Beginning on January 1, 2024, small businesses will be required to file information on owners under the Corporate Transparency Act. Businesses will also be required to submit updated reports when certain underlying information changes. This is all part of Congress’s efforts to combat money laundering activity and other illegal financial crimes.
Why Was the Corporate Transparency Act passed?
So remember back a few years when the Panama Papers were leaked? (Dang, are we really approaching almost a decade since that happened?)
When the Panama Papers and a series of related and similar leaks from law firms, banks, and other entities happened, it really showcased how the really rich and how the less um, law abiding, individuals moved money throughout the world.
But what didn’t get as much attention at the time is the role that many of the U.S. states play as tax havens and centers of secrecy. In fact, two popular states for such entities are Delaware and Wyoming – both because of their favorable tax treatment and because of how the ownership structures can be kept secret.
In fact, in most states, the Secretary of State does not ask “WHO OWNS THIS COMPANY?” that they created. You just need a registered agent to accept legal filings. And that doesn’t have to be an owner – you can hire a local company to do that for you.
It’s so bad that the Tax Justice Network ranked the United States as the #1 most secretive country in the world in their 2022 index. Yep! We beat out noted secrecy hub Switzerland in how we help individuals hide the financial transactions. According to the Tax Justice Network, this financial secrecy “facilitates tax abuse, enables money laundering and undermines the human rights of all.”
Why Business Secrecy is Bad and Transparency is Good
The biggest arguments on Corporate Transparency have to deal with stopping illegal activity – from hiding income so that they don’t have to pay income taxes to money laundering from crimes such as drugs, arms, and human trafficking.
Think about all those crime shows you’ve watched, as cops are investigating and they run into the roadblock because the phone is registered to a “shell company” that doesn’t do any real business, have any real business to go visit, or have any employees to question. What if the cops could then turn to the federal government and say tell me who the owners are? How does that story change?
Why Business Secrecy is Good and Transparency is Bad
While the intentions of the Corporate Transparency Act are good, there are some downsides to increasing corporate transparency. One of the big criticisms comes from domestic abuse survivors – if they have to report their company ownership information to some government entity, will that information then become available to their abusers?
What if you win the lottery or receive a large inheritance? Does that information become available for others to figure out who you are (even in states where lottery winnings can be claimed anonymously)?
To combat some of those criticisms, the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is required to keep the information reported in a secure database that is not available to the public. The information in that database will, supposedly, only be available upon request by (1) federal law enforcement agency, (2) state, local, or tribal law enforcement agency if authorized by a court order, (3) a federal agency of a foreign country, if requested pursuant to an international agreement, or (4) financial institutions to complete due diligence requirements under “Know Your Customer” rules.
Who Needs to File?
Have you created an LLC, LLP, or other entity with your state’s Secretary of State (or similar office that is responsible for legal entity creation)? Have you registered an entity organized in a foreign country to do business in any U.S. state?
Then, the likelihood is that you will need to file a report.
However, there are some exceptions to the reporting requirement – 23 in total. If you are in a regulated industry where you already have to report beneficial ownership – say you are a investment adviser – then you don’t have to file. Nor if you are a publicly traded company, certain investment vehicles, nonprofits or government entities. Accounting firms, registered in accordance with Section 102 of the Sarbanes-Oxley Act, are also exempt.
If you have more than 20 employees AND you have more than $5 million in gross receipts or sales, as reported on the prior year’s tax return, and have an operating presence (you know, a storefront, factory, office, etc), then you don’t have to report either.
It all sounds complicated – and it is. But ultimately, remember the idea is to collect information on owners of small businesses that otherwise fly under the radar and enable tax fraud and money laundering.
What is in the BOI Report?
There will be two general sections of information required – information on the company and information on the beneficial owners and company applicants.
The company information will include the full legal name, DBAs, current address, and EIN or taxpayer identification numbers.
The beneficial ownership information will include the full legal name, date of birth, current address, and an image of either a U.S. passport, state driver’s license, or other identification document issued by a state or local government or tribe. If none of these are applicable, then a foreign passport will also be accepted.
When Do You Need to File?
