Robbins: The Corporate Transparency Act and you
There’s a new kid in town and if you fail to mind your legal Ps and Qs, this one’s going to come out swinging.
While it doesn’t apply to one and all, to those to whom it does apply — especially small businesses — it packs a potential wallop. And, if you have not already attended to it, the clock is ticking.
I am talking about the Transparency Act, which became effective in January of this year.
Known more formally as the Corporate Transparency Act, the act was passed under the William M. Thornberry National Defense Authorization Act for Fiscal Year 2021 and casts a wide net to capture 20 million small businesses that will now have reporting requirements to the Financial Crimes Enforcement Network of the Department of the Treasury.
The act is part of a larger legislative action aimed at preventing the creation of shell companies for laundering money, hiding criminal or terrorist activity, or avoiding the payment of taxes. The law is aimed at any limited liability company, limited partnership, and/or private corporation deemed to be a “reporting company” that is otherwise not subject to federal oversight.
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The Corporate Transparency Act defines a “reporting company” as a “… corporation, limited liability company or other similar entity that is:
- Created by the filing of a document with a secretary of state or similar office under the law of a State or Indian Tribe; or
- Formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe;”
While there are several exceptions, for the meat and potatoes small business entity, they do not likely apply. There are, however, notable exceptions:
“Any organization that is described in section 501(c) of the Internal Revenue Code of 1986 and exempt from tax under section 501(a) of such Code…”, and
“Any entity that (I) employs more than 20 employees on a full-time basis in the United States; (II) filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of (aa) other entities owned by the entity; and (bb) other entities through which the entity operates; and (III) has an operating presence at a physical office within the United States.”
These (and the few other) exceptions aside, there is a new reporting requirement which became effective January 1, 2024, and applies to (1) anyone forming a reporting company (lawyers/paralegals); (2) anyone who supervises the formation of a reporting company (lawyers); (3) anyone who owns not less than a 25% interest in a reporting company; and (4) anyone who has “control” of not less than 25% of a reporting company.
Entities created before Jan. 1, 2024, have one year to comply with the reporting requirements to the federal database (by January 1, 2025). Entities created after January 1, 2024, have 30 days from receiving notice of registration or creation to file the initial report.
If there is any change in beneficial ownership, a reporting company must submit a report that updates the information relating to the change within 30 days of when the reporting company becomes aware or has reason to know of the inaccuracy of information in earlier reports.
So, what is it that has to be reported?
Required information includes the name, date of birth, home address or business address, and a copy of photo ID issued by a state (driver’s license) or federal entity (passport) for each beneficial owner of the applicable reporting company and each applicant (person creating the entity or overseeing the creation of the entity).
Now, the “wallop” I mentioned above. Failure to timely comply will result in a penalty of $500 per day (up to a total of $10,000). There are also criminal penalties for failure to comply, including up to two years in prison. Civil and criminal penalties can be implemented concurrently.
So how, does one comply?
The report may be filed and accessed at fincen.gov/boi. Final regulations can also be accessed there. While filing the report is a little tricky — the instructions must be strictly adhered to — filing is free.
To avoid the potentially significant penalties, LLCs, LPs, and small, private corporations would be wise to get after it before the clock expires at year’s end. You may find, too, that your usual advisors — lawyers, accountants, and other business counselors — will likely direct you to file on your own without their doing so on your behalf. While frustrating, the reason for them not wanting to do so is obvious in that, the way the law is written, the potential penalties may apply equally to the business and to them.
Don’t procrastinate. Don’t delay.
Instead, prepare to be a little frustrated at the infuriating bureaucratic process, and git ‘er done.
Rohn K. Robbins is an attorney licensed before the Bars of Colorado and California who practices in the Vail Valley with the Law Firm of Caplan & Earnest, LLC. His practice areas include business and commercial transactions; real estate and development; family law, custody, and divorce; and civil litigation. Robbins may be reached at 970-926-4461 or Rrobbins@CELaw.com. His novels, “How to Raise a Shark (an apocryphal tale),” “The Stone Minder’s Daughter,” “Why I Walk so Slow” and “He Said They Came From Mars (stories from the edge of the legal universe)” are currently available at fine booksellers. And coming soon, “The Theory of Dancing Mice.”
