Tax and financial advice from the Silicon Valley expert.

New federal report for many small businesses carries big potential penalties

The Federal government will require a new report for small businesses, called the Beneficial Ownership Information Report under the Corporate Transparency Act, effective January 1, 2024. The report and instructions haven’t been issued yet. Watch for the form and developments at

Why is this report required? Why is the federal government requiring this new report? Criminal activities, such as money laundering, trafficking humans and drugs and other crimes are often conducted using entities to shield the individuals involved. The federal government is seeking more transparency to uncover these criminals.

Who must report? The report applies for small business entities that are registered by filing a document with a secretary of state or any similar office under the law of a state or an Indian tribe. The filing requirement will also apply to an entity formed under the law of a foreign country that is registered by filing a document with a secretary of state or any similar office under the law of a state or an Indian tribe.

These entities include limited liability partnerships, limited liability limited partnerships, business trusts, corporations (including S corporations) and limited liability companies (LLCs, including single-member LLCs that don’t file separate income tax returns from their owners.)

Who can give advice about or prepare the report? The reporting requirement is administered by the Financial Crimes Enforcement Network (FinCEN), not the IRS. Since the report isn’t a federal tax form or administered by the IRS, preparation of the form by a CPA or enrolled agent could be an unauthorized practice of law. Whether an owner is a beneficial owner might require a legal interpretation, so the form might be best prepared by an attorney. CPAs and EAs should alert their clients about the required report, tell them that it isn’t in the scope of their services and suggest the client consult with an attorney about the requirements and getting help submitting the report.

When must the report be filed? The due date for the initial report is January 1, 2025 for companies created or registered before January 1, 2024 and within 30 days after receiving notice of creation or registration for companies created or registered on or after January 1, 2024. Reporting companies have 30 days to report changes to the information in their previously-filed reports and to report corrections of inaccuracies when they are discovered. FinCEN will start accepting electronically-filed reports on January 1, 2024.

Penalties. There is a severe penalty for failure to file the report of $500 per day, with a maximum penalty of $10,000. Willful failure to file is a felony that carries a federal prison sentence of two years. (I expect many business owners who prepare their own income tax returns will fail to file the report, because they don’t know the requirement. Hopefully FinCEN will initially be liberal in waiving penalties while business owners become educated.)

What information is required to be reported? Entity information to be reported includes (1) full legal name, (2) any trade or “doing business as” names, (3) complete current street address of the principal place of business, (4) jurisdiction of formation, and (5) taxpayer identification number. (In some cases, getting a taxpayer identification number requires special processing that will make it hard to meet the 30-day filing requirement for new entities.)

Beneficial owner information to be reported includes (1) full legal name, (2) date of birth, (3) complete current residential street address (business address for a business), (4) unique identifying number and the issuing jurisdiction from either a current (i) U.S. passport, (ii) state or local ID document, (iii) driver’s license, or (iv) if the individual has none of those, a foreign passport, and (5) an image of the document from which the unique identifying number was obtained.

A company that is created or registered on or after January 1, 2024 must also report its company applicants. Up to two individuals qualify as company applicants–(1) the individual who directly files the document that creates, or first registers, the reporting company; and (2) the individual that is primarily responsible for directing or controlling the filing of the relevant (formation) document.

Who is a beneficial owner? A “beneficial owner” is defined as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.” FinCEN expects that a reporting company will always identify at least one beneficial owner under the “substantial control” component, even if all other individuals are subject to an exclusion or fail to satisfy the “ownership interests” component, because an individual who exercises substantial control over the company doesn’t have to have any ownership in the company. (The “directly or indirectly” requirement is determined under state and local law, which could require a legal interpretation. For example, an individual could own an interest indirectly as a beneficiary of a trust or as a partner in a partnership that owns corporate stock.) FinCEN has not adopted the IRS rules under Internal Revenue Code Section 318 for whether an ownership interest is constructively owned, so the entity can’t rely on the regulations and case law under that section.

Potential ownership interests, such as stock options, warrants, and convertible instruments are counted. Those interests are treated as though exercised.

The trustee is the individual deemed to control trust assets for the 25% test. The same assets can be deemed controlled by a beneficiary in some cases, such as when the beneficiary is the sole permissible recipient of income and principal from the trust. When a trust is revocable, the grantor/settlor will be considered as owning or controlling the trust’s assets.

The beneficial owner of a minor child’s interest in a business is the child’s parent or legal guardian. When the child becomes an adult under state law where a domestic reporting company is created or in which a foreign reporting company is registered, the event is a change of beneficial owner that must be reported within 30 days.

An individual who inherits an ownership interest outright is potentially subject to the beneficial owner reporting requirements. An individual who is a potential future beneficiary, such as being named as a beneficiary in the will of a living person or a remainder beneficiary of a trust, is not subject to the beneficial owner reporting requirements.

Creditors usually aren’t beneficial owners, unless they exercise substantial control over the entity.

Exemptions from reporting. There are 23 exceptions to the reporting requirement. Here are six of the exceptions:

  • Publicly-traded companies. (Already have registration requirements with the SEC.)
  • Investment companies and investment advisors registered with the SEC.
  • State-licensed insurance producers.
  • Public accounting firms that are registered under the Sarbanes-Oxley Act of 2002.
  • Tax-exempt entities registered with the IRS.
  • Large operating companies that (A) employ more than 20 full-time employees in the United States, (B) have an operating presence at a physical office within the United States, and (C) filed a federal income tax return or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales. The $5,000,000 gross receipts or sales test is applied at the consolidated group level for entities that file consolidated federal income tax returns.

Conclusion. Attorneys especially need to be studying these requirements now as they prepare for helping clients form new entities during 2024.

Businesses, together with their accountants and attorneys, should be preparing to comply with the new reporting requirements during 2024.

Tax and financial advice from the Silicon Valley expert.