Journal of Financial Planning: August 2024
NOTE: Please be aware that the audio version, created with Amazon Polly, may contain mispronunciations.
Bobbie Turner, MBA, is a Wall Street veteran and freelance financial writer. She combines her extensive experience in investment banking, equity research, and marketing management with a passion for clear, insightful communication to deliver compelling content to a range of financial clients. Find her at www.BobbieTurner.com.
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What do drug cartels, terrorists, and your small business owner clients have in common? Many of them will be required to file beneficial ownership information with the Financial Crimes Enforcement Network (FinCEN) before year-end.
This year’s new beneficial ownership reporting law is a mandatory filing for the 33 million small businesses operating in the United States, as well as for foreign entities registered through a U.S. secretary of state.1
The law is part of the bipartisan Corporate Transparency Act (CTA), passed in 2021, which requires for the first time ever that small businesses register their “beneficial owners” on the FinCEN website. This is a separate, additional filing to the one used to create their companies and is designed to give government and law enforcement agencies greater transparency into entities created through state registration, which to date have had little, if any, oversight.
The Backstory of the Corporate Transparency Act
The new beneficial ownership reporting rule has ushered in a flood of red tape for small businesses, along with stiff penalties for failing to comply. Why the fuss? Each year, an estimated $300 billion in illicit proceeds make their way through the U.S. financial system, including assets linked to money laundering, terrorism financing, drug trafficking, human trafficking, and tax evasion.2 Legal entities registered through U.S. secretary of state offices with obscure ownership structures are regularly used to shield the proceeds of these crimes.
The new BOI rule will limit the use of shell corporations—i.e., companies without business operations or assets—and other ownership structures that are used by criminals to obfuscate a business’s ownership from law enforcement, tax authorities, financial institutions, and the public. These new regulations will also affect high-income earners who funnel earnings to shell corporations to avoid personal income taxes.
In terms of its impact on the world’s flow of illicit funds, the Tax Justice Network ranks the United States as the number-one contributor, above Switzerland, Singapore, and Hong Kong (see Figure 1).3 The organization’s Financial Secrecy Index weights the size of a country’s market share of financial services offered to non-residents along with the level of secrecy its laws allow in determining its ranking.
By requiring entities to report their beneficial owners or face stiff penalties, FinCEN’s new regulations aim to close this critical vulnerability, making it harder for criminals to do business and easier for tax, financial, and law enforcement authorities to enforce compliance with laws and regulations.
FinCEN has ongoing publicity efforts aimed at increasing awareness among those who need to register beneficial ownership information (BOI). Nevertheless, a poll taken earlier this year showed that 42 percent of small business owners were unaware of the new rule. With this gap in communication comes a rare opportunity for advisers to step in, stand out, and prove their worth as a trusted resource.
Brandon Garrett, CEO of Bentoak Capital, points out, “Advisers can add real value by proactively educating clients about beneficial ownership registration through social media, emails, videos, blog posts, and especially through direct conversations.” Garrett adds, “Most clients assume their CPA is on top of this change, but that’s not always the case.” He sees the importance of advisers who work with entrepreneurs and business owners becoming well-versed in the new regulation and a go-to resource for answers. “Helping clients with BOI registration is a great example of how a comprehensive financial planner can truly play the role of financial quarterback for his or her clients,” Garrett says.
The Basics of BOI Filing
Following are the basic rules you need to know to navigate the new requirements, as well as tips that can make filing easier.
Starting January 1, 2024, all entities that were created by filing a document with a U.S. secretary of state or similar office are required to register BOI on the FinCEN website: www.fincen.gov/boi. (Similar offices include state offices or agencies that perform functions linked to creating or registering companies, e.g., tribal authorities.) Companies created before 2024 must file by January 1, 2025, while companies formed during 2024 have 90 days to file after receiving notice of their company’s creation.
The registration process is one-and-done in that, once filed, beneficial ownership information does not need to be resubmitted unless it changes. The FinCEN website offers plenty of guidance for registering through an extensive list of answers to frequently asked questions.
