Many small businesses will need to report information about their 'beneficial owners' to the federal government starting in 2024. Our guide explains the reason for the new Corporate Transparency Act, who it applies to, and how to file a report.
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by Jane Haskins, Esq.
Jane has written hundreds of articles aimed at educating the public about the legal system, especially the legal aspe...
Updated on: November 1, 2024 · 13 min read
Alert: FinCEN has extended the filing deadlines to submit BOI Reports for certain reporting companies in response to some hurricanes. Check the U.S. FinCEN website to see if your company qualifies.
As of Jan. 1, 2024, most small businesses will be required to file Beneficial Ownership Information (BOI) reports with the federal government under the Corporate Transparency Act. The act is intended to help law enforcement combat the use of shell companies for money laundering, terrorism, and other illegal activities.
Unless they are exempt from the act, corporations, limited liability companies, and other reporting companies must provide the government with information about their beneficial owners—the people who own or control the company. New businesses are also required to provide information about the people who prepared and filed business formation documents. Reporting companies could face civil and criminal penalties if they don't file the required report.
While the Corporate Transparency Act sounds like a law aimed at big corporations, it's actually most likely to apply to small businesses, including a limited liability company with just one or two owners. Here's what small business owners need to know to stay in compliance with the new law.
The Corporate Transparency Act (CTA) is the product of more than a decade of Congressional efforts to enact legislation cracking down on anonymous shell companies. Shell companies often have legitimate purposes, but they are also commonly used to shield money laundering, tax fraud, and other criminal activity. The act seeks to increase transparency regarding business ownership as a means to curb the use of U.S. business entities for illegal activity.
Under the Corporate Transparency Act, new and existing businesses that meet the definition of a reporting company must file a BOI Report with the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN). The report provides information about the identities of the beneficial owners of the business. A beneficial owner is anyone who directly or indirectly exercises substantial control over the business entity, or who owns 25% or more of the business. Businesses formed on or after Jan. 1, 2024, must also provide "company applicant information" about individuals filing business formation or registration paperwork.
Information contained in the BOI reports will be stored in a highly secure database within FinCEN. The database will not be accessible to the public. FinCEN will only disclose beneficial ownership information in limited circumstances. Those circumstances include requests from federal agencies to further national security, intelligence, or law enforcement activity; a court-authorized request from Tribal or state law enforcement agencies for a criminal or civil investigation; and a request from a federal agency on behalf of certain foreign law enforcement. Financial institutions and their regulators may also have access to information in certain situations, with the consent of the reporting company.
The Corporate Transparency Act requires reporting companies to file beneficial owner information reports unless they qualify for one of the exemptions listed in the act.
Domestic reporting companies are corporations, LLCs, limited partnerships, and other business entities created by filing documents with the state secretary of state or similar office, or with a Native American tribe. Foreign reporting companies are businesses formed in a foreign country that have registered to do business in any state or with a Native American tribe.
A sole proprietorship or informal business partnership is not considered a reporting company and does not have any reporting requirements under the Corporate Transparency Act.
Limited liability companies, corporations, and limited partnerships are reporting companies that must file beneficial owner information unless they fall within one of the 23 exemptions listed in the act. Most of the exemptions apply to larger companies and specific regulated industries, so small businesses will usually need to file a BOI Report.
Here are some of the most common types of exempt entities:
Additional Corporate Transparency Act exemptions apply to businesses in certain sectors:
Exempt entities will need to file a BOI Report if there are changes to the business in the future that cause them to lose their exemption.
LegalZoom can help you with filing your Beneficial Ownership Information Report. BOI reports also can be filed with FinCEN electronically through FinCEN's website. The obligations are as follows:
There is no fee to file the report. If you have questions or need guidance on completing the report, consult with an attorney from LegalZoom's independent network; an outside attorney; or an accounting firm.
FinCEN's website cautions businesses to avoid BOI Report filing scams. Scam letters and emails may have titles like "Important Compliance Notice" and solicit businesses to pay a fee or click on a link or QR code to file the report. FinCEN itself does not send unsolicited requests.
The Corporate Transparency Act imposes severe civil and criminal penalties for willfully failing to file a BOI Report. Civil penalties include daily fines of $500 for continuing violations, up to a maximum of $10,000. Criminal penalties may include up to two years of imprisonment.
All non-exempt reporting companies must include information about their beneficial owners in their BOI Report. Reporting companies formed or registered on or after Jan. 1, 2024, must also provide company applicant information about the individuals who filed formation or registration documents with the state.
