Are you aware of the new Corporate Transparency Act? If you are a small business, it APPLIES TO YOU, and it will involve MANDATORY reporting requirements, with hefty civil FINES, and possibly CRIMINAL penalties, if you do not comply! This new law goes into effect January 1, 2024. This is a MUST READ for any business owner.
The stated objective of the CTA is to prevent money laundering. It will do this by creating a national database of companies (LLCs, corporations, s-corporations, most limited partnerships, and even many general partnerships) and company owners. The CTA requires companies to report the personal identifying information of the company’s Beneficial Owners, as well as the person responsible for filing the company’s formation documents (the “Applicant”).
As a general rule, all companies formed with a State’s Secretary of State or similar office, including limited liability companies (AND including single-member LLCs), corporations, and other similar business entities are subject to reporting. The Act does contain a very narrow list of exceptions.
Under the CTA, Reporting Companies will need to provide the following information:
- Legal Name of Company
- Any D/B/A
- Full address
- State of formation
- FEIN
Additionally, each Reporting Company will need to provide the following information for each Beneficial Owner and any Applicant:
- legal name;
- date of birth;
- current residential address; and
- unique identifying number from an acceptable document (such as a state driver’s license or U.S. or foreign passport). You must provide an IMAGE of the document with the filing!!
Under the CTA, a company’s “Beneficial Owner[s]” are all natural persons who:
- directly or indirectly, own 25 percent or more of the equity in the Reporting Company. NOTE: if an owner is a trust or other entity, you ‘look through’ to the beneficial owners of the trust or other entity. “Equity” can include stock, equity, voting rights, profits interests, and even options. There are exceptions for minor children, custodians and creditors;
- exercise “substantial control” (see below) over the reporting company; OR
- receive substantial economic benefits from the assets of a company.
The individuals who have “substantial control” of a company include: (i) a Reporting Company’s senior officers; (ii) persons with authority to appoint or remove senior officers or board members of a reporting company; or (iii) any other person that provides direction or influences the major decisions of a reporting company.
An “Applicant” is defined as any natural person who files the paperwork to form a Reporting Company under U.S. law or registers a company formed under the laws of a foreign country to do business in the United States. Company Applicants include both the actual filer, and if applicable, also the natural persons who directed the filing.
Reported information for the CTA will be made available to the Financial Crimes Enforcement Network of the Department of the Treasury, known as FinCEN. The information will be maintained in a secure database and (supposedly…) made available only to federal agencies, state and local agencies, and law enforcement agencies.
Exceptions to the reporting requirements include companies which:
(i) have more than 20 full-time employees in the U.S.; (ii) reports more than $5,000,000 in gross receipts or aggregate sales (either independently or consolidated with company subsidiaries or other operating entities); AND (iii) maintain a physical office space within the United States that is exclusively owned or leased by your company
Other exemptions include publicly-traded companies; banks; credit unions; brokers or dealers in securities; investment companies or investment advisors; venture capital fund advisors; insurance companies; state-licensed insurance producers; accounting firms; and tax-exempt entities. (Note: a ‘tax-exempt’ entity is not just a “non-profit”, but a non-profit who has filed an IRS Form 1023 and is exempt from taxation.)
The CTA provides for civil and criminal penalties for any person who fails to report as required. The person will be liable for a civil penalty of up to $500 for each day a violation continues or has not been remedied and may be fined up to $10,000 and imprisoned for up to two years, or both, for a criminal violation.
Important Notes: (i) only companies created after January 1, 2024 are subject to reporting the company Applicant; (ii) for those persons regularly forming entities (e.g., attorneys), such persons can get a FinCEN ID# and provide that to the company; (iii) any new company formed after January 1, 2024 has 30 days to report, and any company in existence on December 31, 2023 will have until December 31, 2024 to report; (iv) must report (within 30 days) all changes in beneficial ownership and beneficial ownership information—i.e., if a Beneficial Owner get a new DL number, moves, etc., this has to be reported!