Estate Planning Update: Preparing for the Corporate Transparency Act

Effective January 1, 2024, a sweeping anti-financial crimes law – the Corporate Transparency Act – will affect every small business. If you own an interest in a small business, even a single-member LLC, you may be subject to robust reporting requirements. 

Purpose.  The Corporate Transparency Act (“CTA”) was enacted with bipartisan support in January 2021. The CTA is intended to combat tax evasion, money laundering, fraud, and other financial crimes – activities often conducted through networks of shell companies – by requiring “reporting companies” to disclose their “beneficial owners” to the Financial Crimes Enforcement Network (“FinCEN”), a division of the US Department of Treasury. The penalties for not reporting, discussed further below, are severe.

Who must report?  A “reporting company” is any corporation, limited liability company, or other entity created by filing a document with the secretary of state (or similar office) of a state (this includes every single-member limited liability company).

There are 23 entity types that are exempt from the definition of reporting company, many of which are exempt because they are already subject to sufficient disclosure requirements. Exempt entities include charitable organizations, public companies, insurance companies, financial institutions, and “large operating companies” (companies with more than 20 employees, $5 million in gross revenue, and a physical operating presence in the US). Note that there is no exemption because an entity is too small or no longer operating. 

What is a beneficial owner?  Each reporting company must report its “beneficial owner information” (“BOI”) to FinCEN. A beneficial owner is any and every person or entity who, directly or indirectly, (a) exercises substantial control over the company or (b) owns or controls at least 25% of the company’s ownership interest. The CTA takes a broad view on ownership, including in its definition equity owners and those with profits interests, convertible instruments, warrants, rights, and options, among others. The CTA also aggregates all of an owner’s interests regardless of how the interests are held.

For example, let’s say ABC LLC has five owners – three of the owners each own 25% of the LLC (75% total), and two of the owners each own 12.5% of the LLC (25% total). Jim is the manager of the LLC controlling day-to-day operations. In this case, the three 25% owners and Jim are beneficial owners of the LLC.

Now, let’s say one of the 25% owners is a trust. We know this owner is a beneficial owner of the LLC, so who is a beneficial owner of the trust? The CTA identifies the following as potential beneficial owners of a trust who must be reported to FinCEN: (i) the trustee or any other individual with authority to dispose of trust assets; (ii) a beneficiary who is the permissible recipient of all or substantially all of the income and principal of the trust, or who has a right of withdraw of substantially all of the trust assets; and (iii) the grantor who has the right to revoke the trust or withdraw trust assets. Other trust roles – such as trust protectors, investment advisors, and distribution advisors – may also be considered beneficial owners if they have the ability to assert substantial control over the trust property and direct or veto distributions. 

For most revocable trusts, the grantor is also the trustee and the beneficiary during his or her lifetime, so that person is the sole beneficial owner with respect to that trust. Still, trusts – and all other entities for that matter – must be assessed on a case-by-case basis.

What must be reported?  There are two levels of reporting: (i) company reporting and (ii) beneficial owner reporting. 

For its part, the company must report its full legal name, all trade and d/b/a names, all associated tax identification numbers, the state of each formation or registration filing, and the street address of its principal office. The company must also report its “company applicant,” the person who actually files the document to create the company (note that the company applicant reporting requirement is not retroactive and only applies to reporting companies formed on or after January 1, 2024; there is no need to update company applicant information for companies formed on or before December 31, 2023). 

For each beneficial owner, the company must report the owner’s name, date of birth, and residential address (this address cannot be a PO box). In addition, the company must provide an identifying number (e.g., Social Security number, passport number, etc.) and an image from an unexpired passport or state-issued ID (e.g., driver license). 

Importantly, an individual may apply for a FinCEN identification number if the individual reports this information to FinCEN, and the individual may then provide the company with his or her FinCEN identification number to report (this provides a level of privacy between the individual and the company). 

Where is this information held?  All BOI is held in a “secure” national database known as the Beneficial Ownership Secure System (“BOSS”). BOSS is not a public system, although it may be accessed by federal national security and law enforcement agencies, as well as by warrant from state and local law enforcement. It is important to note that information reported to FinCEN will not be public (absent a hack or other illegal release of information), so the CTA will not negate the public anonymity benefits of an LLC.

When must a company report its BOI?  Every reporting company formed on or after January 1, 2024 must report BOI within 30 days of formation. Every company formed on or before December 31, 2023 must report its BOI by January 1, 2025 (i.e., existing reporting companies have one year to comply). A safe harbor is available for incorrect BOI filings if the correction is made within 90 days of the original filing.

After its initial reporting, a company must also report any changes in BOI within 30 days of such change. This includes not only changes in ownership or control, but changes in information provided to FinCEN, including beneficial owner address changes (this will be a major catching point, as many entities are expected to comply initially but will not be diligent in reporting changes).

What are the penalties for reporting violations?  Reporting companies are subject to both civil and criminal penalties for failure to accurately report BOI. The company itself and any individuals responsible for the violation may be held liable. A civil penalty may not exceed $500 per day, up to a total of $10,000, and criminal penalties may not exceed 10 years in prison. Beneficial owners have a reporting obligation to the reporting company itself, not to FinCEN.

Action Items and Takeaways. 

1. Consider dissolving dormant business entities before December 31, 2023. Any entity shut down prior to year-end will not be subject to the CTA.
2. Advisors: connect with your clients to make them aware of the CTA and begin to assess their companies and plan for proper reporting. Each entity should assess whether it is a reporting company or exempt from the CTA, and reporting companies should determine the company's beneficial owners and request their BOI.
3. Create a checklist to consider for existing entities and future entities to ensure compliance with the CTA.
4. For operating companies, update the company’s governing documents to expressly define beneficial ownership and require beneficial owners to report BOI to the company, and also appoint an individual responsible for CTA compliance on behalf of the company, particularly to monitor and promptly reports changes to FinCEN after the initial filing.
5. Beware of official-looking scams and fraudulent third-party facilitators. As any owner of a small business, home, or vehicle can attest, scammers are never shy about using public records to create a sense of urgency and fear, particularly with the harsh penalties that may apply under the CTA. When possible, review mailings with strict scrutiny, and remember that reporting obligations are to FinCEN, not to third parties. Do not expect FinCEN to reach out to you regarding failure to report, particularly in the early years of the CTA, so any received correspondence should be reviewed skeptically.
6. Speak with your attorney about the application of the CTA to your business.

If you’d like to discuss these topics or other estate planning matters please contact Adam Centner at 513.579.6488 or acentner@kmklaw.com.