by Jacob Sheffield, CPA, MST
Effective January 1, 2024, millions of privately-owned non-exempt corporations, limited liability companies and limited partnerships will be subject to new reporting obligations under the Corporate Transparency Act (CTA), a new anti-crime law that seeks to uncover the concealment of illicit money through the use of shell and front companies.
In an effort to increase transparency of true ownership behind anonymous entity structures, owners will be required to file a Beneficial Ownership Information Report with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).
Who is required to report beneficial ownership information to FinCen?
A wide net is cast across the business community requiring both domestic and foreign “reporting companies” and “reporting trusts” to disclose their beneficial ownership information. We encourage all our clients to discuss these requirements with their legal advisors.
In general, domestic and foreign reporting companies include corporations, limited liability companies, or other entities established by filing documents with a state secretary or Indian tribe, or formed under foreign laws and registered to operate in the U.S. or tribal jurisdiction.
Entities formed prior to January 1, 2024 have one year to comply with the new requirements and must file by January 1, 2025. Entities formed after the effective date of January 1, 2024 will be obligated to file a report within 30 days of formation.
In addition, if the entity is formed on or after January 1, 2024, the “company applicant,” defined as the person who directly files the document that creates the reporting company, will also need to include identifying information in the report.
Because many private companies have historically enjoyed a great degree of privacy involving internal matters, concerns over exposing the identities of their owners have been top of mind. To safeguard the privacy of owner information, FinCen established a secure, non-public registry accessible only by authorized governmental agencies used to investigate suspicious activities and prevent financial crimes. Penalties are in place in the event of a breach.
Who is exempt from filing a report?
Most of the entities exempt from filing a report are regulated entities who are subject to ongoing reporting requirements and already submit beneficial ownership information to regulators.
There are 23 types of businesses exempt from the reporting requirements and include entities such as banks, credit unions, registered broker dealers, insurance companies, accounting firms, public utilities, and certain tax-exempt entities, among others.
Further, entities that have 20 or more full-time employees in the U.S., filed federal income tax returns showing more than $5 million in gross receipts, and have an operating presence in the U.S. are not required to file.
What if there are changes to the filing document?
If a reporting company has any changes in the information provided about either the reporting company or its beneficial owner(s), or if it becomes eligible for an exemption, it’s necessary to amend the filing document and submit an updated report within 30 days after the date on which the change occurred.
What are the penalties for noncompliance?
The penalties are steep for any person who willfully fails to file a report in its entirety or fails to provide an updated report with FinCEN. Fines can be up to $500 per day (up to a maximum of $10,000) and imprisonment for up to two years.
Due to the strict filing requirements and expensive penalties, owners should consult with legal advisors to ensure compliance and avoid any violations of the new law.
What should entities do now?
Owners should be diligent in determining whether their entity is a reporting company and therefore will be subject to the new rules. It may also be advantageous to implement a system to keep track of the reported information so owners and executives know when updates should be reported.
Of high importance, any individual who currently owns an inactive LLC should take steps to close it. Historically, there has been penalties for leaving LLCs in place, even after they are inactive; however, those inactive LLCs will need to report against the new filing requirements or risk being out of compliance and face these new penalties.
Since we are not attorneys, BPW is unable to provide you with any legal determination as to whether an exemption applies to the nature of your entity or whether legal relationships constitute beneficial ownership. The assessment and application of many of the new reporting requirements may necessitate legal guidance and direction.
The beneficial ownership transparency reform joins over 30 other countries around the world that have implemented a system to identify beneficial owners information in a concerted effort to greatly reduce the misuse of shell companies and contribute to the global fight against financial crimes.
Please exercise caution and be aware of fraudulent requests from scammers demanding private information and payment with the threat of penalties or jail. Consult your advisor if any received document raises uncertainty.
If you have any questions regarding these new reporting requirements, please contact a BPW advisor at (805) 963-7811.