By Mike Valenti, CPA, CFP®, Director,Tax Planning
LLCs can provide legal protections and a level of anonymity, either or both of which can be beneficial for business owners, investors, and others with valid intentions. But those features also attract criminal activity, and layers of shell companies can create excellent cover for those involved in fraudulent activities.
The Corporate Transparency Act aims to pierce the veil and expose criminals hiding behind LLCs and other entities. Sometimes good intentions have far-reaching consequences. What exactly does this new piece of legislation entail and how could it affect you and your business? Let’s break it down in simple terms.
What Is the Corporate Transparency Act?
The Corporate Transparency Act (CTA) was enacted in 2021 with bipartisan support and its provisions became effective on January 1, 2024. It is designed to combat money laundering, terrorism financing, and other illicit activities by improving transparency in corporate ownership.
At its core, it’s intended to make it harder for criminals to hide behind anonymous shell companies.
What Is Required Under the CTA?
The CTA requires certain businesses to report information about their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. Beneficial owners are defined as individuals who directly or indirectly own or control at least 25% of the ownership interests in the company or exercise substantial control over the company.
Every business covered under the law must report the following information.
From the business:
- Legal business name and all DBA names
- Physical address (not a P.O. box)
- State of formation
- Tax identification number (those businesses without one will need to obtain a unique identification number)
- Copy of an identifying document such as Articles of Incorporation or Organization
For each beneficial owner:
- Full legal name
- Date of birth
- Home address (no P.O. boxes)
- Copy of government-issued photo ID (such as a driver’s license or passport)
Penalties for failing to comply with the new regulation are high. For each occurrence, you could be fined $500 a day (up to $10,000) and spend up to two years in jail.
What Businesses Are Covered by the CTA?
The CTA primarily affects certain types of businesses, including corporations, limited liability companies (LLCs), and similar entities formed or registered to do business in the United States. Specifically, it targets entities that are not already subject to robust disclosure requirements, such as publicly traded companies. Most small, family-owned businesses will be covered by this legislation, including LLCs and other entities formed only to hold real estate.
In general, large corporations are exempted from the law. These include:
- Regulated companies (such as banks and credit unions)
- Businesses with more than 20 employees and an annual revenue of at least $5 million
- Companies deemed “inactive” or “dormant” (must have been in existence prior to January 1, 2020, isn’t owned by a foreign person, and hasn’t sent or received more than $1,000)
What Does This Mean for You?
You might be thinking, “I’m not a small business owner, so why should I care about the Corporate Transparency Act?” If you created an LLC for a side hustle or to hold real estate, or if you created a separate legal entity, you may be subject to the new reporting requirements.
NOTE: Applicable entities created in 2024 have 90 days from creation to file the report. Entities created prior to 2024 have until December 31, 2024 to file. After 2024, new entities will have 30 days to file the report. Updated reports will also need to be filed when there is a change to the ownership information.
For more information, refer to https://www.fincen.gov/boi-faqs.
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