New Act Imposes Penalties on Family Partnerships, LLCs, and Corporations

As if keeping proper books and staying on top of administrative filings and tax reporting are not enough, family limited partnerships, limited liability companies, and corporations will soon have more compliance requirements.  The penalties for non-compliance include steep financial penalties, fines, AND jail time.

On January 1, 2024, the new Corporate Transparency Act (CTA) will go into effect, impacting most entities.  As part of estate planning and succession planning, family limited partnerships and limited liability companies (and sometimes corporations) are frequently utilized to hold investments in securities and real estate to simplify management, restrict transfers of ownership interest, and take advantage of fractional interest discounts to gift ownership interests to future generations.  These entities will likely fall within the regulatory scope of CTA, and may be required to comply with this recent legislation to avoid harsh penalties.

Even if you own a single member disregarded California LLC, your LLC is a Reporting Company and is subject to the CTA.  Bottom line: business owners should