The Corporate Transparency Act (“CTA”) is a new law that will require most of our clients to report information regarding their “beneficial owners” to the U.S. Department of the Treasury, Financial Crimes Enforcement Network (“FinCEN”). The purpose of the CTA is to assist the government with detecting and penalizing money laundering, tax fraud, and similar illicit financial activities.
The following is a brief overview of the CTA intended to inform you before the reporting period begins on January 1, 2024.
The potential penalties for failing to comply with the CTA are significant, and fulfilling the reporting obligations may be onerous for business owners. And although the reporting period begins soon, there are still several uncertainties surrounding the process, which are unlikely to be resolved until after the reporting period starts.
Who is Required to Report?
Corporations, LLCs, and any other entities that are created by submitting a document to a secretary of state or similar authority are required to report their beneficial owners, unless the entities are covered by one of the few exceptions. Most of the exceptions cover publicly traded companies or entities in regulated industries that are already required to provide the government with information similar to what the CTA requires.
The only exception that is likely to be applicable to most of our clients is if an entity: (1) has more than 20 employees; (2) reported more than $5 million in gross revenue on its last tax return; and (3) has a physical office within the United States with an operating presence. Entities that satisfy those three criteria do not need to report their beneficial owners under the CTA.
What is a Beneficial Owner?
The CTA requires entities to identify and provide personal information about their “beneficial owners.” This term is misleading because the CTA defines a beneficial owner as any individual who: (1) exercises substantial control over the entity or (2) owns or controls not less than 25 percent equity in the entity. Consequently, an individual can be a beneficial owner without being an actual owner, including by being an officer or director of an entity.
Determining an entity’s beneficial owners may be challenging because of complex ownership structures or uncertainty regarding the meaning and application of the “substantial control” standard. If you find yourself in that situation, Brown & Streza can assist in making that determination.
What Information Must Be Reported?
After the beneficial owners are identified, the entity must submit each beneficial owner’s name, date of birth, residential or business address, and a unique identifying number from an acceptable identification document (such as a state driver’s license or passport) to FinCEN via an online form.
The online form is not available yet, so there is some uncertainty about the specific processes that entities will need to go through to be in compliance.
What is an Individual FinCEN Identifier?
Some beneficial owners may choose to obtain an individual FinCEN identifier. An individual FinCEN identifier is a unique identifying number that FinCEN will issue to individuals who provide FinCEN with the personal information required of beneficial owners through a process separate from the entity reporting. If a beneficial owner has an individual FinCEN identifier, the entity can just submit that number for the beneficial owner rather than having to gather and submit all of the particular information for that individual. The efficiency gained by obtaining an individual FinCEN identifier may be significant for individuals who are beneficial owners of multiple entities.
What are the Deadlines for Reporting?
Existing entities must report between January 1, 2024 and December 31, 2024. Although a year may seem like a long time, clients are encouraged to start the process as soon as possible.
Entities formed in 2024 will have 90 days after submitting documentation to a secretary of state or similar authority to report their beneficial owners. Entities formed in 2025 or thereafter will only have 30 days after submitting documentation to a secretary of state or similar authority to report their beneficial owners.
After filing an initial report, entities must also report changes to information regarding their beneficial owners within 30 days. Accordingly, maintaining compliance with the CTA will not be a one-time event, but will be an ongoing obligation.
What are the Penalties for not Reporting?
The penalties for not complying with the CTA are significant.
Willfully providing false information to FinCEN or failing to report complete information to FinCEN can result in criminal penalties consisting of a fine of up to $10,000 and imprisonment for up to two years as well as civil penalties of up to $500 per day for each day the violation continues.
Beware of Fraud
Criminals are constantly looking for opportunities to obtain individuals’ personal information. Because the CTA will require transmitting such information electronically, there will be numerous attempts by criminals to obtain such information by misrepresenting themselves as part of FinCEN. Be vigilant when clicking on links in emails and visiting websites and ensure they are legitimate before proceeding.
Next Steps
As mentioned above, until the online form becomes available, there will be some uncertainty as to the recommended processes for complying with the CTA. For now, it is recommended that clients begin the process of identifying their beneficial owners and gathering the required information for reporting or obtaining FinCEN identifiers.
Although Brown & Streza is available to support you in your efforts to comply with the CTA, because of the nature of the information required to be reported, we cannot handle the reporting for you. If you need or would like our assistance regarding the CTA, we encourage you to contact us in early 2024 to start the process. We look forward to assisting you.