Small Business Owners: Don’t Let This New Law Catch You by Surprise

For the past few years, the federal government has been rolling out legislation to create the Corporate Transparency Act. This act is specifically designed to combat illegal activities, including tax fraud and money laundering. It also potentially targets funding for terrorism and related activities.

This act took effect starting in January 2024, and it is something that will impact most small businesses.

Most of the time, small businesses aren’t significantly impacted by federal regulations — however, this act specifically targets them. Larger businesses are mostly exempt from this act because of other required financial filings they already have, given the size and nature of their business.

The focus of the act is to capture companies’ ownership information through a compulsory filing of a new report called a beneficial ownership information (BOI) report. The report needs to be filed with the Department of Treasury, specifically with the Financial Crimes Enforcement Network Division (FinCEN).

This new act is catching most small businesses owners by surprise. However, the good news is that companies have until the start of next year (January 1st, 2025) to complete the filing and comply with the new report.

Who Does This Impact, and How?

Nefarious entities and nation-states have been using businesses as covers for funding their activities. For example, entities like Russia or North Korea still have billions of dollars to work with despite being under heavy sanctions.

In many cases, we’re finding that money is being funneled through small business entities to these organizations. This act intends to eliminate that activity from American small businesses.

Specifically, two types of companies will be required to submit a BOI report: domestic reporting companies and foreign companies that are registered to conduct business in the U.S.

This includes companies registered through a Secretary of State or an equivalent state office where you file business registration. This essentially means that all LLCs, corporations, and other types of business entities in the U.S. are going to need to file. The same goes for foreign entities that are conducting business here in the U.S.

Thankfully, this new reporting requirement does not include a filing fee. That’s rare when we’re talking about government regulation and compliance.

Forms are already available as of January 1st online. There is a way to file a paper form as well, though you will have to initiate some work online first before you can download and file a paper form.

What Do Businesses Need to Watch for?

There are several aspects of the Corporate Transparency Act that make it different from a typical business regulation. Be careful to keep these things in mind if you’re required to file a BOI report.

It’s Unlikely That Your Business is Exempt

Small businesses often automatically assume they’re exempt from most federal regulations, but frankly, this act is targeting a lot of small businesses intentionally. In most cases, small businesses can assume they don’t have to comply, unless there’s a clause that says they do.

With the Corporate Transparency Act, everybody should assume they have to comply with this act unless they can prove otherwise. That’s part of what makes this law different, and it’s probably going to catch a lot of small business owners by surprise.

Detailed Reporting Requirements

More importantly, the reporting requirements for this law are very different from previous financial filings and requirements. Typically, ownership is defined as a named owner as part of the business registration and/or people who have a significant financial stake in the business. For the purpose of filing your BOI, the ownership requirements are a lot looser.

In this instance, “ownership” includes individuals who have a major influence on operations or the decision-making process. Of course it still has the financial requirements — anyone with equity ownership of at least 25% needs to be named on the report.

But for this report, people who simply influence your revenue or decision-making process still need to be listed on your BOI, even if they haven’t bought an ownership stake in the company.

As a result, businesses will have to step back and think about all of the people impacting their revenue, operations, and decision-making process.

Requirements for Updating Your BOI Report

While annual filing is not going to be required for this report, there are some pretty stringent update requirements.

When you file your beneficial owner information, some identifying information, such as names, addresses, and driver’s license numbers will be required. If any of that information changes, your BOI filing must be updated to reflect that change within 30 days.

So if an employee gets married or has a divorce that drives a name change, if you renew your driver’s license, or if someone sells their house and moves, your BOI report must be refiled in an extremely timely manner.

The non-compliance penalties for refiling can be pretty steep, ranging from as little as $500 per day for the non-compliance period of personal penalties up to $10,000 and or two years in prison.

The government is very serious about these penalties because shell companies of this sort are a big part of what’s driving malicious cyber activity. With sanctioned actors continuing to fund their nefarious activity through backwater businesses and skirting registration requirements, this act intends to shine a light on them and hopefully close them down.

Will This Have Any Impact on The Funding of Cybercrime and Terrorism?

If this reporting initiative proves to be successful, this could shut down a significant source of funding for their operations, moving the needle globally on cybersecurity.

My concern is that with more than 33 million businesses in the U.S., it’s highly unlikely that FinCEN will be adequately funded to review and validate all of this data, let alone provide swift enforcement.

However, I am hopeful that this will change over time and that this marks a turning point in the U.S. government and how it will target terrorism and cybercrime moving forward.

What Are the Next Steps for Your Business?

Before January 1st of 2025, businesses need to read about these new requirements in as much detail as possible. Visit the government’s website, download the details of the act, and read about it to become as informed as you can.

I also recommend speaking with legal and financial counsel to understand their perspective on these new requirements. If you have an accountant or a company lawyer, they can help you to understand the specifics for how it applies to your business.

It can be pretty gray as to who would be considered your beneficial owners, depending on the size and structure. You might have a list in mind, but your lawyer or accountant may bring up names that you could have overlooked. Over reporting and being thorough is probably going to be in the best interests of businesses.

The big deadline for this entire process is January 1, 2025. If your company is required to file a BOI report, it needs to be submitted in its entirety before that date. Electronic filing is recommended, and even required for at least a part of the process.

Keep in mind also that FinCEN does not send unsolicited emails, so be cautious of the phishing scam that they’ve posted an alert for on the BOI homepage.

Even more importantly, businesses need to set up a plan to regularly review any information they provide for accuracy. With a 30-day refiling requirement, that review is going to have to be at least monthly. Somebody in your business must be accountable for making sure information on that report has not changed, and they’re going to have to do it every month.

Black Kilt recommends doing your homework on this one early and submitting your report well in advance of the deadline. Unfortunately, the deadline being January 1st is a challenging time for a new regulation. Given typical business end-of-year chaos as well as vacation and out-of-office periods during the holidays, it’s going to be very easy to miss the filing deadline on this one, and that could potentially land your business in hot water.

Related Posts