As of January 1, 2024, the Corporate Transparency Act (“CTA”) is set to impact almost all existing and yet to be formed LLCs, corporations, limited partnerships, and other closely held entities, with some exceptions. This federal law aims to enhance transparency by establishing a national database that identifies the individuals behind companies, with the goal of combating financial crimes such as money laundering, terrorism, and tax evasion.
Legislative Intent
The stated purpose of the CTA is to create a national database of companies in the United States that identifies the human beings behind the companies, both owners and controlling persons. The law is part of an increasing effort to combat money laundering, terrorism, tax evasion, and other financial crimes.
The Financial Crimes Enforcement Network (“FinCEN”), which is a bureau of the United States Treasury Department but is not part of the IRS, will oversee creating and maintaining the database, which as of now will not be of public record but will be available to a variety of federal agencies and possibly others in the future. All “reporting companies” will be required to file reports with FinCEN that provide certain information regarding the companies and the “beneficial owners” of the companies.
Affected Entities
This new law will affect virtually all closely held entities, including LLCs and other entities designed for estate planning purposes or liability protection, or merely as holding companies for assets such as real estate, aircrafts, or other investments. If an entity is created by filing paperwork with a Secretary of State (or tribal jurisdiction), it likely will have reporting requirements under the CTA. Even if an entity has only one owner and that entity is disregarded for federal income tax purposes (such as a single-member LLC), that entity will still have to file reports with FinCEN.
Exceptions to the reporting requirements include charities, large companies (20 or more employees and $5,000,000 or more in revenue) and other entities already subject to significant government regulation (such as banks).
Reporting Requirements
Information related to (1) the Company and (2) each beneficial owner of the company will need to be reported. Note that “beneficial owners” include people who exercise significant control over the entity, even if they do not have an ownership interest.
Note that penalties for willfully violating the CTA’s reporting requirements include (1) civil penalties of up to $500 per day that a violation is not remedied, (2) a criminal fine of up to $10,000, and/or (3) imprisonment of up to two years.
Entities Required To File
If you have any interest in a closely held entity, such as an LLC, corporation, or limited partnership, or if you exert significant control over any such entity, then you may be subject to these requirements and may be responsible for filing reports with FinCEN. It is still unclear exactly who is deemed to have “significant control” of an entity, but it may include any officer, director, manager, or chief financial officer. It is also unclear exactly who will have reporting requirements for a trust that is a beneficial owner of a reporting entity, but it may include trustees, investment trustees, trust protectors.
Filing Deadlines
For entities already in existence by January 1, 2024, initial reports will be due by January 1, 2025. For entities created on or after January 1, 2024, however, initial reports will be due within 90 days of the creation of the entity. As of now, there are no available extensions to these deadlines.
In addition, reporting is not a one-time event. There is an initial reporting requirement, followed by ongoing reporting requirements whenever there are any changes to the existing report, including, but not limited to, significant events such as a change of ownership or control persons, and relatively insignificant events, such as when an owner or control person moves to a new home address or changes their name. These updated reports will be due within 30 days of any change.
Responsibility for Reporting
The reporting company, not the individuals, is required to file the reports. At the moment, there is no good faith defense for failing to provide the updated information, so the companies will need to keep track of their beneficial owners.
We suggest that you begin now to compile a list of every privately held entity that you own an interest in or exert control over. Because we may have formed entities on your behalf years or decades ago, we may not have accessible records to identify all such entities. In addition, you may have had other advisors form entities for you, or you may have formed entities without outside assistance, of which we are not aware. In any case, we will not undertake to find these entities for you or to prepare the forms required unless you specifically engage us to do so. If you do wish to engage us to help with this new reporting requirement, we will then begin the process of determining if any of your entities are reporting entities and whether you or someone else will assume responsibility for the reporting.
If you would like our office to complete the reports on your behalf, then we strongly encourage you to reach out as soon as possible to provide the required Reporting Company and Beneficial Owner information listed on the attached checklist for any entities for which you assume responsibility for the reporting.
