• Corporate Transparency Act: What You Need to Know if You Own a Small Business

    Things have gotten a lot more regulated in the last few years especially when it comes to monitoring small business activity here in the United States. This increase is due to security concerns relating to international conflicts, terrorism, and how US businesses might be involved in these illegal activities.

    In particular, the government wants to focus on smaller businesses, who are possibly under the normal monitoring radar due to their size and could be covering up wrongful activity. These concerns include assets being moved around related to terrorist activity, tax fraud or money laundering. To address this, the Corporate Transparency Act was enacted in 2021, but is going into full effect starting in January of 2024. These new rules will impact nearly 33 million small businesses in America.

    What information does the Corporate Transparency Act seek?

    The goal is to capture more ownership information from specific US businesses operating in or accessing the US markets. Under this new legislation, businesses that meet certain criteria must submit a Beneficial Ownership Information Report (BOI) to the US Department of Treasury, through the Financial Crimes Enforcement Network (FinCEN). These electronic reports are available through FinCEN at www.fincen.gov/boi and are designed to provide details identifying individuals who are associated with the reporting company.

    What is the Beneficial Ownership Information Reporting process?

    Beginning January 1, 2024, reporting companies will have a limited time to file their initial Beneficial Ownership Information Report. For qualifying companies established before January of 2024, the deadline will be January of 2025. Companies created between January 2024 and January 2025 will have 90 days to file. Any business established after January 2025 will have 30 days to submit their first report to FinCEN. At this time, businesses will not be required to pay a fee when submitting reports.

    Two basic types of companies will be required to submit the BOI reports: domestic reporting companies, which includes LLC’s, corporations, and other entities formed in the US, and foreign companies that are registered to conduct business in the United States.

    What information must be reported about a company’s Beneficial Owners?

    The details that reporting companies need to include in the BOI report vary based on the date their business was established. Businesses registered or established after January 1, 2024, will be required to provide the most detailed information, which includes the purpose of the business, its beneficial owners, and its company applicants (anyone who created or filed the documents establishing said company).  This information will include names, addresses, birthdays, an identification number such as a license or passport number, the jurisdiction of said document and an image of such document. As part of the process, an individual will receive a unique identifying number assigned by FinCEN.  All reporting companies must provide their legal name and any trade names, current US address, and their taxpayer identification number.

    There is currently not an annual reporting requirement, so for now it is just the new initial filing period. However, an updated filing is required anytime there is a change in the company or related individuals. This includes any operational changes or new delegations of authority, changes of address, legal name changes from a marriage or divorce, or obtaining a new driver’s license. The timeline to report these changes can be as short as 30 days.

    Who is considered a Beneficial Owner of a Company?

    According to the Corporate Transparency Act, an individual qualifies as a beneficial owner if they directly or indirectly have a significant ownership stake in a company. This person either has a major influence on the reporting of a company’s decisions or operations, or owns at least 25% of the company’s shares, or has a similar level of control over the company’s equity.

    Are there potential exemptions from reporting?

    There are 23 categories that are considered exempt including publicly traded companies, banks and credit unions, securities broker dealers, public accounting firms, and tax-exempt entities. Large operating entities are also exempt from filing, and these are defined as having more than 20 employees, annual gross revenue over $5 million, and a physical presence in the US.  In addition, inactive companies are exempt but qualifying for this exemption requires meeting a six-part test including having not sent or received any funds in an amount greater than $1,000.  The reality is that when in doubt as to whether your company is exempt, the best approach is to report and file.  The penalties for non-compliance can result in criminal and civil penalties of $500 per day and up to $10,000 with the potential of two years of jail time.

    Where can business owners get help?

    Businesses can file their own BOI reports, but this can be complicated and is an extremely crucial submission. As with any regulated reporting procedure, consult the appropriate resources available at www.fincen.gov or a legal advisor as there are various legal issues involved when determining who is a beneficial owner and what details should be provided.

    Our view and advice:

    As a small business, we are not proponents of yet another regulatory requirement.  It is just one more thing as a business owner that you need to keep track of and timely file and update regularly – otherwise there are stiff penalties.  While there is no cost to filing the report, there are always costs of compliance especially if you seek professional counsel.  In addition, we personally question to what extent this information will be used in the future for other government or regulatory purposes.  Our view is to take a bit of a wait and see approach in an election year if you are an existing business prior to January 1, 2024.  Perhaps, the rules for this reporting change (as they often do in Washington) as the year progresses.  If they don’t, then be prepared to comply now and on a going forward basis.  For more information and discussion, visit our radio show/podcast episode from February 4, 2024, that can be found at www.NelsonFinancialPlanning.com/Broadcasts.

    Special thanks to Teri Gorman, CPA of Parks, DeFilippo & Associates, P.A. for her insight into this topic. Additional source information can be found at Wolters Kluwer (www.WoltersKluwer.com) and the U.S. Chamber of Commerce (www.USchamber.com).  The views and opinions expressed herein are as of February 20, 2024, and are subject to change.  For a complete and updated description of the Corporate Transparency Act and its requirements, refer to www.fincen.gov.


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