Law of the Land

If you haven't heard of the new Corporate Transparency Act, I'm sorry to be the one to tell you. Sit down because you probably aren't going to like this.

First, the basics. The Corporate Transparency Act (CTA) is being touted as a much-needed tool for law enforcement. The feds are going to use all the information they require business owners to provide to round up the world's notorious money launderers, terrorists, and other criminals.

The enactment of the CTA follows a veto by former President Donald Trump of the National Defense Authorization Act (NDAA) for fiscal year 2021, which Congress overrode Jan. 1, 2021. The CTA falls under the NDAA.

WHEN DOES IT START, WHO HAS TO FILE?

Some details of the CTA remain fluid. For example, there's no website yet. There are no forms available online. But if the federal government is going to meet its own deadlines, it will have to be up and running by the end of the year.

Currently, the CTA is set to take effect Jan. 1, 2024. Businesses formed on that date or after must file a report within 30 days of receiving actual notice that the creation of the business is effective, or within 30 days of the date the secretary of state provides public notice of a business formation. Business entities formed prior to that date that are not dissolved/inactive must file a report no later than Jan. 1, 2025.

Under the CTA, companies required to report include corporations, limited liability companies (LLCs), or other entities formed by filing documents with the secretary of state or similar office of a state or Indian tribe or formed under the laws of a foreign country and registered to do business in the U.S. Entities that own real estate assets are reported to be among those required to file a report.

Exempted entities include publicly traded companies, banks, credit unions, governmental entities, insurance companies operating in the U.S., securities brokers, public utility companies, certain investment advisers, venture capital funds advisers, accounting firms, pooled investment vehicles, inactive entities not owned by a foreign person, tax-exempt entities, subsidiaries of exempt entities, and entities that employ more than 20, operate at a physical office in the U.S., and file federal tax returns that show more than $5 million in gross receipts or sales.

Summed up, the CTA is focused on the little guy.

When information changes as to a business entity's beneficial owners, the entity will have to file an updated report within 30 days of the change. This also applies if the company becomes aware of an inaccuracy in their report.

What is a "beneficial owner?" The CTA defines this as an individual who, directly or indirectly, exercises substantial control over the company or owns/controls at least 25% of the ownership interest of the company.

What is "substantial control?" When the individual serves as a senior officer, has authority over the appointment/removal of a senior officer or a majority of the members of the board of directors; or directs/determines/has substantial influence over important business decisions.

What does that mean? To put it in a nutshell, every mom and pop LLC, partnership, and company will likely be required to submit a report to the federal government under the CTA.

The American Bar Association writes that the CTA "places a significant burden on small businesses required to collect beneficial owner information."

PENALTIES FOR NON-COMPLIANCE

The CTA has some teeth for what it describes as "willful non-compliance" and/or unauthorized disclosures.

The National Law Review has written extensively on the CTA and reported that ownership reports that are false, fraudulent, or incomplete will be a reporting violation only if considered a willful act.

Failure to comply can come with a maximum civil penalty of $500 each day, up to $10,000, and imprisonment for up to two years.

WHAT WILL THE GOVERNMENT WANT TO KNOW?

Although no forms are available yet on the Financial Crimes Enforcement Network (FinCEN) website, early information anticipates reporting requirements will include the following:

-- The entity's full legal name, trade names, and a current address.

-- The IRS Taxpayer Identification Number and Employer Identification Number.

-- Full legal names, birth dates, business or residential address, unique identifying numbers (such as from a passport or driver's license) for each beneficial owner and company applicant.

LLCS AS ESTATE PLANNING TOOLS

No exemption has been noted for the reporting requirement as to LLCs used as part of estate planning programs. Rather, LLCs that hold land are expected to be required to meet the reporting requirements.

The CTA rule and additional guidance in the months to come can be found here: www.fincen.gov/boi.

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Law of the Land is provided for informational purposes only and is not intended as legal advice or legal services. Victoria Myers is an attorney licensed in the state of Alabama and a senior editor with DTN/Progressive Farmer Magazine.

Victoria Myers can be reached at vicki.myers@dtn.com

Follow her on Twitter @myersPF

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