Entrepreneurs share common characteristics: motivation, creativity, persuasiveness, risk tolerance, versatility, vision, innovation, communication, and collaboration,…
In the ever-evolving world of business regulations, a new federal rule has emerged that seeks to enhance transparency, discourage illicit activities, and increase accountability. This game-changing legislation is the Corporate Transparency Act (CTA), which was passed as part of the National Defense Authorization Act for Fiscal Year 2021. As a business owner, it is crucial to understand the CTA and its implications for your business operations.
The CTA’s primary objective is to combat illicit activities such as money laundering, tax evasion, and fraud by requiring businesses to disclose their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. But what does that mean for small business owners? Read on to learn more.
Who are Beneficial Owners?
Under the CTA, a “beneficial owner” is defined as any individual who, directly or indirectly, owns 25% or more of the equity interest in a corporation, LLC, or other similar entity or exercises substantial control over the entity. However, certain entities are exempt from these requirements. The table below summarizes the 23 exemptions.
Further guidance on determining whether your business falls within the exemptions listed above can be found within the Small Entity Compliance Guide, provided by FinCEN.
Trusts as Beneficial Owners
Trusts often play a significant role in business ownership structures. Under the CTA, they too are subject to the beneficial ownership disclosure requirements. If a trust holds a 25% or more beneficial ownership interest in an entity, the trustee is considered the beneficial owner for the purposes of the CTA.
A trustee, in this context, is a person who has the authority to manage and control the assets held in a trust. This typically includes the power to buy, sell, or otherwise transfer those assets. This means that the trustee’s full legal name, date of birth, current residential or business address, and unique identification number from an acceptable identification document must be reported to FinCEN, just as it would for any other beneficial owner.
It’s worth noting, however, that the CTA does not apply to all trusts. Certain trusts, such as those operated entirely by one or more excluded entities (e.g., publicly traded companies) or trusts used solely for estate or inheritance purposes, are exempt from the beneficial ownership reporting requirements. It’s important to check with your estate planning attorney to determine whether your trust is exempted from the reporting requirements.
The CTA requires businesses to provide the full legal name, date of birth, current residential or business street address, and unique identification number from an acceptable identification document of each beneficial owner. This information must be submitted within 90 days of company registration and updated within a year of any change in beneficial ownership.
Reporting Beneficial Ownership to FinCEN
Under the Corporate Transparency Act, businesses are required to submit the necessary beneficial ownership information to FinCEN. Companies formed prior to January 1, 2024 have until January 1, 2025 to file reports. Those formed on or after January 1, 2024 must file reports within 90 days of the company’s registration/formation.
Specifically, the CTA mandates that when filing the formation documents for a new company, the reporting company must provide FinCEN with the required information for each beneficial owner. This information is to be submitted using forms provided by FinCEN.
The CTA also requires reporting companies to update this information within a year of any change in beneficial ownership. This means that if a new beneficial owner acquires significant control or ownership interest in the company, or if any of the existing beneficial owner’s information changes, the reporting company must update this information with FinCEN within one year of such change.
Access to FinCEN’s BOI e-filing system and further information on how to submit beneficial ownership reports can be found here:
Penalties for Non-Compliance
Non-compliance with the CTA can result in significant penalties. Businesses that fail to comply may face civil penalties up to $500 per day, up to a maximum of $10,000, and criminal fines up to $250,000 (or $1 million for aggravated cases) or imprisonment for up to two years, or both. Given these potential penalties, it’s vital to ensure your business is complying with the new reporting requirements under the Corporate Transparency Act.
The Corporate Transparency Act presents a significant shift in U.S. corporate law, demanding more transparency from businesses. As a business owner, it is vital to be aware of these changes and prepare accordingly. While the CTA might seem daunting, with proper understanding and preparation, businesses can successfully navigate these new transparency requirements.
Setting up a business or creating an estate plan that includes business succession planning can be a complex process, especially with the new transparency requirements under the Corporate Transparency Act. At Pierce Legal, we are here to help. We can guide you through each step of the process, ensuring that you are fully compliant and prepared for the future. Don’t leave these important aspects of your business to chance. Contact Pierce Legal today, and let us help you create a solid foundation for your business and estate plans.