If you own a small business – an LLC, corporation, limited partnership, family limited partnership or other closely held entity with less than 20 employees and revenue of less than $5 million over the last 12 months – then your business is very likely subject to new reporting requirements under the federal Corporate Transparency Act.  This law becomes effective January 1, 2024, and applies to entities that are created by filing paperwork with a State – such as filing Articles of Incorporation or a Certificate of Formation with the Texas Secretary of State.  This includes LLCs and other entities formed only to hold real estate but conduct no active business activities as well as entities with a single owner that is ignored for Federal income tax purposes (such as single member LLCs).

A business operated as a sole proprietorship under an individual’s DBA is not a separate entity and is not formed by filing something with the State and should not be subject to the Act’s reporting requirements.

Purpose

The law is part the federal government’s effort to combat money-laundering, terrorism, tax evasion and other financial crimes. The Financial Crimes Enforcement Network (“FinCEN”), a bureau of the US Treasury Department, will be in charge of creating and maintaining a national database of the humans who are behind organizations that might be involved in such activities.  The database will not (at least initially) be of public record but will be available to a variety of government agencies.

Required Reports

A “reporting company” will be required to file reports with FinCen that provide specified information about the company and about any individual who is a “beneficial owner.” A beneficial owner is broadly defined to include anyone who owns a 25% or more direct or indirect interest in an entity or has “substantial control” over the entity, which includes:

• Any officer, director, and manager;
• any individual with authority over the appointment or removal of any senior officer or the majority of a corporation’s board of directors; or
• any individual with substantial influence over important matters of a reporting company.

 

Entities in Trusts

If you are the trustee of a trust that owns an interest in an LLC or other entity, then the LLC will be required to file a beneficial ownership report – it is unclear if such reports would include information about the beneficiaries (unless they have the power to remove the trustee), but it appears that reports would need to include information about the trustee, since the trustee would have substantial control over the LLC.

The information that must be included in company reports includes:

• • Legal name and any trade names such as DBAs for the entity.
  • Street address for company’s principal place of business (not a P.O. box or lawyer or other adviser’s address).
  • State of formation.
  • Tax Identification Number. A passthrough entity, like single member LLC, may have to obtain and provide a unique identifying number.
  • An image of an identifying document from an issuing jurisdiction (e.g., a certificate of incorporation or formation).

 

The information the entity will have to report for each beneficial owner includes:

• Full legal name. (No initials)
• Date of birth.
• Home address (not a P.O. box or lawyer or other adviser’s address).
• PDF (or photocopy) of the individual’s U.S. passport or state drivers license.

 

For entities formed after January 1, 2024, the “company applicant” – the human who actually goes online and forms the entity and their direct supervisor – must also complete a report.

 

Inactive Entities

If you created an entity but it was never operational or it has ceased to be operational, it may be exempt from reporting requirements, but only if the entity:

• was in existence on or before January 1, 2020;
• is not engaged in active business;
• is not owned by a foreign person, whether directly or indirectly, wholly or partially;
• has not experienced any change in ownership in the preceding twelve-month period;
• has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding twelve- month period; and
• does not otherwise hold any kind or type of assets, anywhere in the world, including any ownership interest in another entity. ($10 in a bank account is an asset.  A family cabin is an asset.)

 

You may wish to officially dissolve entities that you no longer intend to use to avoid the need to file initial or updated reports.

 

Required Updates

After an initial report is filed, the entity is required to file an update within 30 days after any of the information in the initial report changes.  This means an update would be required within 30 days after any beneficial owner changes their address, their last name (due to marriage or divorce), or transfers part of their interest to a child, trust or anyone else.

No updates are currently required for changes affecting the company applicant.

No forms are available yet.  The regulations are not yet final, so the definitions and required information to be reported may change before the reporting deadlines.

 Deadlines

Entities that already exist by that date must file initial reports by January 1, 2025.  Entitles created on or after January 1, 2024 must file initial reports within 30 days of formation.  Under the current version of the regulations, no extensions are available. A list of entities that are exempt from the Act are listed on the attachment to this letter.  Most small businesses are not exempt as they are the targets of the Act.

Penalties

Failure to timely file the required reports may result in civil penalties of $500/day up to $10,000 and imprisonment for up to two years.

For more information, go to the Small Business Compliance Guide at FinSec’s website:

https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf

Start Early

If you own interests in or have substantial control over multiple entitles, it would be wise to start collecting information long before the deadlines.  Assemble a list of every privately held entity that you own an interest in or exert control over. Obtain a copy of the certificate that was filed with the state where the entity was formed.  Often someone operating an LLC forgets that their spouse or someone else is also a member or co-owner.  Check the original documents to see who is listed as an owner or member, who is listed as a manager, who can remove officers, directors or managers, and who might have substantial control.  Shortly before filing, confirm that all of the information listed above for each other beneficial owner or person with substantial control is still accurate.  Some people may balk at providing a photocopy of their passports or drivers licenses, so it may take time to collect this information.

Acknowledgement:  The source material for much of this post is a webinar on November 20, 2023 “Are you Prepared for the Corporate Transparency Act” by Martin Shenkman, Jonathan Blattmachr, and Abigail O’Connor and their 26 page paper, “Corporate Transparency Act: Implications to Estate Planning” posted in Steve Leimberg’s Business Entitles Email Newsletter – Archive message #280.  Both are available through this link: https://shenkmanlaw.com/webinars-details/?id=4009

 

Megan Baumer
Austin Estate Planning Attorney
Austin Medicaid Planning Attorney
Law Office of Michael Baumer
Baumer Estate Planning
512-476-8707
Website: www.baumerlaw.com/estate-planning
Blog: www.Baumerestateplanning.com

 

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