The Corporate Transparency Act (CTA) is a new federal law that requires most business entities to file a report containing information about their company and their beneficial owners with the U.S. government, specifically with the U.S. Treasury Department’s Financial Crimes and Enforcement Network (FinCEN). The CTA was created for the purpose of detecting, preventing, and punishing terrorism, money laundering, and other misconduct carried out through business entities. It is aimed at finding and preventing bad actors who would funnel money through cover businesses, assets, and properties.
Under the CTA, any business entity that fails to file a required report could be subject to civil and/or criminal penalties. This includes, for example, a family cabin held in an LLC. Everyone who owns real estate, big ticket items such as airplanes, or any other assets or property in an LLC or other business entity must analyze and determine whether they need to comply with the CTA’s reporting requirements.
CTA Applicability
Unlike other federal regulations that generally exempt smaller entities (e.g., the FMLA), the CTA is aimed at collecting information about smaller companies and business entities. Determining whether the CTA applies to an entity can be a complicated analysis. For example, there are 23 exemptions to the reporting requirements. However, the exemptions are geared toward larger entities and entities that are regulated in other ways, including banks, insurance companies, credit unions, and publicly traded entities.
Unless one of the exemptions applies, the CTA requires reporting for any entity created by filing a document with a Secretary of State or a similar office. This includes properties that have been set up as an LLC or other business entity, and it can include some trusts as well (NOTE: a trust can be a beneficial interest holder of a business, which means the trustor, trustee, and/or beneficiary may need to be disclosed in a CTA filing).
Ultimately, any entity that was created by filing a document with the Secretary of State would be required to submit a report under the CTA (a trust does not typically file documents with the Secretary of State as part of its creation). Entities that have filed with a court for purposes of jurisdiction or registered with a state for some other reason but have not filed creation documents with the Secretary of State would most likely not need to report.
Potential Penalties for Failure to Comply
This is all relatively new. And FinCEN itself has released certain information about the volume of reporting data and the difficulty it may have in keeping up with and monitoring everything. However, FinCEN will be reviewing reporting information going forward, and there are stiff penalties for entities that fail to comply with the reporting requirements.
The CTA provides that (1) willfully reporting or attempting to report false or fraudulent beneficial ownership, or (2) willfully failing to report (or make updates to) required information will result in a civil penalty of up to $500 for each day that the violation continues, or criminal penalties that can include imprisonment for up to two years and a fine of up to $10,000. So, it is important for all reporting entities to comply with the CTA.
What Information Needs to be Reported?
All non-exempt business entities, including LLCs, will be obligated to submit a Beneficial Ownership Information (BOI) Report to FinCEN.
The BOI Report includes:
- Information about the reporting company, including full legal name, any tradename or D/B/A, complete current address, the state, tribe, or foreign country of formation, and the taxpayer identification number.
- Information about every beneficial owner, including full legal name, date of birth, complete current residential address, a “unique identifying number” (likely a passport or driver’s license number), and a copy of the beneficial owner’s passport or driver’s license.
A “beneficial owner” is any individual or trust that directly or indirectly (1) exercises substantial control over the entity, or (2) owns or controls 25% or more of the ownership interest of the entity.
The data reported to FinCEN will be held in a secure, non-public database, and it will not be available to the public generally.
When Does the Initial Report Need to be Filed with FinCEN?
Entities formed before January 1, 2024 have until January 1, 2025 to file their initial BOI report with FinCEN.
Entities formed after January 1, 2024 have 90 days after they are formed to file their initial BOI report with FinCEN.
BOI reporting is not an annual process. However, if information changes for the reporting company or any of its beneficial owners, the entity will need to file an updated BOI report. For example, if some who is a beneficial owner moves residences, that beneficial owner’s address will need to be updated. So, a reporting entity should make sure to track this information and follow up regularly with its beneficial owners to see if their information has changed.
How Can FMJ Help with the CTA?
FMJ is available to help business entities, property owners, families, and anyone else with questions about the CTA to determine if they are obligated to file a BOI report. We have already worked with a number of clients in this space, and it can be a complicated analysis. We are also helping clients to identify beneficial owners, to implement a system for gathering the information required for reporting, and to determine the best way to track and update BOI reporting information when needed. We recommend that people speak with their primary attorney contact at FMJ as soon as possible for assistance with the CTA. If you do not have a contact at FMJ yet, please contact David Ness or anyone else in our Trusts & Estates group to get started. Please reach out soon!
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