Congress passed the Corporate Transparency Act (CTA) in 2021, which will require most entities to disclose information about their owners beginning January 1, 2024. When the CTA now “goes live” in January, business owners and their stakeholders should be ready for a significant impact on their estate planning and asset protection.
The CTA requires most corporations and limited liability companies with less than 20 full-time employees, $5 million in gross receipt of sales and an operating presence in the U.S., to disclose certain information about their “beneficial owners” and itself to the Treasury Department’s Financial Crimes Enforcement Network (known as FinCEN). Any entity formed on January 1, 2024, or after will have 30 days from creation to file the report. Entities formed prior to January 1, 2024, will have one year to file the report.
Beneficial owners are those individuals who (a) directly or indirectly exercise substantial control over the reporting company (such as officers and directors), or (b) directly or indirectly own or control 25% or more of the ownership interest. This will encompass most small family businesses operating as LLCs, real estate investors using LLCs for rental property, and family limited partnerships managing a family’s financial portfolio. It may also include interests owned through a trust agreement, thus disclosing trust information that is otherwise private.
Some of the information required to be reported includes:
- The individual’s name
- Date of birth
- A unique identifying number from an acceptable identifying document (such as a valid driver’s license or US passport)
Why This Matters
The CTA is part of a growing effort internationally to combat fraudulent activities including tax evasion, money-laundering, tax fraud, and other financial crimes. FinCEN creates and maintains a database of all CTA information. Initially, only government agencies will be allowed access to the information, but there is concern that access may be expanded in the future. This is particularly unnerving for those concerned with personal security, stalking, kidnapping and other activities. In addition, compliance with the CTA rules will cost money, add administrative hassles, and worst case, generate penalties for non-compliance.
As mentioned, the rule goes into effect on January 1, 2024. The first report is due January 1, 2025. Begin to plan now if you are a stakeholder in several entities. Advisors will start preparing for the FinCEN reporting process in January and may be overrun with requests. Estate and investment planning should be revised to protect your privacy.
Specifically, compile a list of every entity in which you have an ownership interest in excess of 25% and have an legal advisor review reporting requirements for the entities. Noncompliance or failure to report accurate information will carry a civil penalty of $500 per day during the noncompliance period. Criminal fines are also a possibility. It is believed that more than 30 million entities will be required to file under the CTA.