The Corporate Transparency Act (CTA) is a new federal law that is likely to affect the vast majority of small businesses in America. The CTA will require these businesses to report information regarding their current owners and managers, and will also require these businesses to file updates when there are changes in ownership or management.
Businesses will report this information directly to the Financial Crimes Enforcement Network (or FinCEN), which is a bureau of the United States Department of the Treasury. The primary purpose of this reporting is to identify “shell” companies which may be involved in illicit financial activity, such as money laundering or financing terrorist activities. However, virtually all small businesses will be held to these reporting requirements, regardless of the nature of the business or whether they are currently under any suspicion.
The CTA takes effect on January 1, 2024 – right around the corner!
At Brady Cobin Law Group, we assist our clients in setting up various business entities, such as limited liability companies (LLCs) or business corporations, for estate planning or asset protection purposes. We anticipate that most, if not all, of these entities will be subject to the CTA’s reporting requirements. If you are involved in one of these entities, or are considering forming one, you should be aware of these requirements, as failing to file can lead to costly financial penalties and even criminal liability.
Broadly speaking, the CTA requires a company to report extensive personal information on anyone who has an ownership or control interest in that company. This information includes not only names and addresses, but also more sensitive information, such as copies of driver’s licenses or passports. And because the purpose of the CTA is to identify potential bad actors, the information reported must clearly point to the individual; for example, the address provided must be the individual’s actual residence, and not a P.O. Box, CPA’s address, attorney’s address, etc.
Here are three steps all business owners should consider right now in order to comply with the CTA’s onerous requirements:
- Dissolve Unused or Unneeded Entities. Current guidance indicates that entities dissolved before the end of 2023 will not need to comply with the reporting requirements.
- Accordingly, if you have an entity that remains in existence but is serving no purpose, you may want to dissolve (that is, formally bring an end to) the company before the end of this year.
- We highly recommend consulting with us before dissolving an entity so that we can assist you in determining whether this is an advisable move. If we do recommend dissolution, our Firm can assist you in filing the appropriate documents with the North Carolina Secretary of State’s Office.
Form New Entities BEFORE 2024
Under current CTA rules, entities formed before January 1, 2024 will have one year to file reports with FinCEN. Put differently, existing entities (i.e. which came into existence prior to 2024) must file their first report by January 1, 2025. This rule gives companies formed before 2024 an advantage, as they will have a full year to gather the personal information required.
Additionally, we hope to have much clearer guidance on the CTA’s regulations by that point, so there should be less uncertainty when the time comes to file. On the other hand, entities formed on or after January 1, 2024 will have only 90 days to complete their CTA filings. (Note that this duration is currently 30 days, but is expected to be extended to 90.)
Begin Gathering Information, Especially for Trust-Owned Businesses
If your company is one of the 32 million expected by FinCEN to be subject to the CTA filing requirements, you would be well-served to begin identifying whose information will need to be reported. In our estate planning practice, we often advise individuals to hold business interests in trust for probate avoidance and business succession purposes.
While those benefits remain intact, the CTA has introduced incredible uncertainty as to what reporting requirements trust-owned businesses may be obliged to follow. At this point, there are very few answers from Uncle Sam. However, our clients should at least entertain the possibility that anyone with an ownership or control interest in such trusts – including grantors (trust creators), certain beneficiaries, trustees, and trust protectors – will be required to provide the business with their personal information so that it can be relayed to FinCEN.
In some cases, you may want to remove or replace these parties so as to minimize the headaches from the invasive reporting required under this new law. Similarly, you may want to consider making changes to your Operating Agreement, corporate bylaws, or other business documents for the purpose of making the CTA filings easier for you. Our Firm is here to assist you in making these changes to your estate planning and corporate documents.
If you have questions about whether your business needs to comply with the CTA, what information needs to be disclosed, who might be obligated to provide their personal information, or would like to discuss any other aspects of compliance with this new law, please contact us today to schedule a consultation with one of our attorneys. We look forward to assisting you in navigating these new and potentially treacherous waters.