A Government Dossier for Every Business

By: Terry R. Dowdall

Do we care about the Corporate Transparency Act? Yes.

The Corporate Transparency Act (CTA) went into effect January 1, 2024. This law requires more than 30 million small and medium-sized businesses to report ownership information to the federal government. Failure to timely file could result in fines of up to $500 per day and $10,000 maximum–and, a possibility of a two-year jail term. That makes violation a felony.

The CTA is designed to be a tool to prevent money laundering and other illicit activities in the U.S.’s financial system that are conducted through the veil of one or more entities. Congress adopted the CTA in 2021 as part of the National Defense Authorization Act. However, its implementation was deferred to allow FinCEN to issue regulations and create an online database for filing Reports. The goal of the CTA is generally for smaller, non-regulated, or lightly regulated entities to disclose the human beings who control or own such entities to FinCEN.

The law directs that the “Financial Crimes Enforcement Network) (a unit of the Department of treasury, known as finCEN) create a database of “beneficial ownership” so the government can identify individual owners of privately held assets. The government will gather data from business owners in family companies, including limited liability companies. Who is the “Beneficial Owner”?  A member-managed LLC that has 2 individuals as the only members, are considered the “Beneficial Owners” because they are sole owners. But if an LLC is owned 75% by a corporation, and 25% by a limited partnership, with a different qualified entity serving as manager, then each entity (corporation, limited partnership and the company) will need to be analyzed to determine who are the actual human beings that either own 25%, or are in substantial control.

The Exemptions

The 23 exemptions from FinCEN’s Report are focused on entities that are either:

(a)  highly regulated by some government body (SEC, CFTC, OCC, FINRA, insurance, utilities),

(b)  tax-exempt (a 501(c)(3), 501(c)(4) organization), or

(c)  large (i.e., 20 or more employees plus $5,000,000 of revenue) or public companies.

FinCEN is creating an online database for Reporting Companies to file their Report.

The entities included will be limited liability companies, S and C corporations, limited partnerships, and other closely held businesses and likely trusts. The entities are referred to as “reporting companies” and it is estimated there will be more than 32 million of reporting entities required to act in 2024.

There are no specific forms currently released, but the information appears to be of a very private and confidential nature. Names, dates of birth, photo identification, residential address (not business addresses or those of your lawyers or accountants–they want “personal information.”

After the initial filing, further filing will be required based upon the occurrence of various events.

The “beneficial owner” is someone who owns or controls, directly or indirectly, 25% or more of the entities ownership interest, or exercises “substantial control” over the entity. “Substantial control” may be a question of fact, which should please the trial lawyers. For Beneficial Owners who do not wish to provide this information to a Reporting Company, they can provide the information directly to FinCEN and receive a unique number, referred to as a FinCEN identifying number. The Beneficial Owner can then provide just that FinCEN identifying number to the Reporting Company.

Reporting companies that were formed before January 1, 2024, will have until January 1, 2025 to file the required report. On the other hand, reporting companies formed on or after January 1, 2024, will have 90 days from the date of formation to file the report. Newly formed entities, therefore, will be test subjects for the new, far-reaching, privacy-invading law.

It would appear that compliance with required filings should be handled and/or at least reviewed by your attorney. While matters of this nature are often addressed by the company accountant, it appears the accountancy professionals are being advised that handling matters that fall under the corporate transparency act may constitute the unauthorized practice of law and not covered by professional liability insurance. At this juncture, it is difficult to speculate on cost and time necessary to comply which may change with the issuance of forms when available.

Under the CTA, all newly created entities are now required to file a report with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) within 90 days of formation, unless an entity qualifies under one of 23 exemptions. That means, unless an exemption applies, any newly formed LLC, limited partnership, corporation, statutory trust, or other organization that is created by filing with a secretary of state has an additional federal filing requirement. All existing entities formed prior to January 1, 2024, that do not qualify for an exemption have until the end of 2024 to file a Report.

We will bring you more information when the reporting requirements come into focus and forms are developed.