Starting with January 1, 2024, millions of U.S. companies now face a new wave of compliance requirements under the Corporate Transparency Act (CTA). And this act isn’t just another administrative step. It’s a legal mandate with consequences that can reach far beyond a slip on the wrist. Get this wrong, and you’re looking at hefty penalties, civil fines, and even potential jail time.
From this fact alone, it’s clear that the Financial Crimes Enforcement Network (FinCEN) – the agency tasked with enforcing the CTA – isn’t taking mistakes lightly. And neither should you, especially if you run a small business.
But the first step to avoiding costly beneficial ownership reporting mistakes is knowing exactly where things can go wrong. And that’s precisely what you’ll learn in this guide.
What Is Beneficial Ownership Reporting?
Beneficial ownership reporting is all about transparency. In essence, it requires certain U.S. businesses to disclose the individuals who hold significant control or benefit from the company’s activities.
The concept, while straightforward, plays quite a powerful role in fighting financial crimes.
How so?
Well, the CTA essentially zeroes in on activities like money laundering, tax fraud, and terrorism financing. By mandating that businesses provide Beneficial Ownership Information (BOI) reports to the FinCEN, this law aims to close off avenues where bad actors could otherwise operate in secrecy.
For financial institutions, beneficial ownership information is a due diligence must-have, enabling them to evaluate risks associated with clients or third parties. Governments, too, rely on this data to manage risks when issuing export licenses, approving contracts, or granting funds.
Without clear ownership details, there’s little hope of assessing (or mitigating) exposure to threats like fraud, sanctions violations, or terrorist financing. In other words, the CTA provides the groundwork for protecting national security, economic stability, and fair business practices, one transparent step at a time.
The Importance of Accuracy
Remember how we said BOI reporting is all about transparency? Well, add accuracy to the list, too.
Given the purpose of the BOI report, this shouldn’t come as a surprise. After all, the CTA aims to close loopholes that bad actors can exploit, not create new ones through inaccurate information. So, errors or omissions – even seemingly small ones – can seriously undermine the whole purpose of BOI reporting.
And FinCEN isn’t lenient when it comes to beneficial ownership reporting mistakes. Quite the contrary. Under the CTA, the consequences for willful violations are quite steep.
Civil penalties can reach up to $591 for each day the violation continues, and this amount is adjusted annually for inflation. This means that even minor errors – whether from simple oversight or rushed filing – can quickly add up to significant costs.
Speaking of significant costs, willful violations of the CTA can also lead to fines of up to $10,000. And that’s not even the worst criminal penalty at stake. Individuals found guilty of willfully violating beneficial ownership reporting requirements could also face up to two years of imprisonment. This includes actions such as failing to file a BOI report, knowingly submitting false information, or neglecting previously reported ownership details.
With such serious implications, it’s abundantly clear that accuracy in beneficial ownership reporting isn’t just a best practice. It’s a critical legal obligation.
Common Mistakes in Beneficial Ownership Reporting
Beneficial ownership reporting is relatively new and can be tricky to interpret at times. In the bureaucratic world, this can be a recipe for disaster. But it doesn’t have to be. As long as you recognize the most common beneficial ownership reporting mistakes, you should be able to avoid them. This also means you’ll stay on the right side of the law.
No. 1 – Failing to Identify All Beneficial Owners
One of the most critical mistakes in beneficial ownership reporting is failing to identify all beneficial owners. This oversight is common, particularly in complex ownership structures.
Why?
Because beneficial owners aren’t just those who hold direct ownership stakes; they also include individuals who exercise substantial control over the company. The latter category includes the likes of senior officers, board members, and key decision-makers.
And this is where things usually get murky.
You see, someone can own less than 25% of the business – which is the reporting threshold – and still possess significant influence over crucial decisions. Plus, control can even be indirect, stemming from intermediary entities that collectively steer the reporting company. And this type of control is much harder to quantify.
No. 2 – Incorrectly Determining the Ownership Threshold
Another one of the most common beneficial ownership reporting mistakes is incorrectly determining the ownership threshold. This mistake can only be avoided by understanding the ownership threshold in your jurisdiction. Under FinCEN guidelines, a beneficial owner typically is someone who directly – or indirectly – owns 25% or more of an entity’s equity interests.
Miscalculating the percentage of ownership or control held by individuals can lead to serious compliance issues. After all, beneficial ownership thresholds are designed to pinpoint individuals who wield significant control (or ownership) over a company. So, misidentifying who qualifies as a beneficial owner undermines the entire reporting process.
No. 3 – Providing Inaccurate or Incomplete Information
When it comes to this mistake, there are a million things that can go wrong. In other words, we’re looking at multiple beneficial ownership reporting mistakes under the umbrella of providing inaccurate or incomplete information.
