Understanding the New Beneficial Ownership Information Rules: Implications for Nonprofits

Recent changes in beneficial ownership information (BOI) reporting requirements have significant implications for all business types, including nonprofits.  The Corporate Transparency Act (CTA), enacted as part of the National Defense Authorization Act for Fiscal Year 2021, mandates new federal reporting requirements aimed at combating money laundering, financing of terrorism, and other illicit activities.  This article explores what these changes entail, how they specifically impact nonprofits, and what, if anything, your organization will have to do.

Beneficial ownership information rules refer to regulatory requirements that mandate businesses to disclose information about who ultimately owns or controls them.  Under the CTA, many corporations, LLCs, and other entities created in or registered to do business in the US must report certain information about their beneficial owners to the Financial Crimes Enforcement Network, or FinCEN.

Already some of you reading this are a little confused.

“Ownership?  I thought nonprofits didn’t have owners.”

“Financial crimes?  Whoa, we didn’t do anything wrong!”

Stick with me and this will make a lot more sense.  We’ll get to the nonprofit part shortly.  First, let’s discuss who a beneficial owner is.

A beneficial owner is typically defined as any individual who, directly or indirectly, exercises substantial control over an entity or owns or controls at least 25% of the ownership interest of the entity.  The purpose of these rules is to enhance transparency, making it harder for individuals to use complex corporate structures to conceal illegal activities.

I bolded the word control for a reason.  Just like the hypothetical objection I raised above, a nonprofit technically doesn’t have owners.  It does, however, have those who control it, namely the officers, directors, and/or members.

But you say, “What about the 25% of ownership interest part?”  I recognize this has the potential to be confusing for nonprofits, but FinCEN has determined that this rule applies to some nonprofits, so let’s look at the requirements.

Starting from January 1, 2024, impacted entities will need to provide FinCEN with:

• The full legal name, date of birth, address, and a unique identifying number from an acceptable document (such as a passport or driver’s license) for each beneficial owner.
• Details regarding the entity itself, including its business purpose and ownership structure.

Reports must be filed upon the creation of a new entity or when changes occur in beneficial ownership.  Just to emphasize the seriousness with which FinCEN will enforce the rules, failure to comply can result in substantial penalties (as much as $500 per day beyond the due date, indexed to inflation!) and possible imprisonment.

Since this is a new rule for organizations, AND it is very misunderstood…or not even known about at all(!)…entities required to report will have 90 days to comply, with an added 90 grace period for 2024.  Starting January 1, 2025, the reporting period will shrink to 30 days with no grace period.  Changes to BOI information, such as a change in board members, are required to be updated within 30 days of the change.

It will be interesting to see how aggressively (or not) FinCEN enforces these penalties, given how poorly understood this issue is by businesses nationwide, and not just in the nonprofit sector.

As we’ve already stated, FinCEN has determined that nonprofits are not automatically exempted from BOI reporting requirements.  Therefore, nonprofits must be aware of these new rules, particularly those registered as corporations or LLCs.  There is good news, however:  nonprofits can be exempted from the FinCEN updates.

Exemption for Nonprofits

At the risk of confusing readers with the word exemption, what I’m referencing is the exemption from continued BOI reporting requirements.  Once a nonprofit receives tax-exempt status from the IRS as a 501(c)(3) organization, they are no longer required to report BOI updates.

IMPORTANT:  This does not apply to nonprofit entities that have not received a 501(c)(3) determination letter from the IRS.  Even if your nonprofit has applied for 501(c)(3) status, it must report BOI information and updates until such time as the 501(c)(3) status is approved.  Once it is approved, the nonprofit must update their BOI information to show that as a tax-exempt organization, they are no longer liable for future BOI filings.

501(c)(3) Revocation

For those nonprofits that have their 501(c)(3) status revoked by the IRS for failure to file Form 990 for 3 consecutive years automatically become liable again for BOI reporting and updates.  If the nonprofit regains 501(c)(3) status, it will need to update the BOI filing to reflect exemption again.

Churches are often exceptions to many of the rules affecting 501(c)(3) organizations.  For example, churches have automatic standing as a 501(c)(3) without filing for a determination letter, though most should consider doing so.  That’s even more true now under the current beneficial ownership information reporting rules.

Interestingly, FinCEN regulations do NOT automatically exempt churches from BOI reporting if they do not have a determination letter.  Therefore, churches that have operated as a 501(c)(3), but under the presumption of tax-exemption, ARE required to file their BOI information and future updates.

1. Understand Applicability:  Nonprofits should first assess whether they fall under the CTA’s purview or if they are eligible for any exemptions.
2. Record Keeping:  Maintain detailed and accessible records of all beneficial owners as defined under the CTA.
3. Seek Advice:  Given the complexities of the CTA, consulting with experts who specialize in nonprofit compliance can provide tailored guidance and ensure compliance.
4. Regular Updates:  Unless and until your nonprofit has official 501(c)(3) status, it is liable for BOI compliance.  This is especially important for new nonprofits that frequently change board members and officers.  Once the initial BOI report is filed, updates are required within 30 days of changes to the applicable information, so don’t fail to update if your nonprofit doesn’t have its determination letter yet.

The introduction of the new beneficial ownership information rules marks a significant shift in regulatory requirements with the potential to impact many thousands of nonprofits.  While these rules aim to increase transparency and combat money laundering, they also present new challenges for nonprofits in terms of compliance and operational adjustments.

Understanding these rules, assessing their impact on your organization, and taking proactive steps towards compliance will be crucial for nonprofits moving forward.  The cost of non-compliance is simply too great.