Hey there, Legal Tea Listeners – This is your host, Jenny Rozelle. Welcome back for another episode today – episode 167! Today is a “current trends” topic where we talk about things going on currently that are relevant and pertinent to my estate and elder law world, and/or maybe things I’ve seen on the news or stumbled across on social media. Well, today’s episode is about something called the Corporate Transparency Act that that was enacted by Congress in 2021, but it didn’t go into effect until 2024 – and it’s important and timely to have this episode because, business owners that had a business before 2024 need to get into compliance by the end of the year. We’ll get into more of the details here in a second, but let’s talk about the Corporate Transparency Act and something called Beneficial Ownership Information (“BOI”) reporting.
Now, the Corporate Transparency Act is something that applies to owners of a business – businesses like LLCs, corporations, etc. There’s a list of types of businesses that are exempt from the Corporate Transparency Act, and most on that last are either 1) heavily regulated already – so think of like financial services, banks, etc. – or 2) are those that are fairly large. To count as “large” businesses that have more than 20 full-time employees, have gross receipts and sales in excess of $5 Million Dollars, and are also located in the US. If you fit this definition of “large” you also don’t count and the Corporate Transparency Act does not apply to you. Otherwise, if you’re not on the short list of exempt organizations, the Corporate Transparency Act most likely applies to you – and you should not only listen to this episode, but also seek counsel from an accountant and/or attorney.
Alrighty, let’s start with … what is it? What is the Corporate Transparency Act?
The purpose of the Corporate Transparency Act is to create a comprehensive and secure database of “who” owns business entities with the goal to prevent the use of shell companies which are being used for money laundering and other “bad” activities. As I discussed a second ago, it applies to A LOT of businesses, but not all. Here’s more of a scoop on that front:
“Reporting companies” (a term of art) are now required to disclosed very specific identification information of its “beneficial owners” (another term of art) to the US Department of Treasury’s Financial Crimes Enforcement Network (otherwise known or called, FinCEN). First, what is a, so-called, reporting company? A reporting company is a corporation, an LLC, or any other business entity, unless your company is considered exempt. There are 23 types of companies that are exempt (such as banks, credit unions, financial services, insurance companies, accounting firms, public utility companies, a “large” company as I talked about a second ago – over 20 full-time employees, do more than $5M in sales, etc.). So if your company makes the list of 23, you can forget about the Corporate Transparency Act.
So, if you qualify as a business that must report to the Financial Crimes Enforcement Network of the US Department of Treasury, then the business must submit a report to them with the following information: Legal name of the company, any DBAs, what state the business got formed in, address for the primary place of business, the tax identification number (like the EIN), AND information for all “beneficial owners.” Now, that is the other “term of art” I referenced earlier. So, let’s define it – then talk about what they have to submit. A “beneficial owner” is someone who owns NOT LESS THAN 25% of an ownership interest of the company OR who exercises “substantial control over the entity.” To fit the last qualifier, these are people like senior officers (CEOs, President, etc.), board members, manager of an LLC, etc. So when the business goes to report, they must disclose the following information for each beneficial owner: Legal name, date of birth, address, identification number form a driver’s license or passport, and also submit a scanned image of said driver’s license or passport.
Now, let’s shift to …. When does all of this start?
It’s easier to say it’s going on RIGHT NOW. Though, let’s give this more teeth. The law is effective now – effective January 1, 2024. Though, from there, it depends on when the business was CREATED as to when you need to submit information to the US Department of Treasury – so if the business was in existence BEFORE January 1, 2024, the business has the entire calendar year of 2024 to do their initial report filing. Though, if the business is created AFTER January 1, 2024, you must submit a report to the US Department of Treasury within 90 days of forming the business. Then, starting in 2025, if businesses are started after 1/1/2025, they will have 30 days (not 90 days anymore) to submit a report to the US Department of Treasury.
So yeah, these are super important dates and things to know – if you have a business, my friends! If you have a family member or friend that has a business or recently started a business OR even about to start a business, maybe pass along to them this episode. This is SUCH important information and I fear that not many even know about it – and the end of the year is FAST-approaching!
Alrighty, on that note, we should talk about … What happens if the business does not comply with the Corporate Transparency Act?
If a business willfully provides false or fraudulent information to the US Department of Treasury OR if there’s a total failure to SUBMIT a report in compliance with all these rules, there are some very serious penalties and fines. According to the Financial Crimes Enforcement Network, there could be a fine of up to $500 EACH DAY the violation continues; AND up to $10,000 fine and possible 2 years imprisonment. So yeah, these are harsh consequences.
Now, if I had to guess, they’d reserve the latter stuff (i..e imprisonment) for WILLFULLY providing inaccurate, false information (like … it’s straight up fraud, you know?) – like, I can’t see them throwing someone in prison for 2 years (like a Mom and Pop shop … who just didn’t even know about this change in the law) but this is as new to me as it is to you, so maybe I’m wrong in thinking the government is not going to be that harsh and mean.
Where do we stand today?
Well, if you’re a devoted Legal Tea Listener, you may remember me doing an episode on this in January of 2024. Well, a lot has happened since then – which should surprise no one. The biggest thing to update you on is that it actually got Court-tested in Alabama. Essentially, in the most long story short ever, an Alabama Federal District Court ruled the Corporate Transparency Act as unconstitutional – but only to the Plaintiffs in the case. After the case, the government has made it quite clear that they expect everyone else to comply with the Act’s rules. So, I mention this update because there are a lot of people out there that saw the headline – but didn’t read further to see and hear that the Act is very much still alive and applicable to most business owners. An article on Gibson Dunn states, “Ultimately, the issue would likely not be resolved nationwide without Supreme Court review (or review in each of the other federal courts of appeals), action from Congress, or the government’s acquiescence in the Northern District of Alabama’s decision. It may be several years before the federal judiciary provides a definitive answer.”
Beyond that Alabama case, other states have made similar attempts – and now, there are groups trying to claim to be exempt. Groups like community associations (homeowners associations, property owners associations, etc.). So, we’ll see how Courts continue to deal with all of this – especially as we get closer and closer to the end-of-2024 deadline that is hovering over us.
Final Thoughts
I think that’s all I’m about to share about the Corporate Transparency Act – I think it’s enough to encourage anyone that has an existing business OR that will be starting a business to make sure that the Corporate Transparency Act’s rules are incorporated into things appropriately. Honestly, this is probably a classic example of ensuring you are maintaining a relationship with professionals in your life like your estate attorney; like an accountant; like a financial advisor … or, at the very least, making sure you are making an intentional time to learning (whether it’s through podcasts, or magazines, or newspapers … whatever your cup of tea … yes, pun very much intended … like Legal Tea, get it?). I say this because can you imagine all the people that have absolutely no idea that this 1) got passed, but 2) is now in effect in 2024, and 3) they’re supposed to get into compliance by specific deadlines. That’s scary to think about. I’ll be curious to see how the government handles the many, many business owners who do not comply – whether intentionally or not.
Alrighty, let’s wrap this episode up, shall we? Next week, we’re back to the “celebrity estate planning” type of episode – and during that episode, we are going to dive into what happened estate-wise following the passing of John Dorrance, which you may be thinking, “Who in the world is that?” Or at least most of you may be thinking of that. Well, one day when you need to know who the founder of Campbell’s Soup is … it’s John Dorrance. Next week is on him and his estate, so be sure to tune in for that. Alrighty, Legal Tea Listeners, talk to you next week and stay well!
Sources:
Comments