A major legal change affecting small businesses arrives January 1, 2024, with surprisingly little attention – the federal Corporate Transparency Act (CTA). Small businesses should make plans now. If you are considering starting a limited liability company (LLC) or corporation, do so BEFORE year end so that you will have more time to navigate this new Act than you would if you formed in 2024.
First, why do we have the CTA? Rules for forming a corporation or LLC in any US state have made it easy to hide the identity of the people who actually own or control the company. While most LLCs and corporations engage in lawful activity, the ability to keep owners secret created opportunities for criminals, terrorists, and corrupt actors. They have had even more secrecy when they nested shell companies, where one anonymous company owns another. Our NC Secretary of State’s office explained that even the US Defense Department unwittingly contracted with businesses that turned out to be owned by Taliban associates. The World Bank’s study of 150 “grand corruption cases” showed that most used companies to conceal ownership.
The CTA requires small and medium sized corporations and LLCs registered to do business in the US to report information about their “beneficial owners,” meaning the persons who ultimately own or control the company. (Large companies are not included because they must provide this information through other existing laws, e.g., securities laws.) Records will be kept by the US Treasury’s Financial Crimes Enforcement Network (FinCEN). The Acting Director of FinCEN said the CTA is an “historic opportunity to unmask shell companies and protect the US financial system from abuse by money launderers, drug traffickers, sanctioned oligarchs, and other criminals.”
Companies must upload for FinCEN their Articles/Charter, company’s street address and tax ID number, and certain identifying information on “beneficial owners” who own or control at least 25% of the company: full legal name, date of birth, home address, and a copy of an acceptable identification document (like a driver’s license or passport). After registering that information, no further reporting is required except for uploading changes in the information within 30 days.
For companies in existence BEFORE 1/1/2024, this reporting is due in another year, before 1/1/2025. Companies that form ON OR AFTER 1/1/2024 have a very short window (30 days) to comply. Penalties for willful noncompliance are steep – up to 2 years in prison and fines up to $10,000.
Why am I worried for small businesses?
- FinCEN hasn’t rolled out HOW to comply. January, 2024 is likely to be a big mess. Companies that form with an effective date of 1/1/2024 or after will all scramble to figure out compliance within 30 days. Usually lawyers and accountants recommend that new Articles filed in late 2023 choose an effective date of 1/1/2024 to avoid having to file a 2023 tax return with little or no activity. This year, the advice is the opposite. If you are considering forming a new business anytime in the coming year, I recommend doing that now with the Articles effective upon filing. It’s worth filing the extra tax return for 2023 (especially if it’s a zero activity return) to buy time to comply with CTA, instead of having to comply within 30 days. FinCEN should sort out the mess before you’ll have to comply.
- Existing businesses should begin gathering information about its beneficial owners now. It may take a while, especially for multi-owner businesses.
- There has been almost no media coverage about this, nor outreach by FinCEN. I would guess that FinCEN is not used to working with small businesses, and doesn’t realize what educational support is needed.
It is a laudable goal, but implementation may be difficult for small businesses. So, my advice is to form new companies now rather than waiting until 2024. I advise existing companies to begin gathering information and documents needed to comply. Businesses should educate themselves about what is required. More information is available at www.FinCEN.gov.