Typically, when a new business law goes into effect, I tell clients in solo or small businesses you don’t have to worry too much about this, but that just isn’t the case with the Corporate Transparency Act (CTA). If you own a small business this one is definitely for you, and you may not like it one bit. Why? Because under the CTA you won’t be able to camouflage your ownership interest in any entity. You are going to have to report it to a little-known U.S. division of the Treasury Dept., the Financial Crimes Enforcement Task Force (FinCEN), and it will sit in a database that hasn’t been set up yet. You can thank nefarious characters who have been able to shield their identity (thus money) for too long for this but I’m getting ahead of myself.
The CTA was added to HR 6395, also known as the National Defense Authorization Act, in 2020 after over a decade of various implementation efforts by Congress. It’s designed to prevent money laundering, terrorism financing, and other financially related crimes in shell or shadow entities by even shadowier figures. States like Delaware, Nevada, and Wyoming have become THE place to register your entities in some measure because the true “owners” of the entities don’t need to be identified or disclosed. You can see that this was never going to end well, right?
The notice and comment period implementing the CTA just closed in February and while it is still unclear when it will officially go into effect, it is going into effect.
Who does the CTA affect?
- Reporting Company. The CTA defines a “reporting company” as corporations, limited liability companies, or any other entity (certain kinds of trusts for example) created by the filing of a formation document with their state’s secretary of state or other commission registry (for example, in Arizona we call it the Arizona Corporation Commission, or ACC). A reporting company also includes businesses registered to conduct business outside of the state of its jurisdiction or from other countries, which are known as foreign entities. A reporting company does not include general partnerships or entities resulting from a statutory conversion process.
- Exemptions. Who’s exempt? Well generally those who are already regulated like public companies, financial institutions, registered money transmitting businesses, registered investment advisors and investment companies, certain accounting firms, public utility companies, 501(c)organizations and certain political organizations. “Bigger” small businesses are also exempt if they (1) employ more than 20 full time employees in the United States; (2) have a previous year tax return of more than $5 million of “gross receipts or sales in the aggregate”; and (3) operate at a physical office located in the United States. What that means is that most small businesses fall firmly within the CTA.
What are the requirements?
- Beneficial Owners and Applicants. If you are a reporting company for purposes of the CTA, you must file your personal identification information (PII including full legal name, DOB, current address, and driver’s license, passport, or other governmental identification) for the “applicant” who formed the business and each “beneficial owner” of record. A “beneficial owner” includes an individual who either: (1) directly or indirectly exercises “substantial control” over the company; or (2) owns or controls at least 25% of the ownership interests in the company.
- Reporting Deadlines. New businesses must file their reports with FinCEN within 14 days of formation. Businesses that are already existing must file their reports within one year of the effective date of the CTA rules.
- Updating Obligations. There is also an ongoing duty to update. Updated reports must be filed within 30 calendar days of changes to information previously reported to FinCEN, including applicants who have no ongoing relationship with the company. This is where it can get tricky particularly if you lose track of beneficial owner or applicant.
What are the penalties for noncompliance?
If you fail to report information or provide false information, a civil penalty of up to $500 per day, as well as a possible criminal fine of up to $10,000 and up to 2 years in prison.
When will this go into effect?
The effective date is still uncertain, as well as the entirety of the rules. FinCEN must first implement procedures for the filings and create the database to store the information if they haven’t already done so. The CTA could go into effect as soon as the end of this year or early 2023.
What to do?
The CTA is complicated with lots of technical twists and turns and even more unanswered questions. We have just laid out the high points here. Attorneys and CPAs, for example, who are used to forming entities on behalf of clients are likely going to have to change procedures so they aren’t “applicants” shouldered with liability they did not intend. For me, the biggest unknown is the database.
For now, you don’t need to really do too much other than put this on your radar and begin preparing for the implementation of the CTA and the filing requirements. You should father as much information as you can regarding beneficial owners and applicants as far back as when you formed your business. You may need to dig a little if your company’s books and records aren’t inclusive of certain information needed or well-organized. You will likely need some updated language in your Operating Agreement or corporate documents but it’s just too early to know what. We promise to keep you informed on updates.
