New Corporate Transparency Act Reporting Obligations for Small Business Owners

The Corporate Transparency Act was established by Congress for the purpose of cracking down on “front” companies used for organized crime. The Act, and its reporting requirements, will be operated and regulated through the Financial Crimes Enforcement Network (FinCEN). The FinCEN Small Entity Compliance Guide is a good resource for business owners.

Who Has to Report?

If you own a Corporation, S Corporation, LLC, Limited Partnership, or any other company that was created by filing with the Secretary of State, your company will have to report unless it fits into an exemption. Foreign companies that register to do business in a state are also Reporting Companies. Sole proprietorships and informal partnerships are not Reporting Companies. There are currently 23 exemptions from this Act. Most of them are companies involved in highly regulated finance industries; banks, credit unions, insurance companies, investment advisers, government agencies, accounting firms, public utilities, and tax-exempt organizations are all exempt from the Act.

Two major exemptions may be relevant to our clients in any industry:

1. Inactive Entities – An entity is inactive and thus exempt from reporting if it (i) existed before January 1, 2020, (ii) is not actively engaged in business, (iii) has not had a change of ownership in the last year, (iv) does not have any ownership by a foreign person or entity, (v) has had no transactions greater than $1,000 in the last year, and (vi) does not hold any other assets of value.

2. Large Entities – Large companies are exempt from the CTA. A large company (i) has more than 20 full-time employees (a full-time employee works 30+ hours per week or 130+ hours per month), (ii) has a physical office in the United States, and (iii) shows more than $5 million in gross receipts on its last annual tax return.

 

What Information Must Be Reported?

1. Company Information – full name, trade names, address, and tax ID number.

2. Information about each Beneficial Owner and Company applicant – full name, date of birth, home address, and a unique identification number from an appropriate government document such as a passport, state ID, or driver’s license. Individuals may apply online for a FinCEN ID number that can be used on the report in lieu of their personal identification numbers.

A Beneficial Owner is any individual who directly or indirectly exercises substantial control over the company or controls at least 25% of the ownership interests. This includes all officers and board members. A Company Applicant is the individual who files the documents to create the company. Company Applicant reporting is only required for companies created after January 1, 2024.

Does My Trust Have to Report?

Trusts are not entities that are created by filing with the state government and thus are not generally subject to the CTA. However, a trust that holds Reporting Companies can create reporting requirements.

The trustee of a trust that holds ownership of a Reporting Company is a Beneficial Owner if they have the authority and discretion to dispose of trust assets. The beneficiary of a trust that holds ownership of a Reporting Company is a Beneficial Owner if they are the sole income and principal beneficiary and have the right to demand distribution of substantially all assets from the trust. The grantor of a trust that holds ownership of a Reporting Company is a Beneficial Owner if it is a revocable trust or any other trust arrangement that gives them the right to dispose of or remove substantially all trust assets.

When Do I have to Report?

All Reporting Companies that are not exempt must file an initial report with FinCEN by January 1, 2025. New companies created in the year 2024 will have 90 days from the day they receive confirmation from the state government of the creation of their company to file their Initial Report. New companies created after January 1, 2025 will have 30 days from the day they receive confirmation from the state government of the creation of their company to file their Initial Report.

Updated Reports are due within 30 days any time there is a change in circumstances. This would include an owner getting married or changing their name for another reason, moving to a new address, getting a new ID number, and the addition or removal of Beneficial Owners, including by death.

What Happens if I Don’t Do It?

The CTA allows for civil penalties of up to $500 per day of noncompliance and criminal penalties of up to $10,000 and up to 2 years imprisonment for willful noncompliance. If a Reporting Company makes a mistake on their report, there is a safe harbor from liability if they submit a Corrected Report within 90 days. FinCEN has issued statements indicating that companies and their owners are unlikely to be penalized for inadvertent mistakes made in good faith.

Legal Challenge

The Corporate Transparency Act is being challenged in federal court on constitutional grounds. The first oral arguments occurred at the end of November, 2023 in National Small Business Association v. Yellen. As of now, the CTA is law. But, it could still be overturned or modified.

HELP

If you are a member of our Peace of Mind Protector Program and you have questions about your obligations under the Corporate Transparency Act, please contact our office via phone or email to have an attorney answer your questions.

Trevor