June 30, 2023
Starting January 1, 2024, the new “Corporate Transparency Act” will affect virtually all small family businesses, including limited liability companies (LLC’s) and partnerships designed only to hold real estate. These entities will be required to file reports with FinCEN (the Financial Crimes Enforcement Network at the US Treasury Department) or face stiff penalties and potential jail time.
Who is Affected?
Limited liability companies, partnerships, and corporations (including “S” corporations) will be affected, regardless of their size, value or income level. Even if an entity generates no income, or has only one owner and is ignored for federal income tax purposes (such as a single-member LLC), it will be required to file reports.
In addition, owners, managers, officers, chief financial officers, trustees and anyone else who has a significant interest in or control over an entity will be affected because their personal information will have to be included in the report, even if they do not personally own any interest in the entity in question.
For example, siblings who inherit a house and rent it out jointly using a partnership or LLC, or married couples who put their second home into an LLC so they can rent it out periodically, will be required to make FinCEN reports.
What Information Must Be Reported?
The report must include the following information about the entity:
- Entity’s legal name and any trade names.
- Street address for company’s principal place of business (not a P.O. box or lawyer or other adviser’s address).
- State of formation.
- Tax Identification Number. (We don’t yet know if an entity that does not have an EIN, such as a single member LLC, will have to obtain an EIN now).
- An identifying document from an issuing jurisdiction (e.g., a certificate of incorporation) and the image of that document.
The report must also include information on the “beneficial owners” of the entity – anyone who owns or controls at least twenty-five percent (25%) of the entity. This will affect trustees of trusts that own an interest in entities, and the officers and managers of such entities, even if the trustee or manager is not also a trust beneficiary or an owner of the business. More information explaining this term can be found at https://www.fincen.gov/boi.
For each beneficial owner, the entity will need to report:
- Full legal name. (no initials)
- Date of birth.
- Home address (not a P.O. box, or advisor or service of process address).
- PDF (photocopy) of the individual’s U.S. passport or state driver’s license.
Who Has to Make the Report?
The management of each entity will be responsible for filing the reports. However, even if you are not involved in the management of the entity, you will likely be asked to provide your own personal information to management.
If you are the manager or an officer of the entity, we recommend you begin to gather this information as soon as possible. Failure to timely file the required information will result in a significant penalties, as discussed below.
When is the First Report Due?
For any new entity formed after January 1, 2024, the management will be required to file the report within 30 days of their formation. For entities in existence before 2024, the first report will be due by January 1, 2025.
Thereafter, reports will be required within 30 days of any change in the ownership or control of the entity.
Are There Any Exceptions?
Very few. Exceptions apply mostly to entities that are already highly regulated, such as banks, insurance companies, securities dealers, investment companies, registered public accounting firms, and public charities (501(c)(3)). There are no exceptions for small entities, family-owned entities or entities that have no taxable income.
Where Will the Report be Filed?
The report will be filled with FinCEN. They are compiling a national database of entities and those who own and control them to cut down on financial crimes.
What Happens if I Don’t File on Time?
The law imposes a penalty of $500 per day, up to $10,000, plus up to two years in prison, for failure to file the report timely. At this time, there are no extensions, and no exceptions (not even for “good faith”) to excuse incomplete or late reports.
What Should I Do Now to Prepare?
We recommend you begin assembling a list of every privately held entity in which you own an interest or over which you exert control. We recommend you also obtain a copy of the certificate that was filed with the state where the entity was formed. While some forms can be obtained online from the Secretary of State (for new entities formed in California, for example), other forms may need to be requested by mail. We anticipate that requests to some states may take a long time to fulfill because this is a national law affecting all entities.
With regard to the personal information that must be collected from owners, managers, officers, and even beneficiaries of trusts, we recommend you begin to gather that now as well. That will provide you with time to consider all of your options if any individual fails (or refuses) to provide the required information. Since there is no exception for good faith efforts, you may need to go to court to force a recalcitrant person to provide the information or to exclude them from the entity (and thus the reporting requirement).
We also recommend you amend the operating, partnership or management agreement for your entities to require owners (including trust beneficiaries), and managers to provide this required information, both before becoming involved in the entity, and within ten (10) days of any changes that trigger the need for an updated report (such as a death or a gift). The agreement can also be amended to shift the burden of the FinCEN financial penalty for failure to provide the required information to the person who fails to comply, rather than being a burden to other owners.
Who Can Help Me Comply With this New Law?
Your business lawyer is best equipped to assist you. While CPAs or financial advisors may be able to assist you to complete the necessary disclosure form, most entities will also need to update their current Operating and Partnership Agreements to address the new data collection and reporting requirements. For example, these agreements should address what rights the manager or other owners will have in the event someone fails or refuses to provide the mandatory information. Remedies may include a right to buy out such an owner or to replace such a manager, and may also include the right to withhold distributions from the uncooperative owner to pay any fines imposed on the entity.
Planning ahead and collecting the required information now will make future reporting go more smoothly.