For companies with simple structures, filing is free and can take as little as 20 minutes to complete on the FinCEN website. Businesses with more complex ownership structures will need to plan ahead for reporting and may want to seek the advice of an attorney when determining who qualifies as a beneficial owner.
FinCEN’s BOI registration form asks for basic information about the entity, including its U.S. address. In addition, five pieces of information are required for each beneficial owner: the owner’s name, address, date of birth, number from a proof-of-identity document (e.g., driver’s license or passport), and an uploaded image of that document.
For entities created on or after January 1, 2024, a company applicant must also be named in the BOI report. An applicant is the individual who directly files a document to create or register a company. If more than one person is involved in filing, the individual who is primarily responsible for directing or controlling the filing is also listed as an applicant (the maximum is two applicants). Importantly, an adviser who helps a client create or register a company by submitting a filing to a secretary of state becomes an applicant of record.
Why You May Not Want to File for Clients
Donald LaGrange, a wealth adviser with Murphy & Sylvest Wealth Management, says his firm has decided not to file BOI for its clients. “We are treading cautiously, informing and reminding our clients about the requirement only,” he says. LaGrange explains the challenge in the interpretation that his firm’s legal counsel provided: “The reporting agent (namely us if we take on a reporting role for a client) may also be responsible for updates. There is a 30-day requirement for relevant changes,” LaGrange says. Updates that need to be reported range from the death of an owner to a change in another owner’s phone number. “If a change gets overlooked, then fines, compliance issues and/or legal penalties could result. That’s just not a liability we are willing to take on,” he says.
Filers’ Responsibilities and Penalties
Once its beneficial ownership is filed, the entity becomes responsible for keeping that information current. Updates are required within 30 days of any changes to the original information submitted, including changes in the entity’s ownership structure. Inaccurate information must be corrected within 30 days of the discovery of the error in order to avoid civil and criminal penalties.
What are the civil and criminal penalties involved? Entities that miss FinCEN’s BOI deadline may be subject to civil fees of up to $591 a day, a criminal penalty of $10,000, and up to two years in prison.4 The consequences for noncompliance are clearly punitive, reflecting the nature of FinCEN’s ultimate goal, which is to make it significantly more difficult for some of the world’s most nefarious actors to launder money through the U.S. financial system.
Clients with LLCs Likely Unaware of this Requirement
Edward Jastrem, chief planning officer at Heritage Financial, points out, “The new regulations fall under the Corporate Transparency Act, but many individuals who need to report don’t think of themselves as being in that category.” Jastrem explains, “For example, a client sets up an LLC to buy a second home for liability or estate planning purposes. Even if that property is not rented and conducts no business, the new BOI rule applies to them. Those kinds of clients are going to be caught off guard.”
More ‘Beneficial Owners’ than You Think
The definition of beneficial owner casts a wider net than what most advisers typically think of when it comes to small business ownership and estate planning.
FinCEN defines a beneficial owner as an individual who either directly or indirectly: (1) exercises substantial control over a company, or (2) owns or controls at least 25 percent of a company’s ownership interests. Beneficial owners must be individuals (i.e., natural persons). For this reason, trusts, corporations, and other legal entities are not considered beneficial owners.5 However, if a trust controls at least 25 percent of an entity, that trust would be exercising indirect control over the entity. The trust’s trustees, beneficiaries, and grantors could then qualify as beneficial owners. Likewise, if an estate controls at least 25 percent of an entity, that estate’s executors and beneficiaries could qualify as beneficial owners.
When it comes to determining substantial control, these categories apply:
- The individual is a senior officer (the company’s president, chief financial officer, general counsel, chief executive office, chief operating officer, or any other officer who performs a similar function).
- The individual has authority to appoint or remove certain officers or a majority of directors (or similar body) of the company.
- The individual is an important decision-maker for the company.
