New Federal Law Requires Corporate Transparency

New Federal Law Requires Corporate Transparency

On January 1, 2024, a new federal law requiring more than 30 million small and medium-sized businesses to report ownership information to the federal government takes effect. This new law, called “The Corporate Transparency Act” or “CTA” is supposed to help eliminate anonymity in business ownership that has allowed “bad actors” to hide illicit financial dealings (which may sometimes be used in terrorist or other illegal activities). The law directs the Financial Crimes Enforcement Network (a unit of the Department of Treasury, known as “FinCEN”) to create a database of business “beneficial” ownership information for use by the federal government in identifying the individual, beneficial owners of privately held assets. Typically, a beneficial owner is someone who owns or controls, directly or indirectly, 25% or more of an entity’s ownership interest, or exercises “substantial control” over the entity.

Reporting Companies must report to FinCEN certain information that has, heretofore, generally been kept private regarding a “company applicant” and the “beneficial owners” of the company. While not yet certain, it appears that a reporting company would be required to provide the following information for each “company applicant” and “beneficial owner” and must keep the information current: full legal name; date of birth; a copy of a valid photo identification (e.g., driver’s license, state identification, or passport); residential address (no Post Office boxes, no business address, no lawyer or accountant’s office address).

Unfortunately, under the CTA, there are very few exceptions and virtually any business that is created by “filing a document” with a state or Indian tribe must comply. This means that LLCs, corporations (S and C), limited partnerships, other closely held businesses, and in some circumstances, trusts must comply. The CTA refers to these as “reporting companies.” Even LLCs that hold rental properties, S corporations that operate small businesses, etc. all are likely to be deemed “reporting companies.”

Under the CTA, failure to comply and timely file the required report could result in fines of $500 per day, up to $10,000 maximum, or two years’ jail time.  After the initial filing, anytime there is a change in the beneficial ownership or in the information provided by the company applicant or beneficial owners (e.g., someone moves or renews their driver’s license), the reporting company has 30 days to file an updated report.

Reporting companies formed before January 1, 2024, will have until Jan.1, 2025, to file the required report. Reporting companies formed on or after January 1, 2024, have 90 days from the date of formation to file the report.