FinCEN’s New 2024 Requirement For State-Registered RIAs (And Other Small Businesses) To Report Beneficial Ownership Information (BOI)

*As of March 1, 2024, the Corporate Transparency Act and Beneficial Ownership Reporting Rule has been ruled unconstitutional, and is now pending further review.

Traditionally, the Federal and state governments in the U.S. have afforded a good deal of privacy to business owners. Although businesses such as LLCs and corporations are typically required to register in the state(s) where they operate, and to provide contact information for at least one agent or representative for legal and tax purposes, they generally aren't required to disclose who actually owns the business.

On the one hand, the fact that most businesses haven't needed to report any information on their owners has, at least in theory, helped to foster an open, competitive, and innovative marketplace, with entrepreneurs being able to conduct their business free from public or government scrutiny (so long as they didn't violate laws or otherwise do anything to invite scrutiny upon themselves). On the other hand, the lack of transparency into small business entities has also made them nearly ideal vehicles for crimes like money laundering, fraud, and tax evasion, since it can be exceedingly difficult for authorities to connect an anonymous 'shell' company to the individual(s) controlling or benefiting from it.

Although a large number of small businesses are legitimate – the Small Business Association estimates there are over 33 million small businesses whose employees comprise 46% of the U.S. workforce – the potential for harm caused by less-legitimate entities compelled Congress in 2021 to enact the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act, which created a new requirement for many small businesses to report information on their "beneficial owners" to the Treasury Department's Financial Crimes Enforcement Network (FinCEN).

Subsequent Treasury regulations set the effective date of the CTA's requirements as January 1, 2024, meaning that all businesses that are subject to the law's Beneficial Ownership Information (BOI) reporting requirements are now required to file a BOI report via FinCEN's online BOI E-Filing system. Notably, the information that firms report on their beneficial owners isn't disclosed publicly; rather, it can be shared among government agencies for the purposes of national security, intelligence, and law enforcement, but is otherwise kept confidential.

For financial advisors who partially or fully own their firms, it's important to understand the new FinCEN BOI reporting requirements, including whether or not their own firms are required to report information on their beneficial owners, what information they need to report, and when the reporting needs to be done. And although this post will focus mainly on how the new regulations relate to financial advisory firms, it's also worth noting that advisors of small business owner clients – who may be subject to BOI reporting requirements themselves – could also benefit from a deeper understanding of the new rules in order to help their clients navigate the reporting process.

FinCEN has put together a comprehensive FAQ on the specifics of the requirements, as well as a Small Entity Compliance Guide, to help business owners understand their obligations under the new rules, but it's worth diving into the details of BOI reporting from an advisor perspective to clarify what firms and their owners need to do to comply with the new rules.

Who Needs To Report Their Beneficial Ownership Information (BOI)

At a high level, any company that was created by filing a document with a secretary of state or similar state-level office in the U.S. (or is a foreign company registered to do business in a U.S. state) is a "reporting company" that is required to file a report to provide information on their beneficial owners.

In practice, the requirement applies to business entities like Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), and corporations that are created by filing paperwork with the state(s) where they do business. It does not, however, appear to apply to unregistered entities like sole proprietorships and partnerships. So while advisory firms that are organized as LLCs or partnerships would fall under the reporting requirements, individual advisors operating under 1099 arrangements with an affiliate firm (which is effectively a sole proprietorship for tax purposes) would not, unless they had otherwise structured their business as an entity like an LLC that would be treated as a reporting company.

Although most small businesses that meet the criteria above will need to file a BOI report, there are 23 different types of companies, as shown below, that qualify for an exemption to the BOI reporting requirements. FinCEN's Small Entity Compliance Guide outlines the specific criteria that companies must meet to qualify for each type of exemption.

The exemption list notably includes investment advisory firms – but in reading the fine print of FinCEN's specific exemption criteria, only SEC-registered investment advisory firms qualify from a BOI reporting exemption. Which means that state-registered RIAs do still need to file a BOI report.

But (there's always another "but") a state-registered RIA may still be exempt from BOI reporting if they qualify for a different exemption elsewhere on the list. For instance, an RIA that is also licensed to sell insurance in their state or is a FINRA-member broker-dealer – both of which also fall under the list of exemptions – is exempt from the BOI reporting requirements, even if the RIA on its own would not have been exempt from reporting. Or if the RIA is a subsidiary of an exempt company, such as a broker-dealer, insurance company, accounting firm, or any company that has more than 20 employees and more than $5 million in annual gross receipts, it's exempt from BOI reporting even if it would have otherwise needed to file a BOI report.

