Last week this column discussed the new Corporate Transparency Act, which will require more than 30 million business entities to report detailed ownership information to the US Treasury Department.
The law is effective Jan. 1, 2024. Failure to timely file the report could result in fines of $500 per day, up to $10,000 maximum, or two years’ jail time. This is not something you can ignore if you own a business or maintain a business entity.
Who must file a report?
The law directs the Financial Crimes Enforcement Network (a unit of the Department of Treasury, known as “FinCEN”) to create a massive database of business “beneficial” ownership information for use by the government in identifying the individual owners of privately held assets.
The law was created to eliminate anonymity in business ownership that previously allowed bad actors to hide illicit financial dealings and launder money, which they sometimes used in terrorist activities.
Companies that are required to report are:
—Any corporation, limited liability company, limited partnership, limited liability partnership, business trust, or other entity created by the filing of a document with the Secretary of State (or similar office) or an Indian Tribe; and
—Any such entity created under the laws of another country if such entity is registered to do business in the United States.
This is a very broad definition. If you’ve got a corporation, LLC, limited partnership, or other such entity, your company likely falls under this definition. There are some limited exceptions.
What are the exceptions?
Please note, what follows is a summary of the CTA exemptions. If you believe your entity falls within one of the exemptions, please consult your legal adviser whether that is correct, as the exemptions are very fact specific.
There are 23 narrowly-drawn exceptions to the beneficial ownership reporting requirements, most of which are entities already subject to substantial regulations, including publicly traded companies, banks and credit unions, broker-dealers registered with the Securities and Exchange Commission, money transmitting entities registered with FinCEN, insurance companies, public accounting firms, and public utilities.
There are, however, two which may apply to less-regulated entities.
The Large Operating Company Exception
In addition to the above-mentioned entities, there is an exemption for “large operating companies.” These are defined as entities that have:
—More than 20 full-time employees in the US,
—Reported more than $5 million in sales or gross receipts on their previous year’s tax return; AND
—Have a physical office with an operating presence in the US.
The $5 million in gross receipts requirement includes receipts and sales from subsidiaries owned by the entity.
The physical office requirement “with an operating presence” is going to require some analysis. The Regulations state that an “operating presence” means that an entity regularly conducts its business at a physical location that the entity owns or leases in the United States and that is physically distinct from the place of business of any other unaffiliated entity. This may disqualify businesses operated from home, those with remote workers, and other such scenarios, which will require a beneficial ownership report to be filed by those entities.
Inactive Business Entities Exemption
The CTA will not apply to a business entity that:
— Has been in existence for over one year
—Is not engaged in an active business,
—Is not owned directly or indirectly by a foreign person,
—Has not in the preceding 12 months had a change in ownership or sent or received funds in an amount greater than $1,000, AND
—Does not own any assets, including an interest in any other entity.
Reporting companies should take action
If your business entity meets the definition of “Reporting Company” and does not qualify for any of the very narrow exemptions from filing, your company must file a “Beneficial Ownership Information” (BOI) report before January 1, 2025. FinCEN estimates there will be over 32 million “Reporting Companies” required to act in 2024.
FinCEN is not accepting reports prior to January 1, 2024, and as such no form is yet available. However, it is anticipated that for some reporting companies, the most time-consuming aspect of compliance with CTA will be in determining who are the “beneficial owners” of an entity and gathering the necessary information.
Thus, if you own a business entity, whether the business is active or not, whether it’s in California or elsewhere in the U.S., and whether you’re a small, medium, or large business, be proactive. See your attorney about what your CTA reporting requirements are, if any. This is a new law—preparation of the filing is not likely covered by any retainer agreement you have with your attorney, and it would be impossible for attorneys to reach out to every business entity they’ve formed or worked with over the years. Your CPA is likely not going to be handling CTA matters. The AICPA advised its members that handling CTA matters is likely the unauthorized practice of law and may not be covered by their professional liability insurance.
Next week’s column will discuss the availability of a FinCEN Identifier, which individuals and companies may obtain to help facilitate the reporting process and, perhaps, preserve some privacy, along with updates and resources available to reporting companies.
Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles, CA. She is also the #1 New York Times bestselling author of “The Dog Lived (and So Will I)” and “Poppy in The Wild.” You can reach her via email at [email protected]
