The Biggest Issue You Have Never Heard of

Are you an owner of a business, of real estate, or of other property organized as a corporation, limited liability company, limited partnership or other entity created by filing with a Secretary of State office? If yes, then you and your company will need to file information with the Treasury Department on yourself, your company and every beneficial owner of an interest in your company starting January 1, 2024. If you do not, you face a fine up to $10,000, up to 2 years in jail or both for each failure to report. This is the single biggest issue facing business owners and their legal advisors in 2023 – how to comply with the strict requirements of the new Corporate Transparency Act. (CTA).

The purpose of the CTA is to detect and deter the use of US shell companies from being used for money laundering and hiding ill-gotten gains in US assets. This most famously came to light with the exposure of the Panama Papers. This is to be achieved by having a central registry of the information on every privately held corporation, LLC, LLP or other similar entity together with the information on every individual who has substantial control, ownership or filing responsibility for the company, either directly or indirectly. Most people I have spoken to about this find it hard to believe that the CTA will apply to them, as their company is a holding company for real estate, is a professional practice or is a Family Limited Partnership or other entity commonly used in estate planning. The CTA is precisely aimed at these sorts of entities and other owners. The amount of money laundered through the US is estimated to be as high as $300 billion but launderers break up these sums into much smaller amounts, even as small as $10,000. The CTA is deliberately written to sweep up all these small shell companies, but it will include small, Mom and Pop, operating businesses as well as the large, non-operating entities like those holding a vacation home or other real estate.

The cost of not complying is steep. The penalties are like the penalties for failure to file the Foreign Bank Account Reports (FBAR) on your personal income tax returns, which is $10,000 per failure to file. In the recent case before the US Supreme Court Bittner v. United States, the taxpayer had not filed the FBAR on five foreign bank accounts from 2007 through 2011. The Tax Court calculated the fines as totaling $50,000 – that is one per account, while the IRS calculated the fines as totaling $2.72 million. The potential costs of not filing, even if due to an oversight, can be very high.

I spoke with Jonathan Wilson, one of the co-founders of The FinCEN Report Company, a software solution that aims to help businesses organize their data to prepare their FinCEN Reports for filing. “The CTA imposes a penalty of $500 for every day a reporting company is late, up to a maximum penalty of $10,000,” he explained.

So, how do you determine whether your company must report and what exactly do you need to report? The first thing is whether the CTA even applies to your company. The CTA only applies to entities that require the filing of Article of Organization with a state office to come into existence. This means that most trusts, general partnerships, and sole proprietorships do not need to report. The second thing is to determine whether your company meets one of the 23 specified exceptions to the reporting requirement. These exceptions are for companies that are otherwise regulated (such as a Bank or Insurance company), is a “large operating company” with more than 20 full time employees and revenues over $5 million annual or is a non-profit. Wilson has compiled an index of all 23 exemptions with details for each on The FinCEN Report Company’s website.

If your company is a non-exempt reporting company, the next question is what information your company has to report. Your company must report the name, address birth date, unique identifying number and an image of a government issued photo ID (like a driver’s license or passport) for every individual who, directly or indirectly, has “substantial control” over the company or over the ownership of the company together with any individual who, directly or indirectly, controls 25% or more of the ownership of the company. Again, there are some very specific exemptions to this reporting requirement.

Finally, after your company has filed its first report, if any item of previously reported information changes, you must report amend your report within 30 days of the change occurring. So, for example, if an office or director of the company gets their driver’s license renewed, you must file an image of the new driver’s license within 30 days.

The process of determining whether your company must report is complex enough that we have created online questionnaires to determine if the CTA applies to you and if so, what required information must you report.

So, if you are required to report, what can you do about it before the January 1, 2024 deadline? First off, you can gather and report the required information. Second, you can dissolve entities which are not actively engaged in business, such as a real estate holding LLC, and change the form of ownership into your individual name, as a general partnership or an irrevocable private trust for real estate and other passible income assets. Third, you can convert your operating business into Massachusetts Business Trust since it is required to file in order to do business in a state, but the trust itself is created by a trust agreement [i] The comments on the CTA regulations specifically exempts trust that must register with the court or with the state to do business in the state[ii]. Take note, however, that just placing the stock of a company into a trust does not exempt you from reporting, and for such holding trust, not only the trustee but any of the beneficiaries of the trust may also be reported.

If the initial filing for the CTA is anything like the initial filing when banks were first required to report transactions over $10,000, expect that it will be a tidal wave. There are an estimated 30 million potential reporting entities in the US, and each entity will be reporting multiple beneficial owners and individuals with substantial control. Under the CTA regulations, the senior officers of the reporting company bear the primary responsibility for ensuring that the reporting company files on time. Generally, a company will have a president, vice president, treasurer, clerk and at least one director and one beneficial owner of more than 25 % of the company. The result is that the company must file a report for itself, four for the officers, one each for the director(s) and one each for the owner(s), or a minimum of six reports, and potentially much more, for each of those 30 million entities. That means as many as 180 million reports filed for existing companies by January 1, 2025, and additional reports for new entities or where the reporting information has changed. A willful failure to report on time can be prosecuted as a felony with fines and jail time.

Get started now. Determine whether the CTA applies to you and your company and if so, what you will need to report.

[i] General Law – Part I, Title XXII, Chapter 182, Section 2 (malegislature.gov)

[ii] See Page 133 of the Preamble to the Final CTA regulations