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Since publishing “Unveiling Beneficial Ownership Reporting” on August 31, 2023, the authors have received significant feedback and questions from other professionals and business owners. Unless your entity comes under one of the exemptions, if you do not have more than $5 million in gross revenue and 20 full-time W-2 employees, you will likely need to file.
Although further clarity has been furnished by FinCEN, significant issues remain concerning the burden on the business community, privacy, and ambiguous language. Deferral of the implementation seems unlikely even though House and Senate Bills asking for more time were filed earlier this year. House of Representatives Bill HR 4035 and Senate Bill S 2623, both titled Protecting Small Business Information Act of 2023, assert that 32 million small businesses are now potentially ensnared by burdensome reporting and record-keeping with little benefit. The bills seek harmonization with other parts of the Corporate Transparency Act (CTA) that are not yet addressed in BOI reporting requirements. It asks that all final rules required under the CTA (including the amendments made by such act) should be issued by the Secretary of the Treasury before the FinCEN BOI reporting becomes effective.
FinCEN has provided a “Small Entity Compliance Guide” (Guide), a user-friendly workbook with checklists and flow charts. The Guide is 56 pages with frequently answered questions (FAQs) and explanations covering many aspects of the BOI reporting program, including the exemptions. The FinCEN website also encourages questions to be submitted electronically.
Filing Deadlines are Dramatically Accelerated for Entities Originating in 2024.
For reporting entities in existence before January 1, 2024, the deadline for the initial filing is by January 1, 2025. For those entities coming into existence after December 31, 2023, entities will have 30 days from formation to make their filing on the FinCEN portal. There is a proposal to expand this deadline from 30 to 90 days, but this proposed change is not yet final.
Another benefit for entities in existence before 2024 is that there is no requirement to identify the individuals who registered the entity (aka Company Applicant). The Company Applicant is the individual who directly filed the document that created the domestic reporting company or first registered a foreign reporting company. The individual who directed the Company Applicant is also considered to be a Company Applicant. Only two may be identified as Company Applicants even if more are actually involved.
Will Professional Assistance from Third Parties be Available
The Guide states that Reporting Companies can use a third-party service provider to submit the beneficial ownership information reports via FinCEN’s filing system. It is not clear that many third-party providers are stepping up to perform and assist with the initial filing or to be involved in a real-time change of information reporting requirements.
In October of 2023, the American Institute of Certified Public Accountants (AICPA) issued an alert to its members warning of potential significant exposure for professional liability driven by the penalties for noncompliance. AICPA recommends engagement letters for protection and avoiding casual or off-cuff comments to clients. They are concerned that advice given could be characterized as legal advice and the unauthorized practice of law. CPAs were encouraged to contact their congressional representatives in support of the bills seeking a delay in the implementation.
The legal community might benefit from the vagueness of the CTA. The American Bar Association has posted articles on its website that recognize potential legal issues and address the fiduciary responsibility risks and the civil and criminal consequences of inaccurate reporting. One article asserts that reliance on independent legal advice could help insulate against breach of fiduciary responsibilities. In the final CTA Rule, the estimated cost per initial BOI report ranged from $85.14 to $2,614.87 depending on the complexity of a reporting company’s beneficial ownership structure. Remember this is based on using the hourly labor cost of $56.76 for skills typically offered by CPAs and lawyers. Also, the CTA rule assumes there are no non-labor costs associated with the collection of information because FinCEN assumes that reporting companies already have the necessary equipment and tools to comply with the regulatory requirements. The estimates also do not include the indirect costs incurred by officers, directors, and shareholders having to furnish information and documentation. In the authors’ opinions, these cost numbers are woefully understated as 32 million small business owners will soon find out.
Beneficial Owner Designation and the Catch-All Definition
A Beneficial Owner is an individual with Substantial Control of the entity and or an individual owning indirectly or directly 25% or more of the company’s stock
[or the voting rights]
. Any instruments known to the reporting company that can be converted into equity stock or voting rights, including warrants, options, or debt instruments are deemed exercised for determining both an individual holder’s percentage and the total shares outstanding.
There is no maximum number of Beneficial Owners who must be reported. FinCEN expects that every reporting company will be “substantially controlled” by at least one individual.
Individuals holding the position or exercising the authority of the following “Senior Officers”: President, CEO, CFO, COO, and General Counsel, are expected to have Substantial Control. The usual functions of each office title are not listed in the Guide. Any individual with the ability to appoint or remove one of these Senior Officers or a “majority” of the Board of Directors has Substantial Control. Any individual who has “substantial influence” over important decisions is to be identified as Beneficial Owner regardless of job title or stated position. The Guide describes the subject matter of decisions on business, finance, and structure that create Substantial Control. The Small Entity Compliance Guide devotes numerous pages to the technical interpretations of Substantial Control, which are too numerous to completely list in this article. Despite the examples and discussion, the reporting company will need to consider the catch-all definition that includes “any other” form of control exercised in new and unique ways.
The Employee Exception to being a Beneficial Owner.
The Guide highlights the exemption from Substantial Control for those individuals who despite their title or duties are employees. If an individual is an employee according to the IRS definition and: the individual is subject to the will and control of the employer, the Substantial Control is derived solely from the employment status, and they do not exercise the authority of a Senior Officer, they are not in Substantial Control.
And now states are considering additional disclosure requirements
New York and California have proposed their own reporting schemes. The New York legislature has passed the LLC Transparency Act, but it still needs the signature of the governor. The act is modeled after the federal CTA with the same exemptions and definitions but only applies to entities that are Limited Liability Companies and are either formed in New York or qualified to do business in New York. It does not adopt the CTA’s plans for confidentiality. It will have a searchable public database of the names of the Beneficial Owners, but they plan to protect personal identifying numbers. Some Beneficial Owners may be able to apply for secrecy in extreme situations such as whistle-blowers and those in a witness protection program. The penalties for failing to update the information will be much less severe than the CTA, but the updates may need to be filed formally through the Secretary of State.
California’s proposed version of the CTA is on a slower track. It currently defines Beneficial Owners as those owning 50% or greater, applies misdemeanor criminal penalties, and seems to be directed at (out of state) corporations and limited liability companies. It has not yet passed the legislature.
The bottom line – a small business should expect to have to pay for some professional to help with the filing. One or more individuals will have to spend significant time gathering the information for the initial filing and setting up a real-time system to monitor reportable items such as address changes, changes in organization responsibilities, directors, shareholders, and other reportable items. Most small businesses struggle to timely meet other annual tax and registration filing requirements, so compliance is likely to be a major issue. Remember, this never goes away. Be prepared for the regulatory creep that will bring with it requests for more information and audit oversight.
This article is co-authored by Robert Scharar, JD, CPA, MBA, President and CEO of FCA Corp, and William LeVay, JD, CPA, Chief Compliance Officer at FCA Corp in Houston, Texas.