The Beneficial Ownership Interest Rule: Practical Examples for Small Business

A Follow-up to our previous article: (Click Here if you missed it)

In response to the substantial interest and ongoing queries following our initial discussion on the Beneficial Ownership Interest Reporting Requirements Rule (BOI rule), it's clear that a deeper dive is warranted. Many of you, our valued readers and business owners, have expressed a need for a more practical understanding of how this rule applies to your specific business scenarios. In this follow-up article, we're shifting our focus from the broad strokes of the BOI rule to its direct applicability on various business structures. We will walk through real-life examples, applying the rule to different types of business structures.

Join us as we explore if this sweeping new rule, applies to you!

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Quick Facts about the BOI Rule

• Effective Date: January 1, 2024

• Requirement: Disclosure of personal information of ‘beneficial owners’ and certain officers to the Federal Government

• Penalties: Civil Fines which accrue per day and/or criminal charges.

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“The answer to success in law is not a successful answer, its causing the right question to be asked.”

— The late attorney Christopher French

The proper initial question for the BOI rule and your business is not “does it apply to me?” Rather the correct question is:

“Is my company a “reporting company?”

As almost all of our readers are located in the United States we will focus only on domestic – that is U.S. based businesses. To determine whether your business is a “reporting company” under the BOI rule there are three (3) questions which should be asked:

1. Is your company, a “corporation?”

2. Is your company, a “limited liability corporation?”

3. Is your company one that was created by filing a document with the Secretary of State or equivalent in any U.S. State[1] or Indian Tribe?

 If you can answer, “no” to all three – congratulations the BOI rule does not apply.

However, if you answer, “yes” to any of those then your business may be a “reporting company” under the BOI rule.

[1] The definition of State in the BOI Rule includes, “Any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, the United States Virgin Islands, and any other commonwealth, territory, or possession of the United States.

May versus Shall –

Many readers are likely aware that “may” and “shall” are two very different words. The former indicates possibility while the later indicates a definite. Here the government informs us that answering the three questions above creates only a possibility of the rule being applicable. To reach a conclusive determination we need to ask another question.

“Is my company exempt?”

 The BOI rule includes 23 exemptions which are based primarily upon business type:

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

20. Entity assisting a tax-exempt entity

21. Large operating company

22. Subsidiary of certain exempt entities

23. Inactive entity

All of these exceptions have specific criteria which can be found here. Rather than belabor an analysis let’s dive right into practical examples.

Practical Examples –

Simple Examples

1.      Classic Café LLC

Classic Café LLC is a Food Service business located in Pennsylvania. It is organized as a Limited Liability Company (LLC) under Pennsylvania Law. The entity is wholly owned by husband-and-wife John and Gina Doe. The business has been in operation prior to January 1st, 2024.

•        Is the entity a corporation? NO

•        Is the entity an LLC?    YES

 This company may be a reporting company if no exemption applies

•         Does this company appear to fit any of the 23 exemptions? NO

 VERDICT: Classic Café LLC is a reporting company under the BOI rule.

2.     Tech Innovations Inc.

Tech Innovations Inc is a recent start-up with innovative software applications. It is organized as a corporation pursuant to Delaware state law. The entity is owned by a combination of interests: 8 Investors with traditional equity stakes, 4 Owner-managers, and 1 Financier with a convertible note worth 5% equity as collateral. The business was legally organized and became operational in November of 2023.

•        Is the entity a corporation? YES

 This company may be a reporting company if no exemption applies

•         Does this company appear to fit any of the 23 exemptions? NO

VERDICT: Tech Innovations is a reporting company under the BOI rule.

3.     Dewey, Cheatham, and Howe PC

Dewey, Cheatham, and Howe PC is a (fictional) small-mid size law firm with three offices around Southeastern Pennsylvania and is organized as a Professional Corporation under Pennsylvania Law. There are 4 owners with equity stake in the corporation. The law firm opened in 1776.

•         Is the entity a corporation? YES

This company may be a reporting company if no exemption applies 

•         Does this company appear to fit any of the 23 exemptions? NO

 VERDICT: Dewey, Cheatham, & Howe PC is a reporting company under the BOI rule.

 4.     Cole’s Computers

Cole Doe resells and provides repair services on computers. Cole Doe is the sole owner and employee. Cole operates under the ‘fictitious name’ Cole’s Computers which is registered with the Dept. of State in Pennsylvania. Cole’s Computers has been in operation prior to January 2024.

•        Is the entity a corporation? NO

•        Is the entity an LLC? NO

•        Did the entity come to exist by a filing with the Sec. of State? YES

 This company may be a reporting company if no exemption applies 

•         Does this company appear to fit any of the 23 exemptions? NO

 VERDICT: Cole’s Computers is a reporting company under the BOI rule.

