There is a significant new regulatory development known as the Corporate Transparency Act (CTA), accompanied by its integral component, Beneficial Ownership reporting. This may have substantial implications for our business operations. This will affect more than 32 million entities according to Kiplinger.
For the first time ever, Uncle Sam is taking a magnifying glass to who owns and controls businesses at the federal level. The majority of companies are private and file with a state, but those states aren’t always too nosy about who exactly is running the show. Some don’t ask for any details about owners or management at all. This relative secrecy is where the government thinks some financial shenanigans might be happening.
What is the Corporate Transparency Act
The CTA was signed into law in 2021, but only kicks into gear on January 1, 2024. FinCEN, a bureau of the Department of the Treasury, is on duty to oversee the CTA. Their main job is to guard national security through financial intelligence and fight against illegal financial transactions and money laundering. Many also think the CTA will help clamp down on tax evasion.
Company information reported:
* Legal name and all trade names or DBA (doing business as) names for the company.
* Actual street address for the company’s principal place of business (not a P.O. Box or lawyer’s or adviser’s address).
* State of formation.
* Identification number. A pass-through entity, like a single-member LLC, that may not be required to have a tax ID number may now have to obtain a unique identification number.
* An identity document from an issuing jurisdiction such as filed Articles of Incorporation or Organization, including an image of that document.
Beneficial Ownership Form
So, what does this mean? Basically, each entity that’s created by a state filing like LLCs, corporations, partnerships, etc; will need to fill out a Beneficial Ownership form. This form is to be submitted once and will ask for the following details from each with more than a 25% stake or someone with significant control over the entity.
* name;
* date of birth;
* address; and
* the identifying number and issuer from either a non-expired U.S. driver’s license, a non-expired U.S. passport, or a non-expired identification document issued by a State (including a U.S. territory or possession), local government, or Indian tribe. If none of those documents exist, a non-expired foreign passport can be used. An image of the document must also be submitted.
There are exceptions for entities already under regulation (banks, securities brokers, insurance companies, etc.) but not many. So, most businesses, holding companies, estate planning vehicles, professional firms, and more should be ready to file. You can find out more on the FinCEN website.
When do you have to file?
Timing is a bit like a relay race; existing entities have until January 1, 2025, entities formed during 2024 get 90 days, and those formed after January 1, 2025 have 30 days. And remember, if ownership or management info changes, you’ve got to update your filing.
Now, the actual reporting is just the tip of the iceberg. With such short filing deadlines, keeping accurate records of ownership and management changes will be crucial. Miss a deadline and you could face a penalty of up to $500 a day up to $10,000 and up to two years in jail (per occurrence).
Record keeping needs to be on point and backed by documents. Unlike a tax return that can be amended, you only have a short 30-day window. So, if your COO quits, you need proof of when they left. If ownership changes, you’ll need solid evidence like purchase agreements, bills of sale, minutes approving transfers, etc.