If you asked most small business owners, they’d say that paperwork and red tape are the hallmarks of government and the bane of their existence. Well, it’s about to get worse. Starting January 1, 2024, a new reporting rule takes effect.
What the rule is all about and what you need to do:
Back in 2021, Congress passed the Corporate Transparency Act (CTA) to help the Treasury learn more about business owners as a way to prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activities. Small businesses that are formed under state law—corporations, limited liability companies, and limited partnerships—must submit information about their owners. It appears that sole proprietorships, general partnerships, and trusts—entities that do not register with a state—are not subject to reporting.
Large businesses are also exempt, meaning companies with 20 or more full-time employees, over $5 million in sales, and having a physical operating present in the U.S. do not have to file.
Taking these requirements into account, the Treasury projects that 32.6 million companies will be reporting in the first year, and that 5 million will be reporting each year thereafter.
What, how, and when to report
The Treasury wants to know about the beneficial ownership of entities and to do this, each “beneficial owner” and or “controlling member” must provide certain information. Such individual is someone who has “substantial control” over the business or controls at least 25% of the business.
What to report: The information that will be requested isn’t complicated, but a draft of the form, referred to as a beneficial ownership information (BOI) report, shows 50 questions running 8 pages. Information to be provided includes the owner’s full legal name, tax identification numbers, and copies of driver’s licenses or passports. Special rules apply to foreign reporting companies.
How to report: Reporting will be done electronically through the Treasury’s FinCEN website using the BOSS system, which has yet to be created. It’s expected soon. There’s no cost for submitting the report, but I suspect many businesses will have their CPAs, lawyers, or other professionals do submissions for them…and charge for their time.
When to report: The deadline for reporting depends on when the business is organized:
- Businesses formed on or after January 1, 2024, must report within 30 days of formation.
- Businesses in existence before January 1, 2024, have until January 1, 2025, to report.
- If there is a change in ownership, reporting is required within 30 days of the change.
Note: For businesses that don’t have any change in ownership, reporting is a one-time event.
Penalties for not reporting
Hold onto your hats…. Penalties for not complying with the CTA reporting requirement can result in a civil penalty up to $500 per day for each day late, or criminal penalties up to $10,000 and imprisonment up to 2 years.
There’s a safe harbor for anyone who has reason to believe that a report contains inaccurate information and voluntarily corrects the information no later than 90 days after the inaccurate BOI report was submitted. But this safe harbor does not apply to reports corrected more than 90 days after they were filed, even if a company files a correction promptly after becoming aware or having reason to know a correction is needed. In other words, there is no good faith or other standard for updating or correcting reports.
Because small businesses are unaware of the new reporting requirement, small business advocacy groups, such as NFIB, are urging repeal of the CTA or at least a delay or some other relief. Stay tuned!
For more information regarding small business legislation see earlier blog here.