By: David K. Olive
For many small business owners there are many required reports, filings, and other bookkeeping items that are often missed. It is common to find a new client’s company minute book to be neglected or even completely missing. Required reports that are often missed may include annual registration reports, recording annual meetings of stockholders and directors, and maintaining corporate books on transfers of ownership. Many small business owners may be surprised to learn of a new reporting requirement that if not followed could carry extremely harsh penalties.
Beginning January 1, 2024, almost every existing corporation, limited liability company, and any other entity created by filing registration documents with a state agency will be required to file a report providing personal information to the Financial Crimes Enforcement Network (FinCEN). The Corporate Transparency Act (CTA), enacted by Congress in 2021, will create a central database and collect information on individuals and owners of business entities to help law enforcement prevent money laundering, terrorism, and other financial crimes. Failure to timely file a report can lead to a civil penalty of $500 for every day of noncompliance (up to $10,000), and up to 2 years in jail.
The essential concept of the CTA is that “Reporting Companies” must file a “Beneficial Ownership Report” with FinCEN. This article will try to explain the definition of a Reporting Company, what must be included in a Beneficial Ownership Report, and the deadline for a Reporting Company to file the report.
“Reporting Companies” include corporations, limited liability companies, or any other entity created by the filing of a document with a secretary of state or any similar office. There are several exemptions from the definition of a Reporting Company. Some of the more common exemptions include publicly traded companies, companies with more than twenty (20) employees and more than $5 million in annual revenue, 501(c) entities that are exempt from income tax, FDIC-insured banks, credit unions, insurance companies, as well as companies which are “dormant” that are not engaged in an active business and own no assets. However, there are many entities that will not fall into an exemption, including small businesses with fewer than 20 employees or less than $5 million in gross revenue, entities that hold real estate, family limited partnerships, and many more.
The information required to be included in the Beneficial Ownership Report is extensive. The report requests the name, trade name, address, jurisdiction, and tax identification number for the Reporting Company. Most importantly, the report must also include the following information for every “Beneficial Owner” of a Reporting Company: the legal name, date of birth, address, unique identifying number (non-expired passport, U.S. state driver’s license or other government ID) with an image of the document with the identifying number (e.g., copy of passport). The CTA and underlying regulations define a Beneficial Owner as any individual who, directly or indirectly, either exercises substantial control over the Reporting Company; or owns or controls at least 25% of the ownership interests of the Reporting Company. In addition, for companies created after January 1, 2024, the report will require information on the individual who files the paperwork with the state agency to create the company.
Although there is no periodic filing requirement, the Reporting Company’s obligations do not end with the initial report. New reports are required to be filed within 30 days after the occurrence of any change in the information provided in the initial report. This would mean on the death of a beneficial owner, after a gift, or any kind of sale or other transfer of beneficial ownership, a new report would need to be filed. When a minor beneficial owner reaches the age of majority, that would also require a new report.
For companies formed prior to January 1, 2024, the initial Beneficial Ownership Report is due no later than December 31, 2024. For any Reporting Company formed on or after January 1, 2024, the initial Beneficial Ownership Report is due 30 days from creation. If you are an individual connected directly or indirectly with a small business or any type of LLC, corporation, or other business entity, you should study the rules to learn how and when their business entities are subject to reporting.
Olive, David. (2023, February 27). Here’s the biggest legal issue no one’s talking about. Springfield Business Journal. Feb. 27-March 5, 2023 / Vol. 43, No.32.
David Olive is an estate planning and business attorney with the law firm of Carnahan Evans PC. He can be reached at email@example.com or 417-447-4400.