Small businesses often represent an investment of many years of hard work, and they are an important part of many estate plans. Our firm advises many small businesses, including advice on building strategies to incorporate a small business into the owner’s estate plan. This can involve developing plans for business continuity or transfer of a business.
Recent legal changes will impact many small business owners. Small business owners have one more item on their compliance to-do list with the Corporate Transparency Act (CTA), which became effective January 1, 2024. The CTA is a Federal law that places new reporting requirements on many business entities to help expose illegal activities, including the use of shell companies to launder money or conceal illicit funds. Around 30 million small businesses will be impacted by the law, which will establish a federal database of information, furnished by “reporting companies,” that will be accessible to certain authorities and organizations.
Why was the CTA passed?
The CTA directs the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) to gather information from private companies about their owners and controlling persons. According to FinCEN leaders, “FinCEN is taking aggressive aim at those who would exploit anonymous shell corporations, front companies, and other loopholes to launder the proceeds of crimes, such as corruption, drug and arms trafficking, or terrorist financing.” To address risks posed by anonymous shell companies, the CTA mandates the creation of a national registry that contains certain information about business entities that are formed by filing a document with a state’s secretary of state or similar office.
What does the CTA require?
Effective January 1, 2024, the CTA requires that certain businesses disclose to FinCEN information about the company, its beneficial owners, and in some cases, the company applicant. Reporting companies—defined as any company with twenty or fewer employees that is formed by filing paperwork with the Secretary of State or equivalent official—that are created or registered prior to January 1, 2024, have until January 1, 2025, to file an initial report; reporting companies created or registered after January 1, 2024 and before January 1, 2025, will have ninety days after creation or registration to file a report. Entities created on or after January 1, 2025, will have 30 days to submit the reports to FinCEN.
It's important to note that each state has different standards and practices for business entity formation, and this may create some uncertainty about whether a business must report to FinCEN. For example, some states require sole proprietorships and general partnerships to register with state agencies, while other states do not.
Does the CTA require my business to report?
The CTA applies to companies that are created by filing a document with a state authority. Typically, this includes corporations and limited liability companies. Depending on the state, it could also include limited partnerships, professional associations, cooperatives, real estate investment trusts, and trusts.
It is estimated that 30 million small businesses will have to report to FinCEN. However, the CTA exempts around two dozen categories of companies, including companies that
- are publicly-traded;
- have more than twenty full-time US employees;
- filed a previous year’s tax return showing more than $5 million in gross receipts or sales;
- have an operating presence at a physical US office location;
- operate in a regulated industry, such as banking, utilities, or insurance, that already imposes similar reporting requirements; or
- are subsidiaries of exempt organizations.
These exemptions, which generally include larger companies that are already subject to regulation, underline the primary purpose of the CTA: to combat money laundering and other illicit activities conducted via small, private, and anonymous shell companies.
What information must be provided in the reports?
The CTA requires three categories of information to be reported: company, owners, and applicant.
- Domestic reporting companies created before January 1, 2024, must provide information about the company and its beneficial owners.
- Beneficial owner is defined in the CTA as an individual who exercises “substantial control” over the reporting company or has an ownership interest of at least 25 percent. Company senior officers, directors, and others who make significant decisions on behalf of the company may meet this statutory definition of “substantial control,” although the broad definition may cause confusion in some instances.
- Domestic reporting companies created on or after January 1, 2024, must provide information about the company, its beneficial owners, and its company applicants.
- A company applicant generally is the individual who files the formation document with state authorities for the reporting company.
Technically, the information to be filed with FinCEN is called a Beneficial Ownership Information (BOI) Report. The following is required in the report for a company, an owner, and an applicant:
- The reporting company must provide its name and any alternative (DBA) names, the address of its principal place of business, the state of formation, and its taxpayer identification number or FinCEN identifier.
- Each beneficial owner of a reporting company must furnish their full legal name, date of birth, residential address, and an identification number from a driver’s license, passport, or other state-issued identification (ID), along with a copy of the ID document.
- A company applicant is required to submit the same information as a beneficial owner.
Are there penalties for noncompliance with the CTA?
Penalties for noncompliance may be steep. Willingly providing false information (including false identifying documents) to FinCEN, or failing to report complete BOI information, can result in:
- Fines of $500 per day, up to $10,000
- Imprisonment for up to two years
Civil and criminal liability may be avoided if an individual who submitted an original, erroneous report did not knowingly submit inaccurate information and submits an updated report correcting the inaccurate information within ninety days.
Get help with CTA reporting requirements.
It is important to understand how the CTA applies to your business and what you need to do to comply. Attorney Joel Hjelmaas at Pearson Bollman Law can help small business owners determine whether the CTA applies to their business and what they will need to do to meet these reporting requirements. We encourage small business owners to reach out now to start working on a CTA compliance strategy.
In addition, our firm can advise small business owners on other aspects of business planning, like determining legal needs in starting a business, whether a small business is organized with the appropriate business structure, and whether a business is maximizing potential protection from liability. Please contact Attorney Joel Hjelmaas at Pearson Bollman Law at 515-727-0986 if you would like to discuss any of these areas.
At Pearson Bollman Law we have offices in West Des Moines, Dubuque, Bettendorf, Cedar Rapids, and Okoboji. Call us today to schedule a consultation at 515-727-0986. We look forward to meeting with you and learning about your individualized needs.