Prepare your business for FinCen’s new reporting requirements
In November of 2021, we reported to you about the new reporting requirements imposed by the Corporate Transparency Act (CTA) on start-up companies and certain small businesses operating in the United States.
On September 29, 2022, the Financial Crimes Reporting Network (FinCEN) issued final regulations for these reporting rules under the CTA. The regulations are effective on January 1, 2024, less than 6 months away. Beginning in 2024, barring any legislative or judiciary action to delay or halt the filing requirement, many small businesses will be required to report information about their beneficial owners to FinCEN. A beneficial owner is defined as either:
- An individual that owns or controls 25% or more of the reporting entity, or
- An individual that exercises substantial control over the reporting entity.
Note: At the time of this writing, there is a pending challenge to the CTA (National Small Business et al v. Yellen at al, filed November 15, 2022, in the US District Court for the Northern District of Alabama). It is unknown how this pending case may impact future filing requirements.
Which entities are impacted by the Corporate Transparency Act?
Under the current regulations, companies incorporated or formed before January 1, 2024, will have until January 1, 2025, to comply with the reporting requirements.
Companies incorporated or formed after January 1, 2024, must report within 30 days of incorporation or formation.
These reporting requirements apply to both domestic and foreign entities. A domestic reporting company is a corporation, LLC or any other entity created by filing a document with an organization like the SCC in Virginia. As a result, these reporting rules will apply to single member LLCs. Sole proprietors and trusts are not subject to the reporting rules.
Who is considered to have substantial control over the reporting entity?
An individual does not actually have to have an ownership interest in a company in order to meet the definition of substantial control over the entity. Managers of LLCs and senior officers of the entity are deemed to have substantial control over the entity. An individual is deemed to have substantial control over the entity if he/she can control the entity’s substantial decisions related to signing contract, amending governance documents, sale and lease of substantial business assets of the entity, compensation and incentive programs for the entities and several other item.
What new information does the CTA require some small businesses or startups to file?
Beneficial ownership information that must be reported includes:
- The individual’s full legal name,
- date of birth,
- street address,
- and a unique ID number.
A unique ID number is the number from an unexpired US passport, state driver’s license or state identity card, or other photo-ID card issued by a state or local government.
Similar information about the reporting company must also be reported including the company’s legal name, DBA information, tax identification number, street address and jurisdiction where the company was formed or registered.
What are the exceptions to the CTA reporting requirements?
There are five exceptions in the regulation related to the definition of beneficial owner including the following:
- A minor child when the reporting company includes information on the child’s parents (Family Limited Partnerships or LLCs)
- A creditor of the reporting company
Although trusts are exempt from the filing requirement, an entity may have to disclose in its reports the ownership interest held by the trust, information related to a sole beneficiary, and information related to the grantor of the trust.
The regulations contain 23 reporting company exemptions. Listed among the 23 exemptions are the following:
- Banks and Credit Unions,
- Brokers and Dealers in Securities,
- Accounting Firms,
- Tax Exempt Entities,
- Large Operating Companies defined as an entity with more than 20 full-time US employees and operating from a location in the US producing more than $5 million in gross receipts,
- Inactive entities, and
- Issuer of securities under the SEC acts.
If any of the information changes with respect to beneficial owners and/or the individuals exercising substantial control, an updated report must be filed within 30 days of the change.
Penalties for noncompliance to the Corporate Transparency Act
Substantial penalties are expected to be imposed for noncompliance with these rules. Fines for noncompliance or providing false information are $500 per day up to $10,000. In addition, imprisonment for up to 2 years can also be imposed. These penalties can be imposed on the beneficial owners and individuals that exercise substantial control.
FinCEN is in the process of creating a secure electronic filing system that should be ready for use by January 1, 2024. It is unclear at the time of this writing how ownership reporting under the CTA may be connected to routine income tax filings, but given the potential for significant noncompliance penalties, coordination between reporting entities and their legal and/or accounting advisors will be important to ensure timely and accurate reporting should the CTA survive in its current form.
We will continue to monitor this regulation and update you with changes or new information. Questions on how to meet the CTA reporting requirement for your business? Contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.