Yes, Your Small-Business Clients Still Must File FinCEN Reports

Most small-business clients will not qualify under the exemptions that FinCEN has created. The law does create exemptions for tax-exempt entities, certain political organizations and inactive organizations that are no longer conducting business. Large organizations can be exempt if they have more than 20 U.S. employees, have filed a tax return showing more than $5 million in gross receipts or sales during the prior year and have an operating presence at a physical site within the United States. If the entity fluctuates above and below the 20-employee limit, it must file.

Penalties for failure to comply can be significant. Civil penalties for willful failure to comply with the reporting requirements equal up to $591 per day until the violation is corrected. Criminal penalties can include up to two years in prison and $10,000 in fines. Penalties can be imposed for failure to file, willfully providing false information or willfully failure to correct or update previous filings.

Updated FinCEN Guidance

When a company ceased to exist before the Corporate Transparency Act became effective, it is not subject to the reporting requirements. However, if the company existed as a legal entity for any period after Jan. 1, 2024, it is subject to the new reporting regime. That's true even if the company had technically ceased operations before Jan. 1, 2024.

The new FinCEN guidance also addresses situations in which an entity was created in 2024 or later, yet was dissolved or ceased to exist before the entity's initial reporting deadline. These entities are still required to submit their initial beneficial ownership information via the new procedures. FinCEN did not provide any guidance on how to identify the relevant individuals when an entity formally ceases to exist before their reporting deadline. A different FinCEN FAQ indicates that the report should include information about the beneficial owners at the time of filing.

FinCEN guidance makes it clear that an individual can control an entity through a trust structure. It's possible that a trustee may be a beneficial owner of a reporting company by (1) exercising substantial control over the reporting company, or (2) owning or controlling at least 25% of the ownership interests in that company via the trust or structure. Beneficiaries, grantors and trust settlors can also be beneficial owners for legal purposes. The terms of the trust itself will dictate whether the individual is subject to beneficial ownership reporting requirements.

For example, the requisite ownership or control can be obtained if the trustee has the authority to sell or dispose of trust assets or if a beneficiary is the sole recipient of income and principal from the trust itself.

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