December 2023 Bulletin: New Law

December 2023 Bulletin: New Law

Corporate Transparency Act Creates Trap for Unwary

Starting January 1, 2024, small corporations, LLCs, and similar entities are required to report beneficial ownership information to the Treasury’s Financial Crime Enforcement Network (FinCEN). The penalty for failure to file is up to two years in prison and $10,000. The deciding factor appears to be if the entity was created by filing a document with the secretary of state or similar office. If so and no exception applies, the FinCEN filing is mandatory.

Exceptions and Trusts

The current exceptions are not-for-profit organizations and trusts which were not created by filing a document with the secretary of state. However, if your trust owns an interest in an LLC, corporation, family limited partnership or other reportable entity, then the entity must reflect the beneficial owner as the trust.

Beneficial Ownership

Determining who is a beneficial owner can be difficult. A beneficial owner is any individual who directly or indirectly exercises substantial control over the company or who owns or controls 25 percent or more of the company. Substantial control is broadly defined to include senior officers, those who have the ability to appoint or remove senior officers or a majority of the board of directors, those who have substantial influence over important decisions, and (the catch-all) those who have any other form of substantial control over the company.

Reporting Requirements

A reporting company must provide (1) its legal name and any trade name or DBA, (2) its address, (3) the jurisdiction in which it was formed or first registered, and (4) its Taxpayer Identification Number (TIN). 

For each of the company’s beneficial owners, the company will need to provide the individual’s (1) legal name, (2) birthdate, (3) address, and (4) an identifying number from a driver’s license, passport, or other approved document for each individual, and an image of the document that the number is from. That’s right. They want a copy of your driver’s license or passport.

Filing Deadlines

Companies created or registered before January 1, 2024, must file by January 1, 2025. Companies created or registered after December 31, 2023, must file within 90 calendar days of formation. FinCEN will accept reports electronically beginning January 1, 2024. Final forms are still in the making.

Ongoing Reporting

This is not just a one-time reporting requirement. A company will have 30 days to report any changes to reported information—i.e., any changes in beneficial ownership. For updates, the 30 days start from when the relevant change occurs. For corrections, the 30 days start after becoming aware of—or having reason to know of—an inaccuracy in a prior report. There are no safe harbors for filing an incorrect report.

The government expects over 32 million initial reports to be filed at an estimated cost of about 22 billion dollars; and then 2 billion dollars in additional cost each year for updated reports. In my opinion, the government’s cost estimate is ridiculously optimistic because the rules are complex.

Contact Us for Assistance

If you would like help in determining if a filing is required and then filing the required report in 2024, please contact our office at 212-328-9568 or via email at assistant@abelajlaw.com.