15
Dec

As of January 1, 2024, the Corporate Transparency Act (CTA) goes into effect, carrying with it onerous civil and criminal penalties for non-compliance. In this article, we will analyze what effect this law and the additional requirements it includes will have on small businesses, estates, and similar entities. Startlingly, businesses entities and their interest holders can face fines of up to $10,000 and imprisonment for up to two years.

Background

To begin it is important to recognize the purpose of the CTA and what behavior the passage of this statute sought to curb. Under the CTA, foreign and domestic business entities will be required to disclose information regarding beneficial ownership and administrative functions of the entity. The motivation behind this is to root out entities that exist to skirt the law by providing means of tax evasion, money laundering, and the sheltering of ill-gotten gains. Though the vast majority of small businesses are law-abiding legitimate institutions, the legislation is aimed at closing a loophole that has for long been exploited by bad actors. Whereas the substance of the law itself is nothing to worry about for the average small business owner, it is important to note that the coming enforcement of this law will alter the required filings of these business entities.

Business entities that may be subject to the CTA will be required to file disclosures detailing their own beneficial owners as well as the individuals who have been designated to file corporate paperwork on behalf of the entity also known as the incorporator or organizer. Such disclosures are to be filed by companies on a new cloud-based platform, the Beneficial Ownership Secured System (BOSS). From this system, reported information is made available to all governmental agencies that may request access to it in furtherance of national security interests and law enforcement. This information is similarly furnished to regulatory agencies tasked with supervising specific financial institutions that may be engaged by the reporting business entities.

What Entities are Affected?

The first question on most people’s minds when hearing of this coming development is often what businesses are required to abide by these new requirements. The CTA has divided reporting companies in two categories: 1) domestic reporting companies; and 2) foreign reporting companies. A domestic reporting company is a corporation, limited liability company, limited partnership, or other entity incorporated in a U.S. state or territory. Foreign reporting companies are those entities formed under the laws of a foreign country and registered to do business in any state or territory of the United States.

Companies that operate in fields already subject to intense regulation along with a few select entities deemed exempt or inactive may be exempt from CTA reporting requirements. The best way to ensure a business is compliant with all CTA reporting requirements is to consult with a legal professional before submitting beneficial ownership information.

The CTA and Estate Planning

The entities covered by the CTA, like LLCs and limited partnerships are commonly used by families in order to facilitate the transfer of wealth from generation to generation in a tax-efficient manner. While the CTA does not prohibit such a practice, it does impose new filing requirements on such business entities. Few entities commonly used in estate planning for the purposes of asset management fall under the exemptions laid out in the CTA. However, charitable entities, such as 501(c) organizations as well as their subsidiaries, remain exempt and beyond the scope of the CTA. Charitable trusts likewise fall under this category and are exempt from complying with the new requirements.

It may also be possible for a trust to be considered a beneficial owner of an entity, but only if that trust owns or controls 25% of the total ownership interests of the reporting company. In this case, the trustee, grantor, as well as all beneficiaries over the age of majority must be reported as beneficial owners.

What Information Must Be Included?

The details regarding what must be included and specific deadlines are still the subject of much debate and pushback both from small business interest groups as well as lawmakers. However, as it stands, for a business to be compliant with the new requirements, the filing company must report to the Department of the Treasury’s Financial Crimes Enforcement Network the following information: 1) The legal name of the entity; 2) Any other names that the company does business under including trade names, etc.; 3) The physical address of the entity; 4) The jurisdiction in which the entity was formed or otherwise registered; and 5) The taxpayer identification number of the entity.

In identifying the entity’s beneficial owners as well as the incorporator or organizer, the entity must provide the following: 1) the individual’s name; 2) their date of birth; 3) their residential address; and 4) a photo of acceptable identification such as a passport or U.S. driver’s license.

As of the date of this article, this information must be filed via the BOSS digital system before January 1, 2025, for all businesses formed on or before December 31, 2023. All businesses formed on or after January 1, 2024, have 90 days to file the information required by the CTA, but for those formed on or after January 1, 2025, they will have only 30 days to file following their formation. Startlingly, businesses entities and their interest holders can face fines of up to $10,000 and imprisonment for up to two years.

When a beneficial owner of an entity changes, as would be the case in the event of their death, a similar filing must be made within 30 days of the settling of their estate and reflect the transfer of ownership.

Penalties

The Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has implemented a sort of grace period in which a reporting entity, having reason to believe that it has submitted inaccurate information, may voluntarily submit a report detailing the inaccuracy within 90 days of the original reporting deadline. However, should such an entity willfully fail to complete or update its beneficial ownership report, they may be subject to civil penalties including a fine of up to $500 for each day the information goes unreported, or criminal penalties including imprisonment for up to 2 years, and/or a fine of up to $10,000. The FinCEN has affirmed that in such a case, senior officers of the entity may be held accountable for the failure to report. In addition to this, any person who willfully causes an entity to fail to file their beneficial ownership report or causes the report to be inaccurate may likewise be penalized. With the lofty penalties that have been implemented, ensuring the compliance of one’s entities with this new law is imperative.

Conclusion

The coming changes resulting from the newly enacted Corporate Transparency Act are wide-reaching and complex. This change in reporting standards is something that must be considered by both small business owners as well as those who have incorporated business entities into their estate plans for asset management and taxation purposes. Consulting the information available on the Department of the Treasury’s Financial Crimes Enforcement Network’s Website as well as meeting with a trusted advisor are the best ways to ensure that business entities and estates containing business interests are in compliance with such evolving standards.