The Corporate Transparency Act: Be Afraid. Be Very Afraid.
The Corporate Transparency Act
Congress passed the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act on January 2, 2021. It did so by overriding President Donald Trump’s veto. (Maybe it offered another reason to want to tear down the house four days later.)
The CTA required action by a division of the Treasury Department – the Financial Crimes Enforcement Network for implementation. Its Final Rule – 99 pages of dense text – issued on September 30, 2022. The law takes effect as of January 1, 2024, but it gives entities in existence as of December 31, 2023 one year to report. Entities established on or after January 1, 2024 must report within 30 calendar days of their formation date.
Why do we have this new law? Money laundering. Internet posts mention 32,000,000 business entities in the U.S. Nefarious characters own some of them, and many of those people will avoid the new law, one way or another. Nevertheless, 30,000,000+ entities – the ones that follow the law – get burdened.
Call me, usually, M. Laissez-Faire. I advise clients about relevant legal requirements and encourage compliance, always. However, I try hard not to get too excited when someone errs or fails to comply. Examples:
- With estates and conservatorships, the court requires an inventory of assets. We have a “Don’t count forks” rule. Further, if an asset – with a measurable value – gets left off, we add it on an amended inventory.
- If someone fails to file tax returns, we encourage them to promptly comply, but we don’t assume tax fraud or the likely presence of lawmen banging on their doors.
Now, about the CTA and fear. The law requires reporting by beneficial owners. Who? Individuals who: (a) exercise substantial control over an entity, or (b) own a 25% interest in the entity. Entities are domestic corporations, LLCs, or other entities that, to exist, must register with a secretary of state, corporation commission, or other similar governmental body. As for foreign entities, same drill, but for their being formed in another country.
Sounds simple, right? Forms will exist. Fill them out. Send them in. All’s well! Sure, if you get the information right, beat the deadline, and don’t forget about an entity, or that you made ownership changes last year when your child was ill, your dad died, and that tornado knocked a tree into your back porch.
If you screw up, what happens? Potential civil and criminal penalties. (Maximum civil penalty? $500 per day, topping off at $10,000.)
What should you do now? For starters, get organized. If you own any business entities, you likely own them alone or with your spouse. List them. Get names right, down to correct abbreviations, capitalizations, and punctuation.
If you have partners, figure out who owns at least 25%. Identify anyone who might exercise substantial control. If substantial control raises questions, list the individual.
If you have entities dormant entities, think about dissolving them. The CTA exempts a bunch of categories of entities, including inactive entities. If you dissolve the entity by 12/31/2024, you have no reporting issues. (The dissolution process does not require legal assistance but it has minor tripwires. I can help!)
We will learn how to live with the CTA. (I intended for the headline to catch your attention by overstating the fear factor.) Get this one onto your radar screen and pay attention.
Finally, and as surely as night follows day, entity owners will see many opportunities to retain a service to handle reporting obligations. Beware! You will likely pay high fees and may or may not get taken care of properly. I will be happy to assist you. Stay tuned.