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Small Entities & the Corporate Transparency Act: Managing the Headache of New Compliance Regulations

The Corporate Transparency Act (“CTA”) became effective January 1, 2024, and will affect millions of small entities throughout the United States. The regulations require certain entities to report information regarding their ownership and control to the Financial Crime Enforcement Network (“FinCEN”), a branch of the Department of Treasury.

Intent of the Corporate Transparency Act and Affected Entities

The CTA is intended to collect information necessary to protect U.S. security and commerce; prevent and prosecute money laundering, terrorist financing, and other criminal activities; and align the United States with international standards for data gathering and storage related to these efforts. The purpose of the data collection is to identify the specific individuals who form, own, and control entities, effectively checking attempts to use them to hide undesired activities. The stored data will be subject to the highest levels of federal security protocols.

The entities required to provide information to FinCEN are designated as “reporting companies” and generally include (1) any for-profit corporation, limited liability company (LLC), limited partnership, or other entity created by filing Articles with a secretary of state or (in Wisconsin) the Department of Financial Institutions; (2) that continuously employ 20 or fewer full-time U.S.-based employees (not including part-time employees working fewer than 30 hours per week, or aggregated employees); and (3) have less than $5 million U.S.-sourced gross receipts or sales for the previous year. Any entity deemed to be a reporting company must then report certain information relating to (1) the entity itself (such as its tax identification number, physical location, and any trade or “doing business as” names) and (2) the specific individuals who formed, own, and control the entity. These individuals are considered “beneficial owners.”

Reporting Obligations: When and How Reports are Made and Beneficial Ownership Information

All active reporting company entities will be required to file an initial report. Updated reports are mandatory as entity ownership or control shifts or other required information changes, such as a beneficial owner moving to a new residence. Entities formed prior to January 1, 2024 have until January 1, 2025 to file their initial reports. Entities formed in 2024 are required to submit an initial report to FinCEN within 90 days of their formation. If beneficial ownership information changes, for any reporting company, the updated information must be reported to FinCEN within 30 days via FinCEN’s online portal, the Beneficial Ownership Secure System (BOSS).

As mentioned above, the reporting company must then provide some basic identifying information about itself and its beneficial owners. “Beneficial owners” whose information must be filed include:

  • Individuals who directly or indirectly own 25% or more of the entity’s interests and
  • Individuals who directly or indirectly have substantial control over the entity (including CEOs, Presidents, CFOs, managing members of LLCs, managers of LLCs, or other senior officers of the entity).

For individuals considered to be beneficial owners, the following information must be submitted:

  • Their full legal name,
  • Date of birth,
  • Current residential physical address, and
  • A non-expired personal identification document number (driver’s license or passport, as well as a photocopy of the same).

If the entity is formed in 2024, “company applicant” information must also be submitted. Company applicants include the individuals who file a document to form the entity or are primarily responsible for supervising the filing. Company applicants must report the same information as for beneficial owners, with the exception that certain applicants may submit a business (not personal) address.

CTA Obligations & Monitoring Changes of Reported Information

Because FinCEN requires updated reports for changes in ownership resulting in an individual owning more than 25% of an entity, or exercising substantial control over an entity, entities must now be attentive regarding common situations that may trigger a reporting requirement, including new appointments of senior officers and changes of address for owners or senior officers. Transfers of ownership interest, or voting interests affecting control over the entity, should also be assessed for potential reporting obligations. These changes include adding a trustee of a trust holding entity interests as a beneficial owner if the trustee is someone other than a member, partner, or shareholder of the reporting company. In Wisconsin, a beneficial owner’s marriage may also trigger a reporting requirement for the new spouse if the ownership interests become marital property.

An entity will also need to carefully track its yearly gross income if receipts hover near the $5 million threshold, or if full-time staffing fluctuates close to the 20-employee mark throughout the year, to ensure correct determination of its status as a reporting company. If ownership interests are held by a parent company, changes to ownership or control of the parent company should also be analyzed.

Penalties for Non-Compliance with CTA

Both civil and criminal penalties may be charged due to non-compliance with the CTA, including $500 per day in fines for continuing violations and a maximum of $10,000 in criminal fines, two years’ imprisonment, or both. Details regarding enforcement as a practical matter are currently vague. Importantly, however, violations may only be deemed to apply to “willful” provision of false or fraudulent information or “willful” failure to provide accurate information. Persons considered violators could include, but are not exclusive to, the filers of the reports, individuals who provided the false or inaccurate information, or the senior officers responsible for the entity.

The CTA and Estate Planning Considerations

Many clients may not think of themselves as individuals whose information should be reported to FinCEN under the CTA. As mentioned above, a trustee, trust protector, investment advisor, or beneficiary of a trust owning business interests in a reporting company and who have some control over trust assets may be beneficial owners. LLCs holding a vacation property or hunting land to dictate property management and use among multiple generations of family will also likely be reporting companies. In each of these situations, beneficial ownership information may need to be reported to FinCEN depending on the interests and control involved.

For example, with respect to LLCs holding family land, clients should be mindful that the following situations may trigger CTA reporting requirements:

  • A member paying for improvements to real property, resulting in a capital contribution to the entity that affects proportionate membership interests;
  • Planned staggered gifting of membership interests to family members to reduce a member’s taxable estate (or for Medicaid planning) that occur over time, resulting in frequent beneficial ownership changes; or
  • Designating a manager for the LLC or voting members to control the entity (regardless of their ownership interest).

Members of LLCs should know that if they pass away without updating their governing documents to incorporate CTA provisions, their beneficiaries or heirs receiving the LLC ownership interests may be completely unaware of CTA requirements and the entity may become non-compliant due to the new owners’ lack of familiarity with the CTA.

Similarly, when ownership interests are held in trust, a change of trustee (either due to the settlor’s incapacity or death) may affect who controls the trust’s stock, membership interests, or other business interests. The reporting company may have no way to know that a trustee appointment (or the trustee’s address) has changed unless such information is conveyed to it. The trustee administering the trust needs to be alerted to the entity’s reporting obligations and the trustee’s own duty to communicate these changes to the entity.

The attorneys at Crivello, Nichols & Hall, S.C. are available to advise entities regarding (1) whether they are categorized as a reporting company; (2) who their beneficial owners are; and (3) what information to report. Our attorneys are available to file the required FinCEN reports on behalf of an entity upon request. We also guide our clients through the formation process, including drafting governing documents, while managing CTA compliance.

CTA in the Courts

Since this article was written, the United States District Court for the Northern District of Alabama has ruled that the Corporate Transparency Act is unconstitutional. This ruling does not affect the validity of the Corporate Transparency Act in Wisconsin or the Seventh Circuit Court of Appeals. However, if your reporting company was a member of the National Small Business Association (“NSBA”) on or before March 1, 2024, FinCEN will not enforce the CTA against your company while this judgment remains in effect.

We will be monitoring all rulings that may affect Wisconsin entities and will provide updates as necessary. In the meantime, we recommend that all reporting companies that are not members of the NSBA still file the required reports with FinCEN to avoid penalties.”

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