Even seemingly minor errors like misspelled names, incorrect dates of birth, or wrong identification numbers can trigger rejected filings, regulatory scrutiny, and hefty fines. One letter or one number is all it takes. And remember – FinCEN’s BOI e-filing system lacks a spell-checking feature, so it’s up to you to ensure accuracy in this regard.
If deemed deliberate, these mistakes can result in hefty fines (or worse), even if they are truly unintentional.
Then, there are the more serious inaccuracies or omissions that can completely derail your reporting process.
For example, using your registered agent’s address instead of your company’s principal business address is a misstep. FinCEN requires a valid U.S. address where your operations are primarily located, not just the address of your legal representative. Similarly, reporting a P.O. Box instead of a physical street address for the business or each beneficial owner is a no-go.
Inconsistent information across different documents also raises red flags. The result? Regulatory bodies will undoubtedly conduct a further review. Also, confusion around company applicants can lead to beneficial ownership reporting mistakes. New companies must report individuals responsible for forming the company and misidentifying these applicants could lead to compliance issues.
No. 4 – Failing to Update Reporting Regularly
Submitting your initial BOI report is just the beginning. CTA compliance is an ongoing commitment that requires constant vigilance. Whenever there’s a change – like a beneficial owner moving to a new address or shifts in ownership or management – you must file an updated BOI report with FinCEN within 30 days of the change.
Neglecting to do so can result in non-compliance. Still, many business owners take the “file and forget” approach, opening up their businesses to hefty penalties.
Tips for Accurate Beneficial Ownership Reporting
Until now, you’ve only been bombarded with the potential beneficial ownership reporting mistakes, risks, and consequences. But it’s not all doom and gloom. For every misstep, there’s a solution.
The foundation of all of these solutions is preparation and understanding. FinCEN’s e-filing system is nothing but a form with blanks. It won’t give you any guidance on how to fill out the report. So, diving in without understanding the necessary requirements can be a costly mistake.
Once you thoroughly familiarize yourself with the BOI reporting criteria, you can use the following tips to ensure your report is accurate and compliant.
No. 1 – Conduct a Thorough Review of Ownership Structures
Conducting a thorough review of your ownership structure is essential for uncovering all beneficial owners, even in the trickiest cases. Begin your exploration by diving into legal documents like Articles of Organization and partnership agreements. These often hold the key to understanding who truly controls the company.
But don’t stop there. Dig into financial reports, where the number of shares owned and voting rights can reveal influential figures hidden in the shadows.
The shareholder register can also be your best friend here, as it details all shareholders and their stakes within the company.
To bring it all together, you can create an ownership structure chart. This visual tool highlights the hierarchy and relationships within the business, making it easier to spot potential beneficial owners and avoid the most common beneficial ownership reporting mistakes. A little diligence now will save you a lot of headaches later.
No. 2 – Consult With Legal or Accounting Professionals
When it comes to beneficial ownership reporting, knowing when to seek professional advice can make all the difference – especially for businesses with intricate ownership structures. If you find yourself tangled in complex regulations or unsure about your compliance obligations, it’s time to call in the experts.
Going this route can save you from costly missteps that could lead to penalties. After all, it’s these experts’ job to ensure that your reporting is accurate and up to date. Plus, their insights can free up your time, allowing you to focus on running your business instead of wrestling with paperwork.
No. 3 – Maintain Accurate Records
Keeping detailed records of beneficial ownership information is essential for compliance and risk management. And, of course, for avoiding beneficial ownership reporting mistakes.
A centralized database is the way to go, as it can streamline your reporting process and help ensure you capture all necessary details. Plus, it keeps everyone on the same page.
Of course, you’ll also need to regularly update these records. After all, this is what will allow you to swiftly adjust in case of ownership changes or regulatory updates.
However, this tip isn’t just nice to know. FinCEN also requires you to maintain documentation supporting your BOI reports for at least five years. This helps protect your business during audits and mitigate potential legal repercussions. In short, meticulous recordkeeping is your safety net against compliance pitfalls.
No. 4 – Stay Informed About Regulatory Changes
The regulatory landscape can shift rapidly, which FinCEN has already demonstrated several times. That’s why you have an additional task at hand – staying updated on changes to beneficial ownership requirements.
How can you do this?
By regularly checking the FinCEN BOI page, that’s how. This way, you’ll never be caught off guard, avoid beneficial ownership reporting mistakes, and minimize the risk of non-compliance. Always remember – knowledge is your best defense in the complex world of regulatory compliance.
Mistake-Proofing Your Beneficial Owner Reporting
A lot of things can go wrong when filling out – or filing – a BOI report. You might neglect to mention a beneficial owner, make a spelling mistake, or include incorrect information. It doesn’t matter whether these beneficial ownership reporting mistakes were made deliberately. It doesn’t matter how big or small they are. They can still get you in a lot of trouble. Luckily, with some research, focus, and a little help, you can avoid these costly mistakes and submit an entirely accurate report.
