The Beneficial Ownership Interest rule: A guide for small businesses (and law firms)

The BOI Rule: A Guide for Small Businesses

Benjamin Franklin is attributed as saying, “The only things certain in life are death and taxes.” It’s 2024, and Benjamin Franklin’s words remain as true today as they were in the late 1700s.

However, one thing that has changed is the way the Treasury Department of the United States frames its actions towards financial activity – and subsequently how it affects small businesses. The Beneficial Ownership Interest Reporting Requirements Rule (“BOI rule”) has gone into effect.

While other law firms have discussed the BOI rule and the Corporate Transparency Act that spawned it, we’ve noticed that several clients still have questions. When Moore Legal Counsel (“MLC”) reached out to FinCen, we discovered they have received over 24,000 requests for information. So, it is time for a little Moore Legal Counsel.

FAST FACTS:

1. The reporting requirements arising out of the Corporate Transparency Act took effect January 1, 2024.

2. Most small business entities are now required to disclose the personal information of their beneficial owners, some officers, and others with controlling interests, to the Federal government, unless qualified for an exemption.

3. Failure to comply subjects violators to both civil penalties (fines) and criminal charges.

4. This blog post includes links to the government’s information on this new requirement.

5. Moore Legal Counsel stands ready to help your business understand and, if necessary, comply with these new requirements.

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BACKGROUND –

The Corporate Transparency Act is a law which Congress passed into law and was signed in early 2021 at the end of the Trump Administration. Its purported aim was to assist in the identification of criminal and terroristic uses of the financial system and corporate structuring allowances of the United States.

The underlying theory was that criminal and terrorist organizations could exploit American state-based business registrations to evade federal authorities.

The impetus for enacting this law was a massive data breach known as the Panama Papers. The Panama Papers were one of the largest leaks of confidential information in history, and the name is derived from the fact the information came out of a Panama based law firm. That firm focused on creating offshore – that is to say, outside the legal territory of the United States – companies which could shield ownership interests from being disclosed and profits from being taxed.

The records revealed that some illicit businesses were using these structures to evade detection. However, the Panama Papers also revealed many law-abiding businesses were merely taking advantage of financially beneficial – and entirely legal – options to minimize their tax burden or protect the privacy of owners.

In the name of public safety and advancing the cause of criminal justice, and increasing tax revenue, the Congress decided a new law was needed. They promptly declared the formerly legal practices to be impliedly illicit ‘loopholes’ and set about passing what became the Corporate Transparency Act to end the practices.

With a name like ‘Corporate Transparency Act’ proudly stamped atop government materials and news articles alike, readers might understandably believe the Act underwent thorough debate and discussion in Congress before its passage. That is not the case.

The Corporate Transparency Act was instead passed by incorporating it into “must pass” legislation known as the National Defense Authorization Act (NDAA), which is passed on an annual basis to ensure the funding of the United States Military .

Once enacted, the law required the Department of the Treasury to implement a new federal business reporting requirement equally applicable across the entire United States. The Treasury delegated the enforcement of the new rule to what is known as FinCen or the Financial Crimes Enforcement Network. FinCen published the BOI rule in the Federal Register on 09/30/2022, officially putting it on track for enactment with a stipulated effective date of January 1st, 2024.

WHAT THE RULE DOES –

As the FinCen brochure states, “Beginning on January 1, 2024, many companies in the United States will have to report information about their beneficial owners, i.e., the individuals who ultimately own or control the company. They will have to report the information to [FinCen.]”

“How do I know if I or my business have to report?”

The BOI rule makes this very simple. Any Reporting Company has to report.

A Reporting company is:

(1) any corporation, limited liability company [LLC], or other similar entity that was created in the United States by filing of a document with a secretary of state or similar office, or any legal entity that has been registered to do business in the United States by the filing of a document with a secretary of state or similar office that, (2) does not qualify for any of the exemptions provided under the Corporate Transparency Act.

FinCen also provides this graphic:

The government provides lengthy answers to who is subject to this Rule. However, a simplified definition can read:

“If you own a business, registered with your State, you are most likely subject to this rule.”

WHAT ABOUT EXEMPTIONS –

There are twenty-three types of business/legal entities which are exempt from the requirements of the rule:

1. Securities reporting issuer

2. Governmental authority

3. Bank

4. Credit union

5. Depository institution holding company

6. Money services business

7. Broker or dealer in securities

8. Securities exchange or clearing agency

9. Other Exchange Act registered entity

10. Investment company or investment adviser

11. Venture capital fund adviser

12. Insurance company

13. State-licensed insurance producer

14. Commodity Exchange Act registered entity

15. Accounting firm

16. Public utility

17. Financial market utility

18. Pooled investment vehicle

19. Tax-exempt entity (such as a 501(c)(3)

20. Entity assisting a tax-exempt entity

21. Large operating company

22. Subsidiary of certain exempt entities

23. Inactive entity

Each of these exemptions has nuanced criteria in order to claim them. Any entity planning to claim an exemption is well advised to consult competent counsel to avoid errantly claiming an inapplicable exemption and thereby failing to timely file.

