The Corporate Transparency Act of 2019 includes a reporting mandate that's going to affect millions of entities starting in 2024. Under this new law, corporations, limited liability companies, limited partnerships, and other entities that file formation papers with a state, Secretary of State office, or similar government agency, will be required to file a report with the US Treasury Department's Financial Crimes Enforcement Network (FinCEN). In some states, this might even include a sole proprietorship with a DBA.
The purpose of these reporting requirements is to prevent money laundering by gathering information on the entity's beneficial owners. The law is effective starting January 1st, 2024, so a domestic entity formed or foreign entity registered after 2023 will have to file the report within 30 calendar days of the earlier of either:
For entities that were already in existence prior to January 1st, 2024, the initial report doesn't need to be filed until January 1st, 2025. The report will be filed electronically through a secure system available through FinCEN’s website similar to the Report of Foreign Bank and Financial Accounts (FBAR).
This system is not yet operational, but it will be available before the report filing deadlines begin. The willful failure to report information and timely update any changed information can result in fines of up to $500 per day, or if criminal charges are brought, fines of up to $10,000 and or imprisonment. These penalties can be imposed against the beneficial owner and or against the entity.
The vast majority of small and medium sized businesses that form with the Secretary of State's office will have to comply with these new requirements. FinCEN estimates that there are over 32 million existing entities that will have to comply and going forward, close to 5 million new entities will be required to file reports each year.
The reporting rules do not currently apply to general partnerships, most trusts, tax exempt entities, and other businesses that are already highly regulated, such as public accounting firms, securities dealers, insurance companies, etc. Large operating companies are also exempt, which are defined as businesses with 20 full-time US employees and at least 5 million in gross receipts reported on their prior year federal income tax return. There are a total of 23 exemptions contained in the governing regulations.
Beneficial owners are broadly defined and involve owners who directly or indirectly own more than 25% of the entity's ownership interests, or exercise substantial control over the reporting company, even if they don't actually have an ownership interest. But this can encompass senior officers of the business and anyone involved in significant business decisions, for example, board members.
Types of information that must be provided and kept current for these beneficial owners include:
You must provide an image of these documents to FinCEN for all beneficial owners and keep them updated when information changes.
When the information on record for a beneficial owner changes, such as when a passport or driver’s license is renewed, in the event of marriage or a divorce, or if a beneficial ownership interest is sold or transferred, the new information must be reported within 30 days of the change or face potential penalties.
While the beneficial ownership information may not be difficult to obtain for very small business entities, it may be more difficult and time consuming for tiered entities or entities with boards of directors and numerous related owners or senior officers.
