5 small business misconceptions about BOI reporting under the Corporate Transparency Act

BizFilings recently conducted a survey to see how small business owners were faring in terms of the Corporate Transparency Act (CTA) and its reporting requirements. The CTA mandates that qualifying entities (such as LLCs and corporations) submit information on the company and its beneficial owners to FinCEN (Financial Crimes Enforcement Network). FinCEN is a bureau of the U.S. Department of the Treasury tasked with safeguarding the U.S. financial system from criminal activities.

It is estimated that over 32 million small businesses will need to file an initial beneficial ownership information (BOI) report with FinCEN by January 1, 2025. 

Survey participants were given questionnaires without BizFilings branding to ensure objectivity of the responses. Survey programming and panel recruitment were handled by market research company Ipsos.

The survey discovered that while some business owners had filed or were planning to file an initial BOI report for their LLC or corporation, a significant number of small businesses were in danger of noncompliance with the filing requirements due to misconceptions about the CTA’s qualifying criteria. This article takes a closer look at those misconceptions.

Who we talked to

The survey was limited to owners of small businesses that met BOI filing criteria and are therefore legally required to file a BOI report. 

The CTA applies to business entities that were created through the filing of a document with a U.S. state office, such as a Secretary of State or Indian Tribal-level office. This means that every LLC and corporation has to file a BOI report, unless exempt, because LLCs and corporations are created by filing a formation document with the state. LLCs and corporations that have more than 20 full time employees, that filed a tax return showing more than $5 million in gross receipts or sales, and that operate from a physical office qualify for what is called the “large operating company” exemption and don’t have to file a BOI report. Examples of other exempt businesses include banks, domestic credit unions, issuers of securities, and some tax exempt non-profits.

Diverse industries are represented by the survey, ranging from retail trade and professional services to construction and manufacturing to arts and entertainment. Participants include a food truck operator, a hair and nail salon owner, a software developer, a contractor, and a YouTube content creator. Most respondents were actively involved in the formation of their LLC or corporation, with many having filed the formation paperwork themselves. In addition, these business entities tended to be formed within the past five years.

Misconception 1: Business is too small

A number of owners believe that the CTA does not apply to small or micro businesses. “[N]ot worth the time to audit” was the response given by one business owner. Twenty-four percent of respondents provided similar answers. 

As we’ve seen with misconceptions related to revenue and employee count, the CTA does in fact affect small and micro businesses. 

Misconception 2: Doesn’t apply to my business structure

Twenty percent of business owners provided business structure as their reason for not having to file a beneficial ownership information report. 

As noted, every entity that is created by the filing of a document with the state filing office has to file a report unless exempt. In general, sole proprietorships and partnerships are not required to file a BOI report because in most states they are not created by the filing of a document with the Secretary of State (or equivalent office). In addition, a business does not have to file because of activities such as obtaining an EIN, registering a fictitious business name, or obtaining a business license (whether general, professional, or occupational). None of these activities result in the creation of a new entity. 

However, if an entity meeting the reporting criteria (for example a non-exempt LLC or corporation) was in existence in 2024 before becoming a sole proprietorship or partnership, it still needs to file a BOI report with FinCEN. This is the case even if the qualifying entity had wound up its affairs and stopped conducting business before January 1, 2024 – as long as it still existed as a legal entity for any period of time on or after January 1, 2024. 

Misconception 3: Not enough revenue

Whether your business is a side hustle, has low revenue, or is even generating zero revenue, it does not preclude it from having to file a BOI report. Sixteen percent of the business owners surveyed thought that the CTA’s requirements did not apply to them because of not generating enough revenue.

Revenue can factor into whether an LLC or corporation can qualify for the large operating company exemption. But otherwise, the CTA requires a BOI report to be filed by every non-exempt corporation or LLC regardless of its revenue.