Editor’s Note – Some may find it interesting that a law purported to minimize the likelihood of criminal or terrorist organizations using the American financial and business frameworks exempts many financial businesses and tax-exempt organizations. However, it is important to remember this list makes sense, as the law will almost certainly be wielded to generate increased tax revenue, as the entities listed above are mostly subject to separate regulatory and reporting requirements.

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A QUICK NOTE FOR LAWYERS/LAW FIRMS –

The legal profession does not appear on the list of exemptions.

If your law firm serves non-profits and is considering filing for an exemption as an ‘entity which assists tax-exempt entities’ that is unfortunately foreclosed.

The BOI rule states that Exemption 20 – Entity assisting a tax-exempt entity – is only exempt if all of the following apply:

1. The entity operates exclusively to provide financial assistance to, or hold governance rights over, any tax-exempt entity;

2. The entity is a United States person as defined in section 7701(a)(30) of the Internal Revenue Code of 1986;

3. The entity is beneficially owned or controlled exclusively by one or more United Statespersons that are citizens of the USA or lawful permanent residents; and

4. The entity derives at least a majority of its funding or revenue from one or more United States persons […].

I won’t speak for your law firm fellow lawyer, but item #1 above wiped Moore Legal Counsel right out of contention.

If your law firm would like assistance from a business attorney in filing your required reporting, just email us at info@MooreLegalCounsel.com with subject: Law Firm BOI.

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WHAT HAS TO BE REPORTED –

The exact list varies but the small entity guide states a reporting company must submit:

• Full Legal Name

• All Trade names or DBAs

• Current U.S. Address

• State; Tribal jurisdictional information

• Taxpayer Identification Number (EIN)

Additionally the following must be reported for each Beneficial Owner and Company Applicant:

• Full legal name

• Date of birth

• Current Address

• Unique identifying number AND image of one of the following (non-expired):

  • U.S. Passport

  • State issued Driver’s license

  • Identification document issued by a state, local government, or tribe.

WHY SHOULD I CARE? –

This past week I was speaking with a former client. As our conversation wound through exciting topics, we found ourselves discussing the BOI Rule. The individual said, “I’m not okay with that, I don’t think I want to do that.” Referencing complying with the rule.

Many reading this may share the sentiment. MLC understands these concerns. There are seemingly innumerable regulations and requirements, and here stacks one more. So of course, the next question is why should you care, why should you comply?

The answer, penalties.

FinCen informs us:

As specified in the Corporate Transparency Act, a person who willfully violates the BOI reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues. That person may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000. Potential violations include willfully failing to file a beneficial ownership information report, willfully filing false beneficial ownership information, or willfully failing to correct or update previously reporting beneficial ownership information .

HOW LONG DO I HAVE –

Entities which existed prior to January 1, 2024 have until December 31st of this year. Entities coming into existing on or after January 1st must report within 90 days of notice that your registration is effective.

For example – Say you are a new entity which received notice from your attorney that your registration was filed and effective with the state on January 13th. You would then have 90 calendar days from the 13th to file, or have your attorney file for you, with FinCen.

Additional example – Your business exists currently and did exist prior to January 1st, you have until the end of 2024 to report.

However, it is advisable to begin the process sooner to avoid delays, problems, and increased costs associated with near-deadline reporting.

HOW CAN MOORE LEGAL COUNSEL HELP –

As this is a matter of Federal Law, Moore Legal Counsel stands ready to help clients within Pennsylvania and across the United States navigate BOI compliance.

• MLC can help answer questions about the rule, exemptions, and filing.

• MLC will be offering Filing Services at a Flat Fee.

• Additionally – as several clients have expressed willingness to fund formal letters of objection to Legislators – MLC is drafting at least two letters to sitting Senators as well as the Representatives of Pennsylvania regarding this new requirement. If your business would like to be a signatory - contact Moore Legal Counsel as soon as possible.

For more information on applicability read our latest article: BOI Compliance Practical Examples

CONCLUSION –

Navigating the complexities of the Beneficial Ownership Interest Reporting Requirements Rule can be a daunting task for small businesses and law firms alike. Staying compliant with these new regulations is critical to avoid potential civil and criminal penalties. Moore Legal Counsel is committed to assisting businesses in Pennsylvania and across the United States in understanding and fulfilling their obligations under this rule. Whether you're seeking clarity on the reporting requirements, exemptions, or need assistance with filing, MLC is ready to provide expert guidance and support. Don't let the intricacies of the BOI rule overwhelm you. Contact us today at Info@MooreLegalCounsel.com to learn how we can help ensure your business grows despite increasing and changing regulations.

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FOOTNOTES/RESOURCES

1. Beneficial Ownership Information Reporting | FinCEN.gov

2. BOI Small Entity Compliance Guide

3. Federal Register :: Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024