– IT’S HERE WHETHER WE LIKE IT OR NOT.
Like it or not, federal legislation is going into place on January 1, 2024 and it essentially applies to every business. Most California businesses have little to no exposure to federal regulations generally, and no experience dealing with the U.S. Financial Crimes Enforcement Network, which is a bureau of the U.S. Department of Treasury (“FINCEN”). This is about to change, and it applies to essentially all business entities, from sole proprietorships and general partnerships, which are not even organized businesses registered with the Secretary of State.
Failure to comply with the Corporate Transparency Act (“CTA”) reporting requirements causes both civil and criminal penalties, including a per diem civil penalty of $500, with a cap of $10,000 and possible imprisonment for up to two years. Therefore, noncompliance is not an option, and as with all crimes, ignorance is not a defense.
So, why is this law so burdensome and broad in its application? The entire purpose of this new law – the CTA – is to crack down on money laundering. What this means is that FINCEN will now have the right to know who is behind the business entity, social security numbers and all.
In late 2022 the U.S. Treasury Department’s FINCEN bureau issued the “Final Rule” forming CTA’s requirement to report beneficial ownership information. (Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498). Although some companies can be exempt from reporting obligations, FINCEN’s estimation is that over 32,000,000 businesses and other entities will need to comply with this regulatory burden.
Under the CTA, beneficial owners are defined as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such report company.”1 An individual can exercise substantial control over a reporting company if they serve as a senior officer in the reporting company, have authority over the appointment or removal of senior officers or a majority of the board, have “substantial influence over important decisions” of the reporting company, or have any other form of substantial control over a reporting company.
There are a few limited exceptions to who qualifies as a beneficial owner. Under the Rule, minor children (with parents reporting as guardians on their behalf), nominees, employees (excluding senior officers), future inheritors, and creditors do not qualify as beneficial owners.
This rule applies to those in existence already, but it has an initial reporting window of one year. However, new entities will have to register and report within 30 days of creation. Thereafter, every time there is a transfer of beneficial ownership, a new report must be filed within 30 days. This means every gift of shares to a child, transfers for gifting to a trust, addition of a new partner, inheritance of a deceased member’s interest in an LLC, will require a new filing.
Now that we have established that this reporting requirement is a new cost of doing business in the United States, the best course of action is to contact your business attorney with all the required information for each beneficial owner of the business so they may file on your behalf. The forms will be published in advance by FINCEN, but they are not yet available. We expect the drafts to be released for comment by mid 2023 so they can be finalized well in advance of January 1, 2024. Since this is entirely new to all professionals, it is best practice to calendar this deadline and make sure your advisor is up to date. Our firm is providing a census form for each of our business and trust clients so each client can gather names, pictures, dates of birth, social security numbers of all of its beneficial owners. Once that information is gathered we will complete the forms and get a FINCEN number issued, as appropriate, in order to ensure there is a protocol to address future changes in ownership in a timely fashion in order to avoid penalties after the 30 day reporting deadline. NM LAW prides itself on shepherding our client through the mundane and the regulatory aspects of owning a business so our clients can focus on running their business and assets. If you would like to discuss how our firm can help your closely held business, please feel free to contact one of our business attorneys.
For more information on the CTA see the US Treasury Website www.fincen.gov