Corporate Transparency Act – A New Disclosure Requirement for Business Entity Owners In An Effort To Catch Criminals

Hello Everyone!

Ok, ready for this one? It’s big. And you can be fined $10,000 and sent to prison for 2 years if you don’t comply. So you do not want to mess this up.

Now that I have your attention, let’s talk about The Corporate Transparency Act.

The Corporate Transparency Act (CTA), is a relatively new law passed in 2021 that requires corporations, LLCs, and other business entities to provide information about their owners to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).

The CTA did not take effect immediately. Rather, Congress gave the FinCEN time to write regulations and also gave businesses a heads-up about the new law. FinCEN has now issued regulations on how it intends to implement the CTA.

The reporting requirements will begin January 1, 2024.

These new regulations hold several unpleasant surprises for businesses and the lawyers and accounting firms that advise them.

What the CTA Is About?

The CTA is part of a major government effort to crack down on corruption, money laundering, terrorist financing, tax fraud, and other illicit activity. The CTA targets the use of anonymous shell companies that facilitate the flow and sheltering of illicit money in the United States.

Currently, few states require corporations, LLCs, or other entities to disclose information about their beneficial owners—that is, the human beings who actually own or control them—or the people who form them. And there has never been a federal requirement to do so. As a result, anonymous shell companies are everywhere, and it can be impossible for law enforcement to discover who really owns them.

This will soon change. The CTA empowers FinCEN to establish a massive database containing beneficial owner information for most types of smaller business entities. These include U.S.-based businesses and foreign entities that register to do business in the U.S. The database will not be publicly accessible; it is solely for the use of law enforcement, national security and intelligence agencies, and federal regulators enforcing anti-money-laundering laws.

The CTA focuses on smaller business entities, since they are most likely to be shell companies. The law requires a Beneficial Ownership Information Report (BOI Report) to be filed starting in January of 2024, and ongoing reporting for any changes to entity ownership after that initial BOI Report is filed.

Violations of the CTA can result in a $500-a-day penalty (up to a maximum of $10,000) and up to two years’ imprisonment.

Yikes. Let’s go through those unpleasant surprises I mentioned earlier.

Surprise #1: The CTA Is Not Just for Corporations and LLCs

The CTA mandatory reporting requirements apply to corporations and limited liability companies. This includes the almost 2.5 million LLCs that have only one member and are taxed as Schedule C sole proprietorships (“disregarded entities”).

But the CTA doesn’t end there. It also applies to any other non-exempt entity that is created by filing a document with a state secretary of state or similar state agency.

FinCEN says that this includes limited liability partnerships, business trusts, and most limited partnerships because such entities are normally created by a filing with a secretary of state.

In short, almost every small business that is not a sole proprietorship or general partnership will have to comply with the CTA.

So if you’ve been taking advice from the “LLC Bros” on TikTok and forming LLC’s left and right thinking that LLC’s make you entire life tax deductible (hint, they don’t), this reporting requirement is for you too.

How many businesses are we talking about? FinCEN estimates as many as 30 million!

Surprise #2: The CTA Takes Effect January 1, 2024, Whether You Are Aware Of It Or Not

The regulations recently became final in March 2023 and the reporting timeline is now official.

Here is a link to the BOI Report filing dates for you:

FinCEN BOI Report Filing Dates

The CTA applies to both newly formed entities and existing companies. The deadline for compliance differs for each.

Key point: The deadlines do not coincide with the deadlines for filing tax returns. BOI Reports actually have nothing to do with tax return reporting at all, so does not fall under the umbrella of services your tax professional can provide. These BOI Reports are actually a legal matter that you should be hiring an attorney to assist you with if you need help understanding or completing the requirement.

New companies: New companies formed after January 1, 2024 have to file their beneficial owner reports within 14 calendar days after being formed. Thus, if you form a new corporation, LLC, limited partnership, or other entity in 2024 or beyond that requires a filing with your secretary of state, you’ll have to file a report with FinCEN. Within 14 days. Or pay a $500 per day penalty and risk prison time for not.

Existing companies: The requirement existing companies to file a report is no later than one year after the January 1, 2024 effective date. So January 1, 2025 becomes the due date for those.

Unfortunately, most impacted people with a reporting requirement won’t even know CTA exists, and risk harsh penalties as a result. Lucky for you, Robert is putting this on your radar, so that you can be ready for it.

Surprise #3: Beneficial Owners Are Broadly Defined

The CTA requires affected business entities to file a BOI report including each beneficial owner’s full legal name, date of birth, and residential street address, as well as a unique identifying number from an acceptable legal document such as a driver’s license or passport.

The regulations make it clear that a company can have multiple beneficial owners, and it may not always be easy to identify them all.

There are two broad categories of beneficial owners:

  • Any individual who owns 25 percent or more of the company.
  • Any individual who, directly or indirectly, exercises substantial control over the company.

The CTA didn’t clearly define “substantial control.” The broad definition includes:

  • senior officers of the company;
  • individuals who have authority over appointment or removal of any senior officer, or of a majority of the company’s board of directors; and
  • individuals who have substantial influence over important matters affecting the reporting company, including major expenditures, investments, or borrowing; sale or other transfer of assets; selling, dissolving, or reorganizing the company; selecting or terminating business lines or ventures; entering into or terminating significant contracts; compensation for senior officers; or amending the company’s governing documents.

Moreover, a person’s substantial control need not be exercised directly. It can be indirectly exercised through a variety of means.

Surprise #4: Tight Deadline for Corporations and LLCs

If changes occur in the information included in a beneficial owner information report, the proposed regulations require that an updated report be filed with FinCEN within 30 calendar days after the change.

For example, if a beneficial owner moves, an updated report will have to be filed within 30 days. FinCEN estimates that about 9 percent of all beneficial owners will have a change of address each year requiring an updated report. Updated reports also will have to be filed when a beneficial owner dies.

FinCEN estimates that over 11.4 million updated reports will have to be filed each year.

Surprise #5: The Report Must Identify Those Who Help Form Corporations and LLCs

In addition to the company’s beneficial owners, the “company applicant” will have to be identified in the beneficial owner information report. This is “any individual who files the document that creates the domestic reporting company” or directs or controls others to do so.

This would appear to include an attorney who files articles of incorporation to create a corporation or articles of formation to establish an LLC.

Get Ready—It’s Coming

This massive new filing requirement is coming for small businesses. You now have 6 months to be ready for it, so you should be gathering info about beneficial owners now, familiarizing yourself with the rules, putting processes together on being able to report ownership and address changes on a timely basis, or hiring an attorney to help determine what/who needs to be included on these BOI reports if your entity is complex.

The FinCEN estimates that during the first year the CTA is in effect, over 25.8 million reports will have to be filed at a cost of $1.264 billion. In subsequent years, over 3.2 million initial reports and 11.4 million updated reports will have to be filed, at a total annual cost of over $364 million. All of this to help catch those “bad guys” who probably won’t comply with these rules anyway.

If you’re a beneficial owner of a company subject to the CTA (in other words, a reporting company), you should provide your identifying information to the company so it can file the beneficial owner report.

Instead of providing your information directly to the company, you’ll have the option of applying to FinCEN for a FinCEN identifier and using that instead. You’ll have to provide FinCEN with all the required information, and it will assign you a unique number to give to the reporting company. You’ll need to keep this information up-to-date with FinCEN.

Reporting companies should identify every individual who meets the definition of “beneficial owner” and inform them of the need to provide the required information or obtain a FinCEN identifier.

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Frequently Asked Questions At The Link Below:

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