

Who is a beneficial owner?

FinCEN defines a beneficial owner in two ways:

  • An individual with "substantial control" over a reporting company
  • Someone who owns or controls 25% or more of a company's "ownership interests"

An individual with "substantial control" is someone who makes important decisions and exercises influence over a company's direction, like a senior officer or board member. Likewise, "ownership interests" in a company could be 25% ownership of simple stock or some other arrangement.

For example, let's say a company has 1,500 employees and is led by a CEO, CFO, COO, and general counsel. Let's also assume this company is publicly traded and has an investor who owns 30% of the company's simple stock. In this case, the company has five beneficial owners: the investor, CEO, CFO, COO, and general counsel.

What companies are required to report beneficial owners?

Basically, if you were required to file documents with a secretary of state -- or a similar office -- to register your business, then you will likely have to report beneficial owners. This includes types of businesses like limited liability companies, corporations (like C- and S- corps), and other companies.

Likewise, any foreign corporation that is registered to do business in the U.S. must report its beneficial owners.

What companies are exempt?

FinCEN exempts 23 types of entities from reporting its beneficial owners. These include mostly companies that are already under regulation by the federal government and have already reported beneficial owners, such as certain types of banks, credit unions, brokers, security exchanges, insurance companies, and public accounting firms. You can view the full list on FinCEN's website.

Are there any penalties for failing to report beneficial owners?

Yes, there are penalties if you willfully fail to report any beneficial owners. Basically, if you don't disclose your beneficial owners -- or knowingly report false or inaccurate information -- you could be fined $500 per day if the violation continues, capped at $10,000. You might also face no more than two years of imprisonment.

That said, if you accidentally report inaccurate information about your beneficial owners, FinCEN does give you time to correct it. You'll have 30 calendar days to fix mistakes, which is calculated from the moment you realize you made an error. Likewise, if any changes occur to your beneficial owners, you'll have 30 calendar days to report it to FinCEN.

How you can stay on top of the new beneficial ownership rule

When the rule comes into effect on Jan. 1, 2024, existing businesses will have a full year to report beneficial owners. Until then, check FinCEN's website periodically for more information on how to submit your BOI report. The site also has a handy FAQ section. Eventually the organization will post its report submitting portal, which you'll use to submit reports electronically. As long as you have your information ready to submit, you should be in good shape to avoid penalties.

FAQs

  • FinCEN lists 23 types of entities that are exempt from submitting BOIs (you can find those exemptions on its BOI FAQ page). A good rule of thumb, however, is this -- if you had to register with a secretary of state to form your business, then you'll likely have to submit a BOI.

  • FinCEN is currently building an IT system that will meet requirements under the Federal Information Security Modernization Act (FISMA) to ensure beneficial information is safeguarded from cyberattacks.