A recent federal court ruling has raised questions about a controversial new rule requiring millions of small- to medium-sized business owners to report detailed personal information to the U.S. Treasury Department. This new rule—the Beneficial Ownership Information (BOI) Reporting Rule—went into effect on Jan. 1, 2024, but on March 1, a U.S. District Court judge found that the law establishing the rule is unconstitutional and prohibited the department’s Financial Crimes Enforcement Network (FinCEN) from enforcing it.

The judge’s ruling applies to only a few of the estimated 33 million businesses subject to the BOI requirement, and the Justice Department has already filed an appeal on behalf of the Treasury. While that appeal works its way through the courts, FinCEN says it will not enforce the BOI rule against the limited number of businesses to which the new court ruling applies, but it will continue enforcing the rule for all other affected businesses. As a result, more lawsuits are expected.

To complicate things further, newly established businesses face different BOI reporting deadlines than those established prior to 2024. In addition, the rule lists 23 specific types of businesses that are exempt from the reporting requirement altogether.

The BOI Rule and Its Complications

The BOI reporting rule is designed to help law enforcement entities identify criminals who use anonymous shell companies to avoid taxes, launder money, finance terrorism, or commit other crimes. It applies to corporations (both regular and S-corporations), LLCs, partnerships, trusts in some states, and other businesses that are created by filing a document with the secretary of state or comparable office in a U.S. state, territory, or tribal government. The rule also applies to foreign-based businesses that register with a secretary of state’s office.

Companies subject to the rule must now file a report with FinCEN identifying all individuals who have at least 25 percent ownership of the business or who have “substantial control,” such as company officers and executives, general counsel, and other decision-makers. In addition, they must report each beneficial owner’s full legal name, date of birth, and address and must submit a copy of each individual’s driver’s license, passport, or other approved identification.

Many types of businesses are exempt, however, including publicly traded companies, companies that operate under extensive regulatory oversight (such as financial institutions and insurance companies), and “large operating companies” with more than 20 full-time employees and $5 million in U.S. sales. As a result, most of the compliance burden will fall on smaller corporations, LLCs, certain trusts, and state-registered partnerships.

This burden prompted the National Small Business Association (NSBA) to file a lawsuit challenging the law on behalf of one of its members. The suit contends that the law unfairly burdens smaller businesses and could cause them to incur significant compliance costs. For example, the seemingly straightforward 25 percent ownership threshold might be difficult to determine in companies with multiple levels of ownership, several classes of stock, transferable shares, options, or other owner privileges and interests.

What the Court Decided

On March 1, 2024, Judge Liles Burke of the U.S. District Court in Huntsville, Ala., granted the NSBA’s motion for summary judgement. The judge ruled that the 2021 Corporate Transparency Act that established the BOI reporting rule “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power.” (The judge’s ruling can be found at https://www.govinfo.gov/content/pkg/USCOURTS-alnd-5_22-cv-01448/pdf/USCOURTS-alnd-5_22-cv-01448-0.pdf.)

Thus, the judge enjoined FinCEN from enforcing the BOI reporting rule against the plaintiff who filed the suit. His decision also applies to the approximately 65,000 other businesses that were members of the NSBA on March 1, but it does not apply to businesses that have joined the organization after his decision.

Where Things Stand Now

Because the scope of the judge’s order was limited to the plaintiff and current NSBA members, the vast majority of the 33 million businesses covered by the act will still be required to comply. Businesses formed prior to 2024 have until Jan. 1, 2025, to submit their reports, but compliance is a more urgent concern for newly formed businesses. Non-exempt entities formed after Jan. 1, 2024, must file their initial reports within 90 days of their state registration.

Once they have filed their initial reports, businesses have only 30 days to report any subsequent changes to the ownership information. Willful failure to file can incur civil penalties of $591 per day (adjusted annually for inflation). Criminal violations, such as intentionally reporting false information, can lead to fines of up to $10,000 and up to two years’ imprisonment.

BOI reports must be submitted electronically to a dedicated reporting website at https://www.fincen.gov/boi. FinCEN’s online portal spells out the technical requirements for attaching images of the required identity verification documents.

Although the federal court ruling raises doubts about the long-term future of the BOI rule, the final outcome is still uncertain. The next step will occur in the Eleventh Circuit Court of Appeals, but many observers suspect the case will ultimately reach the U.S. Supreme Court for final disposition. In the meantime, corporations, LLCs, some trusts, and state-registered partnerships that are not specifically exempted should begin compiling the necessary information and documents in order to comply within the allocated time.

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