A beneficial owner is someone who owns 25% or more of the business or who exercises substantial control over the business. In a corporation, ownership interests are commonly determined by shares of stock. In an LLC, ownership interests may be divided into "membership interests" or "membership units."
While determining percentage ownership interests may be fairly straightforward, it can be harder to identify who has substantial control over the business. FinCEN identifies four types of individuals who exercise substantial control:
There are a few exceptions where someone who would otherwise be a beneficial owner is exempt from reporting. These include minors and employees carrying out their employment duties.
FinCEN's BOI Reporting Requirements Small Business Compliance Guide has flow charts and examples to help you determine who is a beneficial owner of your business.
Domestic reporting companies formed in 2024 or later, and foreign businesses that registered to do business in a state in 2024 or later must also include company applicant information in their beneficial owner information report.
There are two types of company applicants, and your business may have only one, or both. The person who actually submits business formation or registration paperwork for filing with the state is known as the "direct filer." All reporting companies will have a direct filer.
If a person other than the direct filer was responsible for directing or controlling the filing with the state, that person must also be listed as a company applicant on the BOI Report.
The BOI Report can be filed electronically through the FinCEN website. Here's the information you'll need to gather about your company and its beneficial owners and company applicants before you file.
Information about your business:
Beneficial owner information and, if required, company applicant information:
FinCEN accepts business' beneficial ownership information reports.
Although BOI reports don't expire or need to be renewed, they must be kept up to date. If a reporting company no longer qualifies for an exemption, it must file an initial BOI within 30 days of ceasing to qualify. If there is any change to the information reported in your BOI about your company or its beneficial owners, you must file an updated BOI within 30 days of the change. However, you don't have to update personal information about a company applicant.
This means you may have to update your beneficial owner information if you have a new chief executive officer or a new dba if an owner dies or leaves the company, if the business moves to a new location, or if one of the beneficial owners moves to a new address. If a beneficial owner moves and gets a new driver's license or other ID document as a result, you'll also need to upload an image of that document.
If you make a mistake on your BOI Report, you're required to file a corrected report within 30 days of learning of the inaccuracy.
The Corporate Transparency Act (CTA) is part of the Anti-Money Laundering Act of 2020, which is part of the National Defense Authorization Act for Fiscal Year 2021. The act imposes reporting requirements on businesses, which must disclose beneficial ownership information to the federal government.
Prior to the effective date of the Corporate Transparency Act, it was up to financial institutions to collect beneficial ownership information at the time accounts were opened and maintain a database of that information. The Corporate Transparency Act shifts the burden of collecting beneficial owner information away from financial institutions and places it on business owners themselves.
The act is intended to help federal and state law enforcement agencies improve law enforcement efforts regarding money laundering, tax fraud, and other crimes that often involve the use of anonymous shell companies. Law enforcement agencies' enforcement efforts are often frustrated by an inability to trace a company's ownership or identify the individuals primarily responsible for the company's operations.
The act applies to "reporting companies," which include domestic business entities that were created by filing documents with a state or Native American tribe, as well as foreign business entities that have registered to do business in a state or tribe. It does not apply to sole proprietorships, general partnerships, and other businesses that have never filed business formation or registration paperwork.
The act contains many exemptions. Large businesses, publicly traded companies, nonprofits, and businesses that operate in the banking, insurance, and securities industries are the primary types of businesses that are exempt from the act. Also exempt are certain inactive businesses.
Most small business LLCs and corporations will not fall within an exemption and will be required to file a BOI Report.
The Corporate Transparency Act requires reporting companies to file a report with the government. The report lists information about the company and its beneficial owners—people who own 25% or more of the business, and people who exercise substantial control over the business.
The act applies to LLCs, corporations, and other types of business entities formed by filing documents with the secretary of state or similar office. It also includes U.S. business entities and foreign businesses that have registered to conduct business in a U.S. state. There are exceptions for large companies and businesses in the financial sector, but many small businesses will be required to file reports.
In addition to beneficial ownership information, a reporting company formed or registered in 2024 or later must report information about company applicants. Company applicants are individuals who file paperwork with the secretary of state or similar office to create or register a business, and individuals who direct the filing.
Existing entities created or registered before the effective date of the act, Jan. 1, 2024, must file an initial beneficial ownership information report before Jan. 1, 2025. Reporting companies created or registered during 2024 will have 90 days to file a report, and businesses formed in 2025 or later will have 30 days.
An initial BOI Report can be filed electronically at no charge on the FinCEN website. No further fillings are necessary unless there is a change in the information reported or a correction is needed.
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