Attention all business owners and owners of entities! The Corporate Transparency Act will likely affect you! As of January 1, 2024, this Act is now in effect and will require your compliance. Listen in as Dugan Kelley, of Kelley Clarke Law, dives into why this Act was put into effect, who this will affect and what your compliance will require.
Hey everybody, it’s Dugan Kelley with Kelley Clarke, The Syndication Closer. So thankful that you’re here today to listen to me talk about the Corporate Transparency Act. In particular, this is one of the hot issues affecting anyone that owns an entity in the United States today. It’s important for you to understand exactly what the Corporate Transparency Act does, if it applies to you, what you should do about it, and what the penalties are if you do nothing about it or if you fall into one of the exceptions associated with this.
I recently spoke on this at a conference elsewhere, and I thought that this would be helpful for a lot of people out there trying to figure out exactly what to do about the Corporate Transparency Act and how to remain in compliance. So, why don’t you join us here as we unpack the act?
A little bit about our firm before we get into the actual content: lawyers here at our firm have been practicing for collectively 45 years. We’re licensed in multiple states. I’m licensed in California, New York, and in Texas. In 2022, I structured over $5 billion in deals in the hard asset space for sponsors, syndicators, operators—I use those terms interchangeably with one another. In 2023, we did over three billion plus and have written a couple of books. That’s a little bit about us. If you want to know more, we’ll give you some contact information at the end of this talk so that you can contact our office to see how we might serve your legal needs. Or if you have questions about the Corporate Transparency Act or if you want a copy of our slide deck, we’re happy to provide that too.
What is the Corporate Transparency Act?
Alright, so this is the Corporate Transparency Act, or CTA for short. It was enacted in 2021 but it’s basically effective from January 1, 2024. So, it’s right off the presses. This requires reporting companies to submit a report to the Financial Crimes Enforcement Network, also known as FinCEN, containing personal information about the reporting companies’ beneficial owners. These are companies that were formed, so if you formed an entity before January 1, 2024, don’t worry, you have until January 1, 2025, unless the regulations change, for the initial report and the filing. There’s an estimated 32 million entities that will have to register, so this is a big act and a big requirement for anyone that owns an entity.
Certainly, when you’re buying and selling assets, most people do that through entities instead of their own individual name. If you’re acquiring assets and you’re using leverage or debt from anyone, almost entirely those people are requiring you to do that business through entities. So, you can see why there’s a massive requirement—millions and millions of entities will have to register.
For people that don’t register, there is non-compliance. We’ll talk about that later in the talk. And there are some proposed regulations that, if they go into effect, maybe some of these time periods for reporting might get elongated. One of the proposed things is that anyone that formed something in 2024, they would have 90 days as opposed to 30 days. That hasn’t been enacted, so right now you’ve got 30 days theoretically to register if you create a new entity in 2024 with FinCEN.
What’s the Purpose of the Corporate Transparency Act?
Okay, Corporate Transparency Act, what’s the purpose, right? Well, the purpose is actually a good purpose. It’s to enhance the transparency in entity structures and ownership to combat money laundering, tax fraud, and other illicit activities. A lot of my clients are privacy buffs and they obviously don’t want to be filing and recording in public databases. And so, they think that there are some issues resolved with privacy. Yes, there’s no doubt privacy is being compromised in connection with the stated purpose of the Corporate Transparency Act, and that is to combat money laundering, tax fraud, and other illicit activities. It is also designed to improve business activity transparency through the reporting of what we call beneficial ownership information, BOI for short, particularly targeted to smaller businesses. A lot of you that have opened up bank accounts with big banks have had to fill out some of the same information already. You’ve already had to disclose some of the same information to those banks in order to get a bank account. Basically, who owns over 25% or more of an existing entity? Most banks have required that in order to go through that KYC (know your customer) anti-money laundering type of process in order for you to open up a bank account. This will impact, according to the Small Business Administration, over 27 million entities that are right now small businesses inside the United States that will actually have to register.
Who Does the Corporate Transparency Act Apply to?
Who needs to file, right? So, we know what the purpose is, but now we’re going to talk about who really needs to file. Well, domestic reporting companies: LLCs, corporations, limited liability partnerships, limited partnerships, or any other entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe. So, it is the broadest possible definition of who actually has to file. And then foreign reporting companies, a corporation, limited liability company, or other entity formed under the law of a foreign country that has registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office. Obviously, there’s an exemption for sole proprietorships not using single-member limited liability companies are exempt from reporting requirements. So, if you fall into that limited category, just when on on this, then you don’t have to file. But most people and most of your entities will have to register.