All new entities created in 2024 (and after) will have thirty (30) days to file their report of Beneficial Ownership Information (BOI). If your LLC or other entity was created prior to January 1, 2024, you’ll have all year to complete your initial BOI.
If you have to update or correct any information on a BOI, you must submit that within 30 days of the underlying change.
Yes, this means if you get a new drivers license, you have to update the BOI within 30 days. New address? Update the report. New drivers license because the old one expired? Update the report. Restrictions added or lifted from the face of your license? Update the report.
But it also means that if an owner turns 18, then you update the report. If an owner moves addresses or dies, update the report. If an officer is added or removed from the company, got to update the report. Or the business moves, yep, that’s another update.
Literally, if any one field on the report changes for any reason – including the ID documents – then you have 30 days to file an update. Are we having fun yet?
All reports will be filed electronically through FinCEN (sorry, no paper filings permitted).
What is “Beneficial Ownership”?
A beneficial owner is generally an individual who owns or controls at least 25% of a company or has substantial control over the company.
Every company should have at least one beneficial owner, but there is no limit to the total number of beneficial owners of a company. No, 4 is not the limit (four owners each with 25% ownership interest). Because of the definition of substantial control.
Substantial control includes senior officers (CEO, CFO, GC, COO, etc), any individual with the ability to appoint or remove such senior officers and/or a majority of the board of directors, any individual that is classified as an important decision maker, or any individual that has any other form of substantial control over a company.
Even within this there are exceptions. For example, the company does not have to report information on a minor child. Instead, the company may report information about the parent or legal guardian of the child. But then the child’s beneficial ownership must be reported within 30 days of reaching the age of majority.
What is a “Company Applicant”?
A company applicant is generally an individual who directly files or is primarily responsible of the filing of the document that creates or registers the company. Companies have to report the “company applicant” only if first created or registered to do business after January 1, 2024. This means all currently existing (as of 2023) entities do not have to file the BOI reports on the Company Applicant.
These individuals will be the people that actually submit the documents to the Secretary of State. If a company uses someone like a lawyer, accountant, or other service, then the individual that directs that person to file will be reported.
What are the penalties if I don’t file the proper reports under the CTA?
There are some significant penalties attached to the willful failure to report under the CTA. These could be in the form of civil or criminal penalties. The maximum civil penalty is up to $500 for each day that a violation continues. The criminal penalties could be imprisonment for up to two years and/or a fine of up to $10,000.
Who is responsible for the failure to file penalties?
FinCEN reports that senior officers of companies that don’t file could be held accountable under the civil and criminal penalties. Also, if an owner refuses to give accurate information to the company to report the beneficial ownership information then that owner could be held responsible for failing to file accurate BOI reports.
I’m Confused! Who Will Help Me?
Don’t worry. Even the professionals are confused by this. Or maybe that should make you worry even more.
At present, you’ll probably want to start figuring out if your entity is required to report. You can talk with your lawyer or your CPA – the most likely professional advisers that you are going to seek help from for compliance with the CTA.
Remember, while the reports are required in 2024 – you won’t have to file your first report for an existing business until the end of the year. So you’ll have some time to figure out what’s what.
Honestly, I expect January and February 2024 to be crazy. So unless you have to file because you start a new entity in early 2024, you’ll want to wait until the dust settles and some of the confusion settles with it. Or maybe new questions that we haven’t even considered yet to appear.
In any case, by mid-2024, I’d expect that we will all be in a better position to know how to handle the most common of scenarios.
In the meantime, feel free to contact Kimberly DeCarrera at DeCarrera Law, LLC for assistance.
Because with every new law there is a criminal waiting to take advantage of unsuspecting business owners, there are already scams out and about relating to this new filing requirement under the Corporate Transparency Act.
Fraudulent correspondence is being sent to business owners asking them to go to a website and enter the appropriate information that would be required under the law. They may also be asking for payment, which isn’t required as you can file on your own (although you may very well want to hire a lawyer or CPA to do this for you).
In any case, I caution you about responding to any unsolicited emails or physical mail regarding the Corporate Transparency Act. Remember, FinCEN will not be accepting any reports until January 1, 2024.