Dave Jones, JD, LLM, CFP® Senior Vice President and Director of Estate Strategy, explains the Corporate Transparency Act, the types of entities impacted but often overlooked, and pragmatic steps for compliance by year-end to avoid penalties.

 

If the Corporate Transparency Act sounds unfamiliar, you are not alone. It’s a somewhat obscure—but significant—piece of legislation that took effect on January 1, 2024. The law’s purpose is to curb illicit finance, such as money laundering and tax evasion, by requiring corporate entities to identify the individuals who ultimately own or control said entities to the Financial Crimes Enforcement Network (FinCEN). Given the law’s intent, it may be surprising that it could apply to you!

To accomplish its objectives, the Corporate Transparency Act (CTA) applies broadly to domestic and foreign entities, including some you might not expect, such as single-member LLCs and consulting entities. For entities created prior to 2024, the first deadline is the end of this year. As a result, many law firms across the country have spent the last six months notifying their clients about the new law and their clients’ responsibility to report what is called beneficial ownership information to FinCEN. You may have already received a notification from your attorney.

This article provides an overview of the Corporate Transparency Act, highlights some common examples of affected but often overlooked entities, and outlines practical steps for compliance before the end of the year to avoid penalties.

Overview of the Corporate Transparency Act

While there are certain exceptions—such as for larger companies and regulated entities—corporations, limited liability companies (LLCs), limited liability partnerships (LLPS), and other entities created by filing a document with a secretary of state or any similar office in the United States, are required to report beneficial ownership information to FinCEN.

Information Required to Report
Fortunately, beneficial ownership information is relatively easy information to locate and report to FinCEN. It includes the following for each beneficial owner:

  • Full legal name;
  • Birthdate;
  • Residential or business address; and
  • Unique identifying number (such as via a passport or driver’s license)

Deadline
Reporting deadlines depend on when the entity was created.

For entities created before January 1, 2024—the most common scenario—there is a one-year grace period. For those entities, the beneficial ownership information report (BOIR) must be filed to FinCEN by January 1, 2025.

For entities created between January 1, 2024 and December 31, 2024, the BOIR must be filed within 90 days of receiving public or actual notice of their formation, whichever is earlier. For entities formed on or after January 1, 2025, the BOIR must be filed within 30 days of formation.

Hefty Penalties for Non-Compliance
Importantly, it should be noted that there are penalties for non-compliance, which include $500 per day and criminal penalties, including fines up to $10,000 and imprisonment for up to two years.

Common Examples of Overlooked Entities

Many of our clients have business entities that fall under the CTA’s reporting requirements that could easily be overlooked. Here are some common examples.

  1. Single-Member LLCs: Many clients use single-member LLCs to hold real estate or operate businesses. These entities, while disregarded for federal income tax purposes, are not disregarded for CTA purposes. They generally need to comply with the CTA by reporting the beneficial owner.
  2. Corporations for Consulting Services: Clients who operate consulting businesses often use corporations to manage their operations. These entities may need to report the ownership details of the individual, or individuals, who control or own significant shares of the business.
  3. Holding Companies: Certain holding companies used to manage family assets or investments may also fall under the CTA. The beneficial owners, often family members, of such holding companies are required to be disclosed.

 

Less Than Six Months Left for Compliance: Three Steps to Take

With the compliance deadline less than six months away, we encourage you to take the time this summer to complete your reporting. Follow these steps to ensure you meet the CTA requirements:

  1. Assessment of Entities: A good place to start is to list all of your business entities, and then determine which ones fall under the CTA reporting requirements. If you need assistance assessing whether the CTA applies to an entity, we recommend you contact your attorney or another trusted advisor who helped you create the entity. Note that larger companies or those already subject to significant regulatory oversight will likely be exempt from CTA reporting requirements.
  2. Gather Beneficial Ownership Information: For each entity that must report, identify all beneficial owners. A beneficial owner is anyone who owns or controls at least 25% of the entity or has significant control over its operations. Collect the beneficial ownership information for each beneficial owner of the entity.If ownership is held through a trust, the following individuals are deemed to be beneficial owners: the settlor with revocation rights, a sole beneficiry of the trust’s income and principal, a beneficiary with rights to withdraw most of the trust’s assets, the trustee, and any individual with authority to dispose of trust assets. Other individuals, like distribution or investment advisers, trust protectors, or beneficiaries of multi-beneficiary trusts, may also need to be reported based on specific circumstances.
  3. Submission Process: Once you’ve obtained all of the relevant information, prepare the BOIR using the standardized forms provided by FinCEN on their website. Double-check details to avoid mistakes. You can submit the report to FinCEN through their secure online portal, and save a copy of the confirmation of your submission with your related records.

Reporting to FinCEN will be an ongoing process. It’s important to update FinCEN as ownership or control of an entity changes over time. This can happen in a number of ways, such as when an owner dies or an interest in an entity is gifted or sold to a family member. We recommend reviewing the FinCEN reporting requirements as estate planning or other events impact a reporting entity, and to generally review the reporting requirements on a regular basis.

A Note About Corporate Transparency Act Scams

As the deadline for compliance nears, scams related to the CTA may become more prevalent. Scammers often exploit the urgency and complexity of new regulations to defraud businesses and individuals. To protect yourself, first be cautious of unsolicited communications about the CTA. Legitimate information and notices will come from your trusted advisors and recognized government agencies like FinCEN. They can provide accurate guidance and help you avoid fraudulent schemes. And, as always, verify the source before responding to requests for information or payments, and ensure that sensitive information is only shared through secure channels.

Next Steps

The Corporate Transparency Act is a significant change in reporting for those who own or control business entities. We encourage you to take steps to comply with the CTA in the next few months if you have not already done so. Make sure to not overlook some of the entities that are not as obvious, such as single-member LLCs, and work with your attorney and other trusted advisors to answer questions. By taking proactive steps, you can ensure compliance with the CTA.