What is the Corporate Transparency Act?
The Corporate Transparency Act (“CTA”) became effective January 1, 2024 and impacts domestic and foreign companies operating in the United States. The CTA is a new regulation that requires certain business entities to report a beneficial owner’s identity to the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), if such person exercises control over the business entity, or beneficially owns more than twenty-five percent of the business entity, as of the end of 2023. The following businesses are examples of business “entities” that must report its “beneficial owner”: corporations, limited liability companies, and other entities that require filing with the Texas Secretary of State office.
The U.S. Congress created this new federal reporting requirement to help law enforcement monitor smaller businesses. Because small businesses have less reporting requirements, they may be ripe entities for criminals who seek to evade taxes, hide illicit wealth, or defraud U.S. citizens.
The new regulations require business entities in existence before January 1, 2024 to file its report before January 1, 2025. Business entities formed January 1, 2024 and after are required to file its report within thirty (30) days of formation. Some entities are exempt from this reporting requirement, but if an exempt entity loses its exempt status, it must file within (30) thirty days of losing its status. The information reported by the entity to FinCEN will not be available to the public, but may be shared with law enforcement when appropriate.
The filing with FinCEN is in addition to the business entity’s required filings with the Secretary of State and the Texas Comptroller, and does not replace other required state filings. If an entity fails to comply with the CTA reporting requirement, FinCEN may impose a penalty of $500/day for each day the report is late, with a maximum of up to $10,000 and/or imprisonment up to two years.
What types of businesses need to report under the CTA?
The CTA requires domestic entities, that are created by filing a document with the secretary of state under the law of a U.S. state or Indian tribe, to report the “beneficial ownership information” (BOI) of the entity to FinCEN. An example of entities in Texas that are required to report are corporations, limited liability companies, and other entities that require filing with the Texas Secretary of State office. General partnerships and common law trusts are considered exempt from the reporting requirement because there is no filing required to create those entities. However, foreign entities are required to report once it qualifies as a business in the United States.
The law identifies twenty-three entity types that are exempt from the BOI filing. The exempt entities include SEC-reporting companies, banks and savings and loans, insurance companies and inactive entities. If a business is unsure whether its exempt, it should still file before the deadline and claim the exemption.
Reporting entities are required to disclose all beneficial owners of the business. A beneficial owner is anyone who exercises, either directly or indirectly, substantial control over the business or owns at least twenty-five percent (25%) of the business. New entities must also provide information about the company applicant, or the person who filed to create the company.
How does the CTA apply to estate law?
Many estates may contain business assets. If you have created a limited partnership or limited liability company to own assets, that entity most likely needs to file a report. Further, if you hold business assets in a trust, the trust may be required to report as a beneficial owner of the entity.
New reporting requirements like the CTA are a good time for business owners to evaluate their business succession plan. If you are a beneficial owner, do you know who will continue to ensure the business entity is compliant with federal and state laws if you were to become disabled? When a beneficial owner of the business is an individual, it is especially important to have a plan in place for the business if the owner is unable to continue running the business due to disability or death. All businesses should have a succession plan and review it periodically to ensure it still works for the current state of the business.
To find out more about the CTA reporting requirements, contact our office today to speak with an estate planning attorney or business planning attorney!