In other words, as shown below, an RIA is most likely to be subject to the BOI reporting requirements if it meets all of the following criteria:

1. It's registered at the state level;
2. It's not dually registered as an insurance producer or broker-dealer; and
3. It isn't owned by a company that qualifies for any of the reporting exemptions.

Who Counts As A "Beneficial Owner" For BOI Reporting?

FinCEN defines a beneficial owner as "an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests".

It goes on to define "substantial control" as follows:

An individual can exercise substantial control over a reporting company in 4 different ways. If the individual falls into any of the categories below, the individual is exercising substantial control:

• 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 the authority to appoint or remove certain officers or a majority of directors (or similar body) of the reporting company.
• The individual is an important decision-maker for the reporting company. See Question D.3 for more information.
• The individual has any other form of substantial control over the reporting company as explained further in FinCEN’s Small Entity Compliance Guide.

In other words, anyone with heavy influence over the direction of the company is a beneficial owner, regardless of whether or not they actually own any piece of the company. For instance, this would likely apply to an RIA's Chief Compliance Officer (CCO), who would be considered an important decision-maker on account of their responsibility for creating, implementing, and maintaining compliance policies and procedures for the firm.

The 25% ownership interest component of FinCEN's beneficial ownership definition is fairly straightforward when it comes to companies that are owned directly by one individual or a group of partners or shareholders, of which any person who owns at least 25% of the company is considered a beneficial owner. Where it gets more complex is when there are indirect owners, as when the company is owned by other entities (such as businesses or trusts), which are themselves owned by either individuals or by an additional layer of entities and so on, in which case it's necessary to calculate how much indirect ownership each individual effectively has of the reporting company via their ownership of the intermediary entities.

Example 1: Alpha Capital LLC is a state-registered advisory firm that is directly owned by 2 other companies, Beta LLC and Gamma LLC, which each own 50% of Alpha Capital.

Beta LLC is owned by 2 individuals, Anna and Brad, who each own 50% of Beta LLC. Gamma LLC is owned by 4 individuals, Calvin, Derek, Eva, and Flo, who each own 25% of Gamma LLC. These 6 individuals are Alpha's indirect owners, who control the company via their ownership of the entities that own it directly.

By the indirect ownership rules, Anna and Brad, who each own 50% of Beta LLC (which in turn owns 50% of Alpha Capital), each indirectly own 50% × 50% = 25% of Alpha Capital.

On the other hand, Calvin, Derek, Eva, and Flo, who each own 25% of Gamma LLC, indirectly own 25% × 50% = 12.5% of Alpha Capital.

Graphically, then, the ownership structure can be outlined as follows:

So when Alpha Capital reports its beneficial owners, it will need to include Anna and Brad, who are both beneficial owners by virtue of indirectly owning at least 25% of the company. Calvin, Derek, Eva, and Flo, who each indirectly own only 12.5% of Alpha Capital, don't need to be reported as beneficial owners (assuming none of them also exercises substantial control over the company as described above).

The question of who is ultimately considered a beneficial owner, then, can depend a great deal on the size and structure of the firm. In a company where ownership and decision-making for the firm is concentrated among only a handful of individuals, the firm's beneficial owners are more likely to be the owners themselves. However, in a company where ownership is more spread out such that no individual actually owns 25% or more of the stock or ownership interest, the beneficial owners are more likely to be the key decision-makers – board members, officers, and senior leadership – who have substantial control over the firm's operations.

New "Company Applicants" Must Be Reported Along With Beneficial Owners

So far, most of the attention around FinCEN's new BOI reporting requirements has been on the reporting of the beneficial owners themselves. However, companies formed on or after January 1, 2024, are also required to report information on their "company applicants". This rule doesn't apply to pre-existing companies as of the beginning of 2024, only to those formed on or after January 1.

At a base level, a company applicant is the individual who filed documents with a secretary of state's office to legally create the company in question. Notably, this definition is very literal: FinCEN wants the information for the person who physically filed the documents, whether by bringing the paper documents to the state offices or by submitting the forms online. (Except for when a third-party courier or delivery service transports the documents to the secretary of state's office; then the applicant is whoever hired the courier to deliver the documents.)

Which means that a company applicant could be anyone from the founder or owner of the company, to one of its employees, to a third-party attorney hired by the company, to one of that attorney's paralegal staff. If they actually filed the company's creation documents with the state, the company will need to report their information, along with the company's beneficial owners. If a financial advisor files business-creation documents as a service for their business owner clients, then the advisor themselves could be considered those businesses' company applicant!

In some cases, there will be a second category of company applicants whose information will also need to be included in a company's BOI report. If there were multiple people involved with filing the business-creation documents – for example, if one person prepared the documents and another person filed them – then the person who was "primarily responsible for directing or controlling the filing action" is also considered a company applicant.