Alright, so the reporting company, what is that? Well, a reporting company is a legal name, the trade name, or doing business as the name, the current address—this is information that they’re gathering up—the jurisdiction of formation. So, for example, if you’re in California formed a limited liability company in California, your formation would be California, New York, or Texas, or any of the other states throughout the country. The company’s employer identification number (that’s what that EIN stands for) or foreign tax identification number for foreign reporting companies. Without any, what type of information are they going to be required to submit for the beneficial ownership information, the BOI? Well, the definition of a beneficial owner according to FinCEN is any individual with direct or indirect substantial control over the reporting company. Individuals who own or control at least 25% of ownership interests, including equity stock voting rights, and more. I recently saw for another client where they had a non-member manager, like a professional registered agent company, that was in control of their entity. And they terminated that relationship with the client because they did not want to have to report or go through the hassle of this aspect of it. I don’t think there’s anything illicit with not wanting to go through the hassle of it, but you need to understand that if you fall into this category of a beneficial owner, any individual with direct or indirect substantial control, regardless of whether you own equity in that company, you could have substantial control. In my analogy, I don’t want to have any more control because I don’t want to have to file and take ownership of that filing process. So, what does substantial control really mean? Well, the definition might include individuals with significant authority, such as senior officers. If you have any of these style individuals like a chief executive officer or chief financial officer, those who can appoint or remove officers, influence key decisions, or like compensation schemes, meaning the compensation that people within the organization actually will get. Multiple beneficial owners are always possible, so substantial control reporting is always required. So just don’t think that just because you report it on one person that you’ve fulfilled your duty and everyone in your entity is properly filed. You need to make sure that the beneficial ownership, the BOI, is properly filled out and complied with.
What to Expect When Reporting for the Corporate Transparency Act?
Company applicants, so what can the company expect? For reporting companies with two individuals, you’re going to have two individuals: the person who directly files formation documents. So, that might be your legal counsel or your chief financial officer or something like that. The person primarily responsible for directing or controlling the filing if it is not the same. And so, in our example, we have individual A prepares formation documents, individual B files those documents. Both A and B are company applicants in connection with this filing requirement. Here is going to be the required information from both beneficial owners and company applicants. Information for the beneficial owners will be the full legal name, date of birth, current residential address, and identifying number and image from documents like a US passport, a driver’s license, an ID card, or foreign passport if no US document is available. Information for the company applicants will be the full legal name, date of birth, current residential address or business address for the entity, formation business identification number or image of the following same documents. And you might think to yourself, ‘Oh my gosh, I have to provide my driver’s license or my passport, that seems super intrusive on your privacy concerns.’ Well, remember the purpose of the Corporate Transparency Act, and that is to stop money laundering or other illicit activities. So, certainly being able to recognize when the filing is somebody that is not engaged in illegal or illicit activities, they need to be able to tie the identity of the person to a number like your social security number, your passport, or other type of government number in connection with this.
Who is Exempt from the Corporate Transparency Act?
Many of you are probably thinking, ‘Oh my gosh, I just don’t want to do it, right?’ Well, there might be a silver lining for those of you that don’t want to do it. If you fall into some of these exempt companies based on provided information, here’s a list of potential sample entities that might not have to register. These are exempt, and when you start looking at these Bank Credit Union Deposit Institution Holding Company, Money Service Business Broker Dealer in Securities, Securities Exchange or other clearing agency, other Exchange Act Registered Entity, Venture Capital Fund Advisor, Commodity Exchange Accounting Firm, Public Utility—you can start to see that these are entities that have already provided information to other government institutions because they have regulated licenses in large part to provide the services that they do to the public. So, the government isn’t requiring them to file because they’ve already essentially filed. They’ve already provided sufficient information to allow the government to feel confident that they’re not engaged in money laundering or other illicit activities, to accomplish that purpose for what the Corporate Transparency Act was designed to do. So, just here’s a little bit more about like a Securities Reporting Issue or if you fall into that governmental Authority. These are, again, exempt entities of Bank, Credit Union, Broker Dealer in Securities, Investment Company, or Investment Advisor, Venture Capital or Fund Advisor. So, if you’re a syndicator, operator, sponsor that bought, let’s say, an apartment building or something like that, or a self-storage building, or a mobile home park or something like that, are you going to have to register your syndicated entity or even your manager entity, your general partner entity if you’re doing that? The answer is yes, you will. That does not fall into one of those exemptions. Tax-exempt entities, 501(c)(3)s, those types of things, entities that exist in tax-exempt, and these large operating companies that have basically an entity that employs more than 20 full-time employees in the United States with full-time payroll records and things that are already filed, tax returns that are already filed with the government, that helps the government establish essentially some of the same things that they’re looking for in connection with whether they are exempt or not. And they’ve determined, obviously, after extensive dialogue and the passage of the Corporate Transparency Act, that some of these entities are so inactive.
