Corporate Transparency Act

Dear clients, this is an important risk alert that I have deemed necessary to give to all clients to inform you about an important reporting law implemented by the US government starting January 1st 2024 if you own a business. If you have officially organized a business with any secretary of state, you will likely be required to comply with the Corporate Transparency Act (CTA or “the Act”), except for some exceptions. The Financial Crimes Enforcement Network (FinCEN) has implemented the Act to gather information for the US government about who ultimately owns and controls companies.

I cannot urge you enough to please read this entire memo and make sure you understand the CTA and the next steps for you. For advice relating to filing reports to comply with the CTA, I advise you to get legal counsel on the matter. This horribly anti-small business law has finally lit the fire enough for me to get my website resource page going so that I can provide you with valuable information in an ongoing manner.

My main goal in this article is to inform you about the CTA’s existence, who is required to file, and the kind of information that must be reported. It will be my goal as your trusted advisor, and the goal of all who you trust at our firm, to help in any way we can. We do not know yet if we will be able to advise on CTA or file the beneficial ownership information forms for you without being in noncompliance with Circular 230 of acting as an attorney. This law is not under Title 26 of the US Code (Internal Revenue Code) which is the only law we as CPAs may interpret and advise on. I assure you that we will assist you as much as possible within all legal means we can. For a start, let me educate you on the CTA.

Summary of CTA:

CTA is administered by FinCEN whose mission is to “safeguard the financial system from illicit use, combat money laundering and its related crimes including terrorism, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence.” The CTA was passed in 2021 on a bipartisan basis to make it harder for bad actors to hide or benefit from gains through shell companies or complex ownership structures.

While the mission is not to harm small businesses, at its very core the Act is aimed at small businesses (less than 20 employees and under $5 million revenue are some of the exemption criteria) and will cause the most harm to small business owners. The reporting requirements have civil penalties of up to $500 per day and criminal penalties of up to 2 years in prison and a fine of $10,000 for failure to timely file initial or updated reports.

The requirement is to report information about the company, company applicants, and beneficial ownership information about the individuals who directly or indirectly own OR control a company. (Control is a large grey area that will be discussed later)

One of the parts of the law that scares me is that FinCEN “will permit Federal, State, local, and Tribal officials, as well as certain foreign officials who submit a request through a U.S. Federal government agency, to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement”. Financial institutions and their regulators will also have access to beneficial ownership information (BOI). This means that a large number of people will have direct access to your personal information submitted in the BOI reports, including foreign officials.

Reporting information – Who and when are we required to report?

A company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial beneficial ownership information report. FinCEN says all “reporting companies” must file the BOI. This includes all corporations, limited liability companies (LLCs), and any other entities created by filing a document with a secretary of state or any similar office in the United States. My understanding is that this will not apply to general partnerships (as in you didn’t file anything with any Secretary of State (SOS), just went into business with a partner and filed a tax return with that business), and it will not apply to someone doing business that has not formally registered with the Secretary of State who practices under their name. This, however, does imply that a fictitious name will be required to report because that is a filing with the SOS. Any foreign entity that has registered to do business in the US by filing a document with a SOS must file as well.

Engaging in passive activities (for example an LLC for your rental property) and unprofitable businesses, or even being the beneficial owner of inactive entities, means you are required to report.

Any company created or registered in 2024 will have 90 days to file its initial BOI report. A company created in January 2025 or later will have 30 days to file its initial BOI report.

BOI reports will begin being accepted on January 1, 2024. They have not even released the form yet so we don’t know what it looks like! (Are you ever surprised by the ridiculousness of government anymore though?) BOI reports will be submitted electronically through a secure filing system on FinCEN’s website.

Who is a beneficial owner?

A beneficial owner is an individual (always an individual, not an entity) who either directly or indirectly (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests.

Substantial control includes the following:

  • Senior officers (president, VP, CFO, general counsel, CEO, COO, or other officer performing similar functions)
  • An individual with authority to appoint or remove certain officers or a majority of directors of the reporting company
  • An individual who is an important decision-maker for the reporting company (big grey area, right!?) Examples include the selection of a geographic focus, entry into contracts, financial matters such as sales, leases, mortgages, or other transfers of principal assets, making decisions for major expenditures or investments, issuances of equity, incurrence of significant debt, or approval of the operating budget. Structure decisions such as reorganization, dissolution, or mergers and amendments of governing documents.
  • An individual who has any other form of substantial control over the reporting company as explained in FinCEN’s Small Entity Compliance Guide

An owner of at least 25% of the reporting company’s ownership interests is straightforward! Or is it? What if someone has 25% control but no actual ownership such as voting rights or other mechanisms?

Company Applicants that must be reported:

A reporting company created on or after January 1, 2024, will need to report their company applicants. This includes the individual who directly files the document with the Secretary of State and, if more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing.

There are no attorneys at My CPA Guy and WE DO NOT FILE AND WILL NOT FILE any forms for you or your business with the Secretary of State to form a reporting company. This is acting as an attorney and is strictly prohibited by Circular 230. We may no longer provide registration renewal services for your business through the Secretary of State websites and you will need to hire an attorney or manage those yourself beginning January 1, 2024. This is still to be determined, but this is a heads-up.

We know that we have served you in this way for many years, however, we will likely not accept the associated risks with the Corporate Transparency Act and the potential criminal penalties associated.

What information will be reported about the company?

The reporting company will report the following:

  • Legal name
  • Trade names (doing business as names, “DBA”)
  • Current street address of the principal place of business (no PO Boxes)
  • Jurisdiction of formation or registration
  • Taxpayer identification number (could be your SSN or your EIN)
  • Indication of whether it is filing an initial report, correction, or update of the prior report

What information will be reported about beneficial owners?

Each individual who is a beneficial owner is required to provide the following:

  • Individual’s name
  • Date of birth
  • Residential address
  • An identifying number from a US Passport or US driver’s license and the name of the issuing state or jurisdiction of the identification document
    • An image of the identification document must be provided

In summary, the Corporate Transparency Act which goes into effect January 1, 2024, is a very important law for you to know about. You can read the FAQ on FinCEN’s website at the below URL to answer more detailed questions or as a starting point for more research. If you have questions related to understanding the law, we recommend that you meet with your attorney for advisement.

https://www.fincen.gov/boi-faqs#D_6

There is a “FinCEN identifier” which is an identifying number that an individual can apply for so that the beneficial owner can use this to file information on that beneficial owner in place of that individual’s otherwise required personal information on the BOI report. This is going to be very helpful for those of you with multiple reporting companies.

The penalties, both civil and criminal, are steep and scary for not timely filing. Please be diligent about understanding this law and filing on time. We will keep you informed on how we can help in the coming months.

I will be closing all LLCs I have registered with the Secretary of State that I am no longer using so that a report is not required to be filed for those companies. I’m telling all of my friends and family about the CTA so they are aware, and you should tell your friends and family as well. I will also be avoiding creating new companies for myself in 2024 until more information is available on this law.

It is an honor to serve you and you are truly a valued client. We look forward to providing you with useful information and resources on this new part of our website. Stay tuned!