The survey also revealed that 58% of the businesses with less than $500,000 in revenue had not previously heard of the Corporate Transparency Act. Of those that were aware of the CTA, the top three sources for information were “word of mouth” (13%), lawyer or law firm (11%), and social media (8%).

Misconception 4: Not enough employees

From the survey, we found out that 18% of business owners felt that they were not subject to BOI reporting requirements due to not having enough employees. Sixty percent also thought that employee count was a qualifying factor. 

As noted earlier, employee count can play a part in the exemption criteria for large operating companies. However, the CTA applies to all non-exempt LLCs and corporations regardless of how many, or few, employees the company has. 

Small businesses with fewer employees are also less likely to be aware of the CTA and less likely to file a BOI report. Of the total survey responses, only 42% of businesses with one employee (the owner) had heard of the CTA, compared to 63% (businesses with 2-5 employees), 71% (businesses with 6-9 employees), and 81% (businesses with 10-19 employees).

Misconception 5: Business not currently operating

From the survey results, 3% of the business owners believed that they did not have to file a BOI report because their business was not currently operating.

This scenario may apply to a business owner who formed an S corporation but has yet to set up shop. Or perhaps they’ve formed an LLC for a temporary or seasonal business that only operates during certain months of the year. In either case, the S corporation or LLC is still required to submit a BOI report unless it qualifies for an exemption. The CTA applies to all non-exempt LLCs and corporations regardless of whether they are currently operating.

The CTA does exempt so-called “inactive entities”, which are entities that were in existence on or before January 1, 2020, and meet five other criteria including not being engaged in active business, not having gone through any changes in ownership or sending or receiving more than $1,000 in the previous 12 months, and not holding any assets. 

Additional misconceptions

Thirty-three percent of survey respondents had misconceptions other than those relating to current operational status, revenue, employee count, business size, and business structure.

Some respondents felt the CTA does not apply to their industry. While FinCEN provides examples of industries that are excluded from the reporting requirements, it does not define entities that are subject to filing according to industry type or sector. 

Non-profit entities that are tax-exempt under Secs. 501(c), 527(e)(1), or 4947(a) of the Internal Revenue Code, are exempt from filing a BOI report.  All other nonprofits that were created through a filing with the state will have to file a BOI report unless they qualify for another exemption. A non-profit that was exempt because it was a 501(c), 527, or 4947 company but lost its exemption status would be required to file a BOI report unless it qualifies for another exemption.

Reasons for filing with a third-party provider

There is a lot at stake when it comes to compliance with the CTA. Penalties for willful violations include a civil penalty of up to $591 per day, as well as criminal penalties of up to $10,000, imprisonment for up to 2 years, or both.

But many businesses can find the compliance process daunting. A service provider can help make fulfilling the legal obligations of the CTA less intimidating by providing tools and resources, and a safe process for gathering sensitive information. For each beneficial owner, a reporting company needs to supply their name, date of birth, residential address, and an identifying number from an approved document (such as a passport or driver's license), along with an image of that document. 

A service provider can help save time when handling multiple entities and can also help manage ongoing compliance. Reporting companies are required to file an updated report for changes to previously given information on the company and beneficial owners within 30 days.

In the survey, those who used a third-party provider cited reasons such as convenience, unfamiliarity with the new law, and assurance of properly executed filings. One business owner stated that a service provider “adds a layer of protection…errors are less likely than if we tried to do it ourselves.”

Conclusion

It is important for small businesses to understand how they may be affected by the Corporate Transparency Act, including whether they will need to file a BOI report. A major reporting deadline is fast approaching. All non-exempt companies created before January 1, 2024 have until January 1, 2025, to file their initial report. 

The first step towards complying with the CTA is to see if your business is required to file a BOI report. For those looking for guidance, FinCEN has a number of resources, including an FAQ page. 

BizFilings provides a quiz to help determine Beneficial Ownership Information filing status. For more information, visit our Beneficial Ownership Information Report solutions page.