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Moderate Examples

 5.     Shred, Booke, and Hyde Accounting

 The accounting firm of Shred, Booke, and Hyde is a Pennsylvania entity registered as a Professional Limited Liability Company (PLLC). There are 3 owners, Gogh N. Shred, D. Otter Booke, and Nao Hyde. The firm was operational prior to January 1st, 2024.

•        Is the entity a corporation? NO

•        Is the entity an LLC?  YES

 This company may be a reporting company if no exemption applies

•         Does this company appear to fit any of the 23 exemptions? MAYBE

• Exemption #15 – Accounting Firm

  •    Is the entity a public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2022? YES

 VERDICT: Shred, Booke, and Hyde is EXEMPT from the BOI rule.

 6.     Good Childcare 501(c)(3)

Good Childcare is a registered non-profit corporation in Pennsylvania. It is wholly owned and controlled by a religious institution called The Church of Vague Description which is also a recognized tax-exempt non-profit entity.

•        Is the entity a corporation? YES

  This company may be a reporting company if no exemption applies

•        Does this company appear to fit any of the 23 exemptions? MAYBE

•        Exemption #19 – Tax-exempt entity exemption applies if any of the following are true:

  •    Is the entity an organization described in section 501(c) of the Internal Revenue Code of 1986 (“Code”), without regard to section 508(a), and exempt from tax under section 501(a)?       YES

VERDICT: Good Childcare is exempt from the BOI rule as a 501(c)(3).

 7.     Mega Corp

 Mega Corp is a Delaware corporation with an annual revenue in the 100’s of millions. It is publicly traded and involved in multiple industries.  

•      Is the entity a corporation? YES

  This company may be a reporting company if no exemption applies

•        Does this company appear to fit any of the 23 exemptions? MAYBE

•        Exemption #1 – Securities reporting issuer (Either must apply)

  •   The entity is an issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934. YES

•    The entity is required to file information under section 15(d) of the Securities Exchange Act of 1934. YES

 VERDICT: Mega Corp is exempt from the BOI rule as a publicly traded company (issuer of securities).

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  Unique Example

 8.     New Hope School

New Hope School will be religious affiliated non-profit school primarily catering to members of a local Church of Vague Description, but also open for public enrollment. The school expects to be operational by February 1st, 2024 following approval of the articles of incorporation for a non-profit corporation with the Pennsylvania Dept. of State. Thereafter the school will seek a 501(c)(3) exemption from the IRS, which it is likely to receive, pending the IRS period of review which is currently greater than 90 days.  

•     Is the entity a corporation? YES

   This company may be a reporting company if no exemption applies

•       Does this company appear to fit any of the 23 exemptions? MAYBE

•       Exemption #19 – Tax-exempt entity exemption applies if any of the following are true:

  • Is the entity an organization described in section 501(c) of the Internal Revenue Code of 1986 (“Code”), without regard to section 508(a), and exempt from tax under section 501(a)? Yes…NOT YET

  • Is the entity an organization that is described in section 501(c) of the Code and was exempt from tax under section 501(a) but lost its tax-exempt status less than 180 days ago? NO

  • Is the entity a political organization as defined by section 527(e)(1) exempt from tax under section 527(a)? NO

  • Is the entity a trust described in paragraph (1) or (2) of section 4947(a)? NO

FinCen, requires an entity which comes to exist after January 1st, 2024 to comply and report within 90 days of their successful incorporation. There is no stipulation or exemption for ‘in-progress’ filers seeking an exemption which may, or even is likely to be, granted after 90 days. However, the case is not closed, yet.

•       Exemption #22 – Subsidiary of certain exempt entities

  • The entity’s ownership interests are controlled or wholly owned, directly or indirectly, by ANY of entity exempt under the first 21 exemptions.

Because New Hope School upon its legal ‘birth’ will exist as a wholly owned subsidiary of the Church of Vague Description it is exempt from the BOI rule based upon the exemption status of the Church of Vague Description. Therefore, despite not obtaining its own 501(c)(3) within the 90-day reporting window, the Church of Vague Description need not submit reporting information upon start-up.

 VERDICT: New Hope School is Exempt.

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Conclusion: Simplifying Compliance with Expert Assistance

As we wrap up our exploration of the BOI rule, it's clear that understanding and complying with this regulation is vital for small businesses. The varied examples we've explored, from Classic Café LLC to Mega Corp, highlight the rule's broad reach and the need for tailored compliance strategies. If you're unsure about how the BOI rule applies to your business or simply want to ensure this new regulation is handled correctly, competently, and in a cost-effective manner, Moore Legal Counsel is here to help. MLC can provide you with the clarity and direction needed to ensure your business remains on the right side of this important new requirement.

Don't let the complexities of the BOI rule slow down your business. Click the button below to schedule a consultation.

You can also reach out to us at Info@MooreLegalCounsel.com to get started today. At Moore Legal Counsel, we're committed to providing effective business assistance so you can focus on your success.