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Answering Your Questions About The Corporate Transparency Act

Malm & LaFave, S.C. Jan. 4, 2024

What Is the CTA and Who Must Report?

If you are a business owner or a member of the corporate world, it is likely you have heard of the new
Corporate Transparency Act that took effect on January 1, 2024. If not, you’re in the right place. The Corporate Transparency Act (CTA) is a federal act that now, as of January 1, 2024, regulates any domestic corporation, LLC, and all individuals that have substantial interest or control in an entity operating in the United States. These entities are known as reporting companies. All reporting companies are now required to file a report with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). The CTA will have the most significance on smaller corporations, LLCs, and even potentially effect estate planning. It is important for reporting companies and their owners to become aware of the rules and deadlines of the Act to avoid the harsh penalties of non-compliance. Naturally, there are many questions surrounding the CTA. What is its purpose? How long do I have to file an initial report? How do I file? Do I need an attorney? What happens if I do not file a report? This blog post will answer all these questions and more.

What Is the Purpose of The CTA?

The purpose of the CTA is to enact federal regulations on businesses and their ‘beneficial owners’ to
counteract illegal operations that operate under the guise of a legal entity. Some examples of these operations include money laundering, terrorism, drug trafficking, etc. The Act is specifically designed to have a broad, comprehensive scope to encompass businesses that currently operate while consistently monitor newly created entities.

Exceptions to The Act

Despite the comprehensive language of the Act, there are some exemptions. Companies that do not file
paperwork regarding their formation, such as sole proprietorships, general partnerships, joint ventures, and, in most circumstances, trusts, will not have to file a report under the CTA. Most financial entities, securities traders, banks, insurance companies, tax exempt entities, and large operating companies are also exempt as they are already scrutinized by other federal regulations. In total, there are 23 exceptions, so each individual entity will have to review the nature of its business carefully to help determine whether they are subject to the CTA. Consulting an attorney familiar with the CTA requirements can be beneficial.

When Do I Have to File a Report?

Reports will be filed online with FinCEN, an entity within the Department of the Treasury. The deadlines
for filing with FinCEN depend on when the reporting company was created. Currently, all reporting companies in existence before January 1, 2024, no matter how many members or ‘beneficial owners,’ must file an initial report within the next year before January 1, 2025. All newly created reporting companies created between January 1, 2024, through January 1, 2025, must file their initial report within 90 days from receiving notice of valid registration. Any reporting company created after January 1, 2025, must file their initial report within 30 days of receiving notice of valid registration.

The initial report must include information about the entity, its owners, the individual filing the report,
and anyone who is considered a ‘beneficial owner.’ A ‘beneficial owner’ is defined as anyone who directly or indirectly has substantial ownership or control over the company or owns at least 25% of the ownership interests in the entity. The term “beneficial owner” is designed to be broad enough to ensure all individuals operating within an entity are following regulations. After an initial report is filed, all changes regarding the structure, governance, or beneficial owners of an entity must also be reported.

What Is a FinCEN Identifying Number?

To help manage the influx of reports, FinCEN has created a strategy allowing businesses to apply for a
FinCEN identifying number before an entity files its initial report. This identifier is a number unique to the entity and can be used in lieu of providing individual pieces of beneficial ownership information. Entities must provide identifying information, such as information already provided on federal tax forms, to receive a FinCEN identifier. Applying for this identifier is not required, but it is believed to simplify the filing process.

Some critics, however, believe a FinCEN identifier is another way for beneficial owners to remain
anonymous when filing and could be counteractive to the goal of the CTA. FinCEN identifiers are still up for debate but will be used as companies begin reporting.

What Happens if I Do Not File a Report?

Be aware: failure to comply with the CTA comes with harsh penalties. Currently, a civil fine of $500 per
day for each continuing day of violation, a criminal penalty with a fine of up to $10,000, and imprisonment of up to two years, or both, is the penalty for reporting companies that do not file within the required time limit. Though you can file the report online by yourself, it can be beneficial to contact an attorney that is familiar with the CTA rules to avoid these potential penalties.

Will This Affect My Estate Plan?

As alluded to above, most private trusts will be exempt from the CTA. However, there are a few
exceptions to this exemption. If a trust owns at least 25% of a reporting company, the reporting entity must file a report. Under some trust arrangements, the trustee, grantor, and/or beneficiaries are ‘owners’ of an interest in a reporting company, such as an LLC, held by a trust. These individuals would be considered “beneficial owners” under the CTA, and the reporting company held in the trust would have to file a report, including the ‘beneficial owners’ information.

For example, an LLC titled under a trust designed to hold real estate would be reportable under the CTA.
The report would have to include information on the owner of the LLC (usually a trust), the trustee and grantor of the trust, and any ‘beneficial owners’ (beneficiaries of the trust). These new regulations will have many consequences for individuals looking to protect their real estate or business entities through the use of a trust. Contacting an experienced estate planning attorney with knowledge of the CTA requirements can ensure your assets are protected and your entity is compliant.

Begin Complying with The CTA Now

The Corporate Transparency Act will have many implications on current and newly formed reporting
entities within the coming years. Trusts, along with their agents, that are used to hold real estate or business interests may also be affected by these regulations. There are still many unresolved concerns and issues, so there is potential for changes in the coming years. For now, most entities, less the 23 exceptions, are now required to follow the CTA’s regulations.

The attorneys at Malm & LaFave, S.C. have extensive experience with estate planning and corporate work. They are familiar with the Corporate Transparency Act and can file a report on behalf of your company or provide guidance as you navigate these new regulations. Contact our office today to ensure your business entities & estate plan are compliant with the CTA.