- The individual has any other form of substantial control over the company as explained in FinCEN’s Small Entity Compliance Guide.6
The last two categories are deliberately broad and are meant as catch-alls to include all other forms of control not listed.
Do Planners Need to Register?
Companies in industries that already have a significant amount of regulatory oversight are excluded from BOI registration requirements. The list of 23 exempt categories on FinCEN’s website includes banks, securities brokers and dealers, securities exchanges or clearing agencies, other Exchange Act-registered entities, investment companies or investment advisers, venture capital fund advisers, insurance companies, insurance agencies, and accounting firms, among others. (Visit www.fincen.gov/boi for the full list of exemptions.) Large operating companies are also exempt. To qualify, companies must have at least 20 full-time employees, a physical office space in the United States, and at least $5 million in gross receipts from tax year 2023.
RIAs that are registered with the secretary of state or similar office (not with the SEC) must file beneficial ownership information unless they are also registered as insurance producers, broker–dealers, or are a subsidiary of an exempt company.7 At this point, sole proprietors, general partnerships, and trusts are exempt since they are not created through a state’s registration process. (Note the caveat above about the potential for individuals involved in trusts and estates to qualify as beneficial owners if the trust or estate indirectly controls at least 25 percent of a reporting company.)
The rules around the types of entities that need to register and who qualifies as a beneficial owner are intentionally broad and the penalties are deliberately punitive. For this reason, clients who don’t clearly fall into one of the 23 exempt categories would be better off filing as opposed to trying to justify an exemption.
Client Privacy
LLCs have long been the corporate structure of choice for business owners who value anonymity. Any clients in this situation should be aware that beneficial ownership information will not be accessible to the public, but will be available to federal agencies including the U.S. Treasury Department; state, local, and tribal law enforcement with a court order; and financial institutions for due diligence with an entity’s consent. Foreign governments will not have direct access to beneficial ownership information, but can request it through an intermediary U.S. federal agency for investigations and issues relating to national security and/or law enforcement.
Conclusion
The new BOI rule presents an opportunity for advisers to offer their small business clients real help with a pressing matter—one that could have serious consequences for those who miss the deadline. Advisers who move now to make clients aware of what’s required will become a valuable resource. Use this opportunity to go deeper in your client relationships. Do they have friends, family members, or colleagues who need to hear about the new BOI rule? It won’t be hard to prove you’re just the right person to help with that.
Financial advisers should consult with their compliance departments and/or legal counsel before providing specific advice to clients regarding reporting requirements. This article is for general educational purposes only and does not constitute legal, tax, or compliance advice.
Endnotes
- U.S. Chamber of Commerce. n.d. “Small Business Data Center.” Accessed June 26, 2024. www.uschamber.com/small-business/small-business-data-center.
- Federal Bureau of Investigation. n.d. “Combating the Growing Money Laundering Threat.” FBI News. Accessed June 26, 2024. www.fbi.gov/news/stories/combating-the-growing-money-laundering-threat.
- Tax Justice Network. n.d. “Financial Secrecy Index.” Accessed June 26, 2024. https://fsi.taxjustice.net/.
- Original penalty of $500 per day, adjusted for inflation as of April 18, 2024. Financial Crimes Enforcement Network. n.d. “Beneficial Ownership Information Frequently Asked Questions.” Accessed June 26, 2024. www.fincen.gov/boi-faqs#K_2.
- Financial Crimes Enforcement Network. n.d. “Beneficial Ownership Information Frequently Asked Questions.” Accessed June 26, 2024. https://www.fincen.gov/boi-faqs#D_1.
- Financial Crimes Enforcement Network. n.d. “Small Entity Compliance Guide.” www.fincen.gov/boi/small-entity-compliance-guide.
- Kitces, Michael. n.d. “FinCEN’s Beneficial Ownership Information Reporting Requirements Under the Corporate Transparency Act.” Kitces.com. Accessed June 26, 2024. www.kitces.com/blog/financial-crimes-enforcement-network-fincen-beneficial-ownership-information-boi-reporting-corporate-transparency-act/.