The Corporate Transparency Act (CTA) was signed into law in 2020 and goes into effect in 2024. The CTA has a new reporting requirement to the US Treasury Department. I plan on helping clients file their CTA reports. The reporting will be through FinCEN, likely similar to how foreign accounts are reported to FinCEN.
Most legal entities that are incorporated, organized, or registered in a state must report information regarding its owners, officers, and controlling persons to FinCEN. Among my typical clients, this means single member LLCs, partnerships, and S corporations. Many foreign based entities will also have the same reporting required.
There are some entities that are exempt (23 types), but most of the exempt organizations are already under reporting requirements of some type like with the Securities Exchange Commission for example. There is a “large operating company” exception which may apply to some entities which otherwise have to report. A large operating company needs to have at least 20 full time employees, at least $5 million dollars of US revenue, and presence in a physical office in the US.
Another exempt organization is an inactive entity that was established prior to January 1, 2020 and that also meets other requirements. I’ve come across quite a few people over the years who established an LLC, but never actually did anything with it. Or whose activity ended quite some time ago. Or that has done very little activity. Some of these will be exempt, but only if they were established prior to January 1, 2020 and meet other requirements.
The entities that are not exempt are called reporting companies.
The reporting includes entity (or reporting company as the CTA calls them) information:
- the full legal name of the entity
- any trade or d/b/a name
- the address of the entity
- the jurisdiction of formation of the entity, and
- the federal taxpayer ID number.
Information about the “beneficial owners” is also required to be reported:
- Full legal name;
- Date of birth;
- Current residential or business address; and
- Unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of such document), such as a driver’s license or passport.
The same information is required to be reported regarding company applicants (but not company applicants for pre-January 1, 2024 companies).
A beneficial owner is any individual who, directly or indirectly, either:
- Exercises substantial control over such reporting company, or
- Owns or controls at least 25% of the ownership interests of such reporting company.
A company applicant is one of two people:
(a) the individual who is responsible for filing the documents that create the entity or, in the case of a foreign entity qualified to do business in the US, the individual who directly files the document that first registers the foreign reporting company to conduct business in a state; or
(b) the individual who is primarily responsible for directing or controlling the filing of the relevant formation or registration document by another.
There is more detailed information on who are beneficial owners and who are not and also who is a company applicant in the text of the CTA and accompanying regulations. You can read more about it here.
Any reporting company that was established or registered before 2024 has all of 2024 to file a report. Any reporting company established or registered in 2024 or later has to file initial beneficial ownership reports within 30 days of being established or registered.
If information changes on the report, an updated report has to be filed within 30 days of the change. If there was an error on a previous report, the corrected report must be filed within 30 days of noting the error.
There is NO annual filing requirement.
What if I don’t?
If companies and individuals violate the CTA, they will be subject to civil penalties of not more than $500 per day, capped at $10,000, and imprisonment of up to two years if an individual willfully provides false information or fails to report.
So what should I do now?
We expect that sorting out whose information really needs to be included in the report filing will be the most difficult part of this for many entities. If impacted by the CTA, I recommend you let any other owners and anyone who may be a beneficial owner know that this information will be required and it will be collected. And make sure that you are prepared for the additional costs this may bring to you.
If you have an LLC that you do not use, if it is inactive, consider closing it. Even if it qualifies for the inactive exception. Why carry the costs if you aren’t going to use it? Some inactive LLCs won’t qualify for the exception, so not only may you be paying to keep them “alive”, but now you’ll have additional requirements. It may be a good idea to formally end them by whatever method the state of formation requires. As the reporting requirement approaches I recommend that taxpayers impacted by this new requirement keep an eye out for updated information regarding this new requirement here.