I. CORPORATE TRANSPARENCY ACT REPORTING REQUIREMENTS
The Corporate Transparency Act requires that, starting January 1, 2024, small corporations, LLCs, and similar business entities must report beneficial ownership information to the Financial Crime Enforcement Network (FinCEN) of the Treasury Department. An estimated 32.6 million businesses must file in 2024. Do not assume your business is exempt! There are serious penalties for failure to file.
II. PENALTIES FOR NON-COMPLIANCE
Possible criminal penalties for failure to report as required include up to two years in prison and a fine of up to $10,000. The civil penalty is $500 per day that your business is non-compliant.
Uncooperative individuals who refuse to provide the information needed to comply with the Corporate Transparency Act could cause serious issues for others associated with the business.
Although the business itself is responsible for reporting, every person involved and every advisor for a business could potentially be accused of being a co-conspirator or an aider and abettor for those entities that do not comply or that inaccurately comply.
III. “REPORTING COMPANIES” THAT MUST REPORT
Any business formed via filing with a state entity – usually it’s the Secretary of State – must report the required information. This includes corporations and LLCs.
Twenty-three types of entities are exempt from the reporting requirements. You can pause this video and review these exemptions. They mostly apply to larger businesses that already have other reporting requirements. If you have any doubt about whether your business should report, you should error on the side of assuming that it must and, at the least, consult with an attorney about it. Note that the exemption for inactive entities is very limited. Your business may not qualify for this exemption simply because you haven’t done anything with it lately.
IV. REPORTING DEADLINES
Companies formed or registered before January 1, 2024 must report by January 1, 2025. Companies created or registered after December 31, 2023 must report within 30 calendar days of formation. This is not a one-time reporting requirement. A company will have 30 days to report any changes to the already reported information, starting from when the change occurs.
V. REPORTING METHOD
FinCEN will require the reports to be filed electronically via the BOSS – that is, the Beneficial Ownership Secure System. As of late November 2023, the BOSS is not yet online, and some wonder if it will be ready in time. Nonetheless, prudent folks should assume the filing requirements will become effective as scheduled.
VI. INFORMATION TO REPORT
A reporting company must provide: (1) its legal name and any trade name or DBA; (2) its street address; (3) the jurisdiction in which it was formed or first registered; and (4) its Taxpayer Identification Number or TIN.
For each of the company’s beneficial owners, the company must provide the individual’s: (1) legal name; (2) birth date; (3) street address; and (4) an identifying number from a driver’s license, passport, or other approved document, along with an image of the document. That’s right; they want a copy of your driver’s license or passport.
The company must provide the same information for each Company Applicant. The Company Applicant is the person who files the business’ formation documents with the state.
VII. WHO IS A BENEFICIAL OWNER?
Determining who is a beneficial owner can be tricky. Beneficial owners have either control or ownership of the business.
An individual with substantial control over the business is a beneficial owner. FinCEN defines substantial control broadly. It includes senior officers, those who have the ability to appoint or remove senior officers, those who have substantial influence over important decisions, and (here’s the catch all) those who have any other form of substantial control over the company.
An individual who owns 25% or more of the business is also a beneficial owner. Both ownership and control over the business can be direct or indirect, for example, through other businesses.
Beneficial owners cannot be businesses; they are individuals. FinCEN wants to know the individuals behind each and every business.
Trusts add incredible complexity and uncertainty to these reporting requirements. FinCEN has not yet clarified reporting requirements for trusts.
VIII. WHAT WILL FINCEN DO WITH THE INFORMATION?
What will FinCEN do with the reported information? The information should be used by the government only with significant safeguards for privacy.
The beneficial ownership information will be provided upon request from: (1) a federal law enforcement agency; (2) a state, local, or tribal law enforcement agency (if authorized by a court order); (3) a federal agency on behalf of a foreign country (if the request is pursuant to an international agreement); or (4) a financial institution for customer due diligence purposes if the Reporting Company authorized such disclosure.
In other words, the information will not be publicly available. The Corporate Transparency Act, then, will not necessarily threaten strategies aimed at protecting assets from civil lawsuits.