“The best laid plans of mice and men often go awry.” Robert Burns.
The plan was benevolent. The Corporate Transparency Act (CTA) was enacted by the Federal Government in 2021 to combat money laundering, tax fraud, and other illicit activities that are usually done through shell companies – entities without active business operations or significant assets – by requiring disclosure to the Department of Treasury as to who holds the ownership interests in limited liability entities.
As of this writing, the actual implementation of the CTA has failed to live up to its altruistic ambitions.
While other provisions of the CTA are already in place, beginning January 1, 2024, a new reporting requirement mandates compliance by over 33 million existing small businesses across the United States. An overwhelming percentage of new businesses formed after that date will be required to comply upon formation. In addition, every company must file an updated report within 30 days of any change in Beneficial Ownership, including minor changes as a new owner’s new address.
Larger businesses are excluded; a company is exempt from filing if it exceeds $5 Million in gross receipts, has 21 or more full-time employees, and has a physical office in the United States. In short, if you are a business owner reading this article, it is more likely than not that you will need to comply with the CTA in 2024 and as part of your business compliance requirements going forward.
The CTA requires corporations, limited liability companies, and other similar entities to disclose the “Beneficial Owners” of the entity to the Financial Crimes Enforcement Network (FinCEN), a bureau within the U.S. Department of Treasury. A Beneficial Owner is an individual who, directly or indirectly, either exercises substantial control over the entity or owns or controls not less than 25% of the ownership interests of the entity. Each Beneficial Owner will be required to provide FinCEN with their full legal name, date of birth, current address, and a copy of an acceptable government identification document.
Entities existing on January 1, 2024, must file prior to January 1, 2025, and while there is a minor grace period for entities formed in 2024, the general rule is that entities created on or after January 1, 2024, must file within 30 days of formation. Filing is done through a “secure filing system” on the FinCEN website.
Failure to comply can result in extreme penalties: $500 for each day of non-compliance, up to $10,000 per violation – and possible imprisonment of up to two years.
Despite the far-reaching impact of the CTA, its stringent requirements, and stiff penalties for non-compliance, as 2024 begins, no one, including FinCEN, appears to be ready for the realities of actual compliance with the CTA or exactly how to comply.
Entity formation and governance have always been subject to state law. Going forward, regardless of what state in which your entity is formed, it will also be subject to the mandates of Federal agencies. Despite this, many business owners and professional advisors still need to fully grasp the realities of this fundamental change in business entity law, largely because there has been almost no advanced outreach by FinCEN to the small business community. Not surprisingly, most small business owners have never heard of FinCEN. Professional advisors have been unable to advise their clients because the information necessary to understand the details and mechanics of the actual CTA-mandated filing process has not been available. As late as December 2023, the filing form did not exist, and inquiries to the FinCEN website yielded responses such as “not yet available” and “in development.” Finally, FinCEN itself has acknowledged that it is underfunded, overstretched and lacks the resources necessary to actually process the filings once they are submitted. Despite this, the reality is that companies need to comply, and the failure to do so puts those entities and their owners at significant risk. We recommend that you consult with your attorney and professional advisors early in 2024 regarding the initial filing process and requirements once FinCEN releases more details and adjust your corporate governance procedures to include this filing obligation as your business ownership changes in the future. Our Business and Banking Services Group remains focused on understanding and providing additional information on compliance with the CTA as it becomes available. For updates, please visit us at www.grossmcginley.com.
