The Corporate Transparency Act (CTA), brings a new wave of transparency to the business landscape. Designed to combat money laundering and enhance corporate accountability, the CTA imposes specific requirements on businesses, including small enterprises such as single member LLC’s, corporations, and limited partnerships. Practically all small business owners will be affected by its strict regulations. As such, let’s dive into its requirements and explore what they mean for small business owners.
What is the CTA?
The purpose of the CTA is to create a national database of companies in the U.S. that identifies the human beings behind the companies. This law is part of an increasing effort to combat money-laundering, terrorism, tax evasion, and other financial crimes. While Congress intended to try to help law enforcement by creating this national database of organizations that might be involved in such activities, it will undoubtedly apply to mom and pop entities. Even though, law abiding small business owners will be severely affected and potentially penalized, Congress' purpose is to bring all small business owners out of the shadows and into the regulatory spotlight.
The Financial Crimes Enforcement Network (“FinCEN”), which is a bureau of the United States Treasury Department (not part of the IRS), will be in charge of creating and maintaining this database. Although this database, as of now, will not be a public record, it will be available to a variety of agencies, such as financial institutions, and may possibly be available to others in the future.
So, what are small business owners required to disclose?
Under the CTA, small businesses in all 50 states, are obligated to disclose comprehensive information about their beneficial owners to the FinCEN. Beneficial owners are individuals who either:
· hold a significant stake (own at least 25% of the company); or
· exercise substantial control over the business.
The business must disclose the beneficial owners':
· full legal names,
· dates of birth,
· addresses, and
· unique identification numbers, such as social security numbers or passport numbers.
What does this mean?
If you own an LLC, including even entities designed only to hold real estate, this new law will most likely affect you! Even if your entity has only one owner and that entity is ignored for federal income tax purposes (such as a single-member LLC), that entity will still have to file reports with FinCEN and the business must disclose the information.
If you exert significant control over any such entity (which might include any officer, director, manager, chief financial officer, or investment trustee), then, you may be subject to these requirements. In which case, you would be responsible for filing reports with FinCEN.
The rule goes into effect January 1, 2024. For entities that already exist by that date, their initial reports are due by January 1, 2025. For entities created on or after that date, their initial reports are due within 30 days from the creation of the entity.
As of now, there are no extensions available. Additionally, if any information changes, such as an officer’s address, the business MUST disclose and update the information within 30 days of the change.
What if I don't comply?
If you're a renegade and decide to ignore the regulations, you may be facing stiff civil and criminal penalties for failing to report – this is not something that can be ignored.
The civil penalty is $500 a day up to $10,000. AND the potential criminal charges could be up to two years in prison!
Will the Feds catch the bad guys?
That is to be determined. There are estimates of upwards of 3,000 filings per bad guy caught - and, that is assuming, the bad guys suddenly turn into law abiding citizens who report true and accurate information! You decide!
So, what should I do?
We are still waiting for more direction and guidelines from FinCEN (as well as the expected constitutional challenges that are sure to come!) In the meantime, we advise you to start gathering the required information and stay tuned for updates. As with all laws and regulations, changes are only a signature away, which is why it is imperative to update your legal plans and documents regularly to ensure you are in compliance with all the newest requirements.
Contact us for more information and to ensure your estate and business plans are up to date.