For instance, if a company hired a law firm to prepare their LLC formation documents, and an attorney drafted the documents and then instructed a paralegal to submit them to the state office, then both the attorney (who directed the filing of the documents) and the paralegal (who actually filed the documents) would be considered company applicants for the firm on whose behalf they created and filed the documents.

In other words, all reporting companies created on or after January 1, 2024, will need to include at least 1 company applicant in their BOI report (i.e., the person who filed their business-creation documents with the state), and those who had multiple people involved in the filing will have 2 company applicants (the person who controlled or directed the filing, and the person who filed the documents). Businesses can report a maximum of 2 company applicants, so if there were more people involved in creating and filing the state registration documents, the company will have to decide who was "primarily" responsible for directing or controlling the filing to report alongside the person who actually filed the documents.

Information That Needs To Be Reported For A Company's Beneficial Owners And Applicants

The Beneficial Ownership Information (BOI) report itself, which can be filed online via FinCEN's E-Filing system, is fairly simple and consists at a high level of 3 sections (plus an introduction page and a submission page) for reporting information on the following:

1. The company itself;
2. The company's applicants (for companies formed on or after January 1, 2024); and
3. The company's beneficial owners.

In the first section, the following information about the company must be provided:

• The company's legal name (along with any trade or DBA names);
• The company's Tax ID number, such as an EIN, SSN, or a foreign tax ID;
• The state and/or country in which the company was formed; and
• The company's U.S. address (i.e., the location of its principal place of business).

For the second and third sections, companies must report the following information for each of their company's applicants and beneficial owners:

• The individual's name;
• Their date of birth;
• Their home address;
• Their state ID (e.g. driver's license) number, U.S. passport number, or, if neither of those are available, a foreign passport number; and
• An uploaded picture of the ID listed above.

Some individuals and companies may find it useful to request a FinCEN Identifier number, which is a unique ID number that can be entered on the BOI reporting form in lieu of all the information above. For example, an attorney who files lots of company-creation documents would need to be reported as a company applicant for many companies, which could require them to provide their home address, date of birth, and driver's license image to every single company for whom they filed creation documents. But if they instead applied for a FinCEN Identifier number, they would provide that information only once (directly to FinCEN in their initial request for the Identifier number), and then simply give out the Identifier number to the companies for whom they need to be reported as a company applicant. A FinCEN Identifier number can be obtained by filling out a separate application form online.

Deadlines For Beneficial Ownership Reporting

There are effectively 3 separate deadlines for companies to complete their initial Beneficial Ownership Information (BOI) reporting, depending on when the company was created:

• For companies created prior to 2024: The reporting needs to be completed by January 1, 2025.
• For companies created during 2024: The reporting needs to be completed within 90 days of the date they receive notice of their company's creation from their state's secretary of state office.
• For companies created in 2025 and later: The reporting needs to be completed within 30 days of the date they receive notice of their company's creation from their state's secretary of state office.

Additionally, if an existing company that had previously qualified from an exemption from BOI reporting stops qualifying for that exemption, they have 30 days from the date of the change to submit an initial BOI report, regardless of the date the company was created.

For example, if a state-registered RIA that was also registered as a broker-dealer (which would have qualified it for a reporting exemption, as noted earlier) terminated its broker-dealer registration to become solely an RIA, it would lose its reporting exemption and would be required to submit an initial BOI report within 30 days of dropping the broker-dealer registration.

Changes In Company Or Beneficial Ownership Information

In addition to completing their initial BOI reporting by the deadlines above, companies also need to submit an updated BOI report any time there is a change to the reported information about the company or its beneficial owners within 30 days of the change. (Changes to company applicants' information do not necessitate submitting a new BOI report.)

For example, any time the company changes its address or registers a new trade or DBA name, it would need to submit a new BOI report reflecting that information within 30 days of that change. Changing to an exempt company – such as a state-registered RIA (which isn't exempt from reporting) becoming registered with the SEC (which is exempt) – requires submitting a new report simply to reflect that the company is now an exempt entity. If any of the company's beneficial owners changed their name or home address, the company would also be required to submit a new BOI report.

Furthermore, any changes to the makeup of the beneficial owners will require the company to submit a new BOI report. For instance, a purchase or sale of ownership interests that results in different people owning at least 25% of the company, a change in leadership that results in different people having substantial control over the company, or the death of a beneficial owner causing their ownership interest to transfer to a different person would all be events requiring the filing of a new BOI report within 30 days of the change. (In the case of the death of an existing beneficial owner, the 30-day clock starts not upon the owner's death but upon the date that the estate is settled, so the new BOI report can both reflect the removal of the deceased beneficial owner and identify any new beneficial owners resulting from the settlement.)

