The Corporate Transparency Act (CTA) was passed by Congress and became effective on January 1, 2021. The CTA is a new law that requires corporations, LLCs, and other business entities to provide information about their owners to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), which is a unit separate from the IRS. The CTA was included with the Anti-Money Laundering Act of 2020. The CTA is part of a government crackdown on corruption, money laundering, terrorist financing, tax fraud, and other illicit activity.
Are you an owner of a corporation, limited liability company (LLC), limited partnership, limited liability partnership, limited liability limited partnership, or business trust?
Or are you planning to form one of these entities?
If so, be alert. There’s a new federal filing requirement coming.
Businesses subject to the Corporate Transparency Act will have to file a “beneficial owner report” with FinCEN, including each beneficial owner’s full legal name, date of birth, and residential street address, as well as an identifying number from a legal document such as a driver’s license or passport. FinCEN will include the information in a database for use by law enforcement, national security and intelligence agencies, and federal regulators that enforce anti-money laundering laws. The database will not be publicly accessible.
Violations of the CTA could result in a $500 per day penalty (up to $10,000) and up to two years’ imprisonment.
The Corporate Transparency Act did not take effect immediately. Rather, Congress gave the FinCEN time to write regulations governing how the CTA should be applied and to give businesses a heads up about the new law. FinCEN has now issued its proposed regulations, and they take a fairly hard line on how the law will be applied.
Here are four issues the new regulations make clear.
1. The filing requirement may begin soon. The CTA goes into effect when the proposed regulations become final, which is expected to occur sometime in mid to late 2022. As soon as it goes into effect,
- new corporations, LLCs, and other entities must comply with the filing requirement within 14 days of formation; and
- existing entities will have one year to comply.
2. Millions of small businesses are affected. The reporting requirements will apply to almost every small business that is not a sole proprietorship or general partnership, including corporations, LLCs, limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships—over 30 million in all.
- Larger companies with more than 20 full time employees and $5 million in gross receipts are exempt.
3. There will be many beneficial owners. The proposed regulations make it clear that a company can have multiple beneficial owners, and it may not always be easy to identify them all. There are two broad categories of beneficial owners:
- any individual who owns 25 percent or more of the company; and
- any individual who, directly or indirectly, exercises substantial control over the company.
4. Law and accounting firms are not exempt. Neither the CTA nor the proposed regulations contain any exemption for legal or accounting firms, except for the relatively few public accounting firms registered under Section 102 of the Sarbanes-Oxley Act of 2002. Thus, any law or accounting firm that is a professional corporation or an LLC will have to file a beneficial owner report unless it has more than 20 employees and $5 million in annual income.
Please contact me for help concerning these new compliance requirements.
Page Last Updated 06/19/2022.