On January 1, 2024, the Corporate Transparency Act (“CTA”) comes into effect, requiring more than 30 million small and medium sized businesses to report ownership information to the Financial Crime Enforcement Network (a unit of the Department of Treasury, known as FinCEN). The CTA is designed to enhance transparency into entity structures and to fight money laundering, tax fraud, the financing of terrorism, and other illicit activities.
Who must report?
The reporting requirements are very broad and apply to any business that is created by “filing a document” with a state or Indian tribe. This includes Limited Liability Company (LLC), a corporation (S corps or C corps), a partnership, other closely held entities that were created by filing a document with the Secretary of State (or similar office), and in some circumstances, trusts. This includes your LLC that holds rental properties.
There are reporting exceptions but most of these are related to financial institutions and industries already heavily regulated by the U.S. government. The most relevant exemptions are: U.S. public companies, SEC-registered companies/broker-dealers/advisers, insurance companies, tax-exempt entities, and large operating companies (defined as any entity that employes more than 20 full-time employees, has an operating presence at a physical office in the U.S., and filed a federal tax return for the previous year reporting more than $5M in gross receipts or sales).
What has to be reported?
Reporting companies must report to FinCEN from each company applicants and beneficial owner (as defined below): full legal name, date of birth, a copy of a valid photo id (driver’s license, state ID, or passport), residential address (no P.O. boxes, no business address unless for company applicants, no trusted professionals address). This information must be kept current, and the reporting company has 30 days to file an updated report.
What happens if you fail to report?
Failure to timely file the report could result in fines of $500 per day, up to $10,000 maximum, or two years’ jail time.
Who is a company applicant and beneficial owner?
A company applicant is the person who files the application to form an entity (i.e., your estate planning attorney) or is primarily responsible for directing or controlling the filing of such document. A maximum of two individuals can be company applicants of a reporting company.
A beneficial owner is someone who owns or controls, directly or indirectly, 25% or more of the entity’s ownership interest, or exercises “substantial control” over the entity. An individual exercises “substantial control” over a reporting company if the individual serves as a senior officer, has the power to appoint or remove senior officers or a majority of the members of the board of directors, or has substantial influence over the important decisions made by the reporting company. Further, since a beneficial owner must be an individual, if the ownership interests of a reporting company are held by a trust, the beneficial owner may include any one or more of the settlor, trustees, or other individuals serving in quasi-fiduciary roles (e.g., trust protectors) and/or certain beneficiaries of the trust, all of whom must report their personal identifying information to FinCEN.
The rule exempts from the definition of beneficial owner a nominee or agent of another individual, an employee acting solely as an employee, a creditor of the reporting company, and someone with a mere future interest in the reporting company through a right of inheritance. A minor child is also exempted but only if a parent’s or guardian’s information is provided instead.
When must the report be filed?
Reporting companies formed before January 1, 2024, will have until January 1, 2025, to file the required report. Reporting companies formed on or after January 1, 2024, will have 90 days from the date of formation to file the report. Reporting companies created or registered to do business on or after January 1, 2025 must file within 30 days from the date of notice that the company has been created or registered.
Summary
The CTA requirements are cumbersome and will require many privately held companies to disclose personal identifying information about their owners, senior officers, and other control persons to FinCEN for the first time. We suggest you meet with your attorneys and accountants to determine whether and how the reporting requirements may apply to you and the entities you own or control.
Sources: Rhyne, T. (2023, December 10). How new law will affect many small businesses. Orange County Register.
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