Unfortunately, it seems as though any one of the changes above requires resubmitting the entire BOI report – that is, not just the information that's changed, but all of the information about the company, its applicants, and its beneficial owners… even the information that hasn't changed. Which means that it would be a good idea for reporting companies to hold onto all of their beneficial owners' and company applicants' information used to file the initial report and any subsequent reports (including names, addresses, birthdates, ID images, and/or FinCEN identification numbers) to ensure that any further updates won't require gathering the same information over and over again.

Penalties For Violating Reporting Requirements

In order to give teeth to the Corporate Transparency Act's new disclosure requirements, Congress included hefty civil and criminal penalties for companies that violate them. Namely, people or companies that willfully provide false or fraudulent beneficial ownership information, or willfully fail to submit an accurate report (or to update an existing report as required), can be subject to civil penalties of up to $500 for each day that the violation isn't corrected, and criminal penalties of up to $10,000 in fines and 2 years in prison.

These penalties can apply both to companies and their leaders (e.g., for knowingly submitting inaccurate information in the company's BOI report) as well as to individuals (e.g., for beneficial owners who knowingly provide false information to their company for BOI reporting purposes).

If a BOI report containing inaccurate information is filed, a company may submit a corrected report within 90 days of the original report's deadline without facing civil or criminal penalties.

Takeaways For Financial Advisory Firms (And Advisors)

If you've been skimming past the details above (and there are a lot of details, so I don't blame you), at this point you might be wondering, what exactly does all of this mean to me as an advisor? Well, what follows are the big-picture highlights for advisory firms (though it would also be advisable to reread the above in-depth, as well as FinCEN's Small Entity Compliance Guide, for more understanding of the nuances of each of the points below).

First, most state-registered RIA firms will need to file a Beneficial Ownership Information (BOI) report with FinCEN. Dually registered (RIA and/or broker-dealer and/or insurance broker) firms, however, are likely exempt from the reporting requirements, as are all RIAs registered with the SEC.

Firms that do need to file a BOI report will need to provide basic identification about their companies and their beneficial owners, who are defined as anyone who (directly or indirectly) owns at least 25% of the firm or exercises substantial control over the company. For the purposes of BOI reporting, beneficial owners are not necessarily the same owners who are disclosed on the firm's Form ADV, Part 1 (though there will likely be some overlap).

For firms that were formed on or after January 1, 2024, they'll also need to report the same information on anyone who filed (or directed the filing of) state business-creation documents on the company's behalf.

Companies that existed before January 1, 2024, will need to file their initial BOI report by January 1, 2025. Newly formed firms created between January 1, 2024, and December 31, 2025, will need to file within 90 days of receiving notice of the company's creation, while those created on or after January 1, 2025, will have 30 days to file. Any change of information on the company or its beneficial owners will require filing an updated BOI report within 30 days of the change.

Finally, it's worth noting that many clients of financial advisors may be owners of small businesses, from multimillion-dollar firms to single-member LLCs, who may be subject to the new BOI reporting requirements. And although information about the requirements has begun to trickle into the media and trade publications, there are still likely a great many business owners who are either still completely unaware of the BOI reporting requirements or who just aren't sure whether the requirement apply to them (or how to complete them if so).

So for advisors who have needed to familiarize themselves with the FinCEN BOI reporting requirements, there's an opportunity to apply that same knowledge to guide small business owner clients through requirements and the process of reporting – which could potentially save them some money over hiring an outside consultant to give them the same information (of which there are likely to be many popping up, of varying degrees of expertise and trustworthiness, as the January 1, 2025, reporting deadline nears).

Likewise, even for advisors who don't need to worry about BOI reporting for themselves, getting familiar with the rules of who needs to report, what information needs reporting, and when it needs to happen can capture that same opportunity to give clients peace of mind about complying with their reporting obligations.

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For many firms with just one or a handful of owners, the process of BOI reporting should be simple and straightforward, which means that the biggest hurdle is simply remembering to file the report by the January 1, 2025, deadline (or within 90 days for firms newly formed in 2024). For those that have more complicated ownership structures, it may require some help from a lawyer to understand exactly what needs to be reported, and who counts as a beneficial owner for the firm.

In either case, it's better to get started on the process of BOI reporting sooner rather than later, even with the initial reporting deadline for existing firms currently almost a year away. Firms that can file quickly can do so and be done with it, while for more complex firms, the longer they go before engaging with legal counsel to confirm their reporting requirements, the more likely it is that they'll be stuck in a logjam with all of the other firms that waited until the end of the year to comply. And given the penalties and fines involved with missing the deadline, there's a lot of motivation to get it done quickly – and accurately – to prevent legal headaches later on.