What if your Entity is Inactive?
Well, any entity that was in existence on or before January 1, 2020, and is not engaged in active business, is not owned by a foreign person—whether directly or indirectly, wholly or partially—has not experienced any change in ownership in the preceding 12-month period, has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or an affiliate of the entity had an interest in the preceding 12 months, and does not otherwise hold any kind of type of assets within the United States or abroad. So, if you fall into that category, you don’t have to file either. I would encourage you to talk with your legal counsel, your certified public accountant, before you unilaterally make a decision on whether you are exempt or not because the penalties are very stiff. If the government decides that they want to audit and/or determine that you were required to file, ignorance of the law is not going to be a defense nor is the inability to do it or the feeling or good-faith belief that you thought you were exempt when you were not.
Why You Should Care about the Corporate Transparency Act
So, why should you care, right? Well, remember, the government, Uncle Sam, is watching every step you take. I will be watching you. This is a little pun here, but the reality is that in order to require compliance, specifically with the purpose to stop illegal activities and to provide transparency in connection with a lot of these businesses that take place, the government has fairly stiff penalties associated with this Corporate Transparency Act. So, the willful failure to report or to update the beneficial owner’s information—here are the penalties: it’s civil penalties, a daily fine of $500 for each day for a continuing violation, with a maximum cap of $110,000, or criminal penalties if it was very severe, up to two years of imprisonment. I think it’s important to note that the Corporate Transparency Act does not include provisions for non-willful or negligence-related penalties. That would be something like, ‘I just forgot,’ or ‘I never heard about it,’ or ‘I was traveling for a long time, what’s this all about?’ Or, ‘I’m not into podcasts or consuming this type of content.’ Nobody ever told me that I had to do that. Those types of things. They haven’t come out with a penalty scheme, but if you were stuck with $500 per day up to $10,000, that’s a stiff penalty. So, you want to make sure, again, seek counsel and advice before just disregarding any obligation in connection with this.
What Else Should You Be Aware of?
What changes in the timelines do you need to be aware of? Changes to your beneficial ownership information require updates within 30 days of any change. For instance, selling off a significant chunk of your entity or bringing in someone else who shares control triggers an update requirement under the Corporate Transparency Act.
Examples of changes that require an update include reporting company details, new DBA registration, beneficial ownership changes, a new CEO, a sale altering at least 25% of ownership, or the death of a beneficial owner, including changes in address, name, or unique identifying numbers like your EIN changes for beneficial owners.
It’s important to think about this because there are countless scenarios that might trigger an update requirement under this act. Remember, report changes due to a deceased beneficial owner when their estate is settled. Include any new beneficial owners if applicable and update if a beneficial owner obtains a new identifying document within 30 days.
Persistence is key here. As Calvin Coolidge said, ‘Nothing in the world can take the place of persistence.’ You’ll certainly need to be persistent and resilient in responding to the Corporate Transparency Act. Talent alone or thinking you can avoid this won’t work. Pay attention, process the information, and act accordingly.
Here’s another quote from Calvin Coolidge: ‘Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent.’ So, if you’re facing bureaucratic changes, adopt the ‘press on’ slogan. Press on because it’s required, and consider it as part of the cost of doing business.
This applies to anyone with a business that existed before 2024 or anyone starting a new business. If you enjoyed this content and want to follow us, please like or subscribe to our page. You can find us on Facebook, YouTube, and you can contact us at our Prosper, Texas, or Center Barbara locations. Feel free to reach out via email; here’s my email address.
Hope this content was helpful. Please stay tuned for more updates. God bless you, and happy hunting!”
If you would like more help and information, please contact us for a consult.