One of the benefits of owning a small business is that small businesses are exempt from many federal rules, regulations, and other forms of red tape that their larger counterparts are obligated to comply with. However, starting as early as late 2022, small business owners will be forced to comply with new federal reporting requirements under the Corporate Transparency Act (the “Act”).
There is a lot to know about the Act. It’s a complex statute. In this article, you’ll learn about some of the most important provisions, but you should consult with a business lawyer to understand the precise obligations you and your business may have pursuant to the Act.
The Corporate Transparency Act
The Act became law as part of the larger National Defense Authorization Act of 2021, pursuant to the Anti-Money Laundering Act of 2020. It requires certain business entities to report the “beneficial ownership” of an entity to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FINCEN”).
The Act is intended to deter activity such as money laundering, financing terrorism, and tax fraud, among other things. Failure to disclose the necessary information may subject businesses to significant civil and criminal penalties.
The Scope of the Act
Pursuant to the Act, a “corporation, LLC, or similar entity” formed or registered to do business with any State or Indian Tribe within the United States will now be required to identify all applicants and “beneficial owners” of the business. Foreign entities that have registered to do business by filing with a secretary of state or similar office of any State or tribal jurisdiction are subject to the same reporting requirements as domestic entities.
Several types of entities are exempt from reporting requirements, including government entities, as well as certain financial institutions, certain nonprofits, and publicly traded companies. Entities that (i) employ 20 or more full-time employees in the United States; (ii) filed a federal income tax return showing more than $5 million in gross receipts or sales; and (iii) have an operating presence at a physical office within the United States are also exempt. These types of entities are exempt because they are, generally, already subject to state or federal supervision.
A company that is required to report under the Act must disclose certain information about itself, and also provide information regarding every individual who is a “beneficial owner” and every individual who is a “company applicant.”
Under the Act, a “beneficial owner” is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:
- exercises substantial control over a corporation or limited liability company;
- owns 25% or more of the equity interests of a corporation or limited liability company; or
- receives substantial economic benefits from the assets of a corporation or limited liability company.
A reporting company must submit a report to FINCEN that discloses the full legal name, date of birth, address, and a unique identifying number from an acceptable identification document or a FINCEN identifier of any beneficial owner.
Reporting companies must also disclose similar information for any “applicant.” An “applicant” includes an individual who:
- Files an application to form a corporation, LLC, or other similar entity under state or Indian Tribe law; or
- Registers or files an application to register a corporation, LLC, or other similar entity formed under the laws of a foreign country to do business in the United States by filing a document with the secretary of state or similar office under state or Indian Tribe law.
The information collected by FINCEN will be stored in a secure and encrypted system by the Secretary of the Treasury, and will be available to federal and state law enforcement, foreign law enforcement, the Treasury Department for tax administrative purposes, and, with consent of the reporting entity, financial institutions. The information collected pursuant to the Act is not available to the public nor subject to FOIA requests.
Failure to abide by Corporate Transparency Act reporting requirements could result in civil penalties of $500 per day up to $10,000, or 2 years or imprisonment. Unlawful disclosure or use of information gathered pursuant to the Act can result in penalties of $500 per day up to $250,000, or 5 years of imprisonment.
A safe harbor rule protects individuals from liability if they voluntarily follow procedures and submit a report with correct information within 90 days. The safe harbor is inapplicable to individuals who submit a report with knowledge that it contains incorrect information in an effort to evade reporting requirements.
What Should You Do to Prepare?
The exact date on which businesses’ obligations under the Act will take effect is uncertain, although there is speculation that it may be late 2022 or early 2023. Accordingly, businesses have a short window of time to understand what their obligations are and prepare accordingly, with the assistance of a business lawyer. We can help. Please contact Zana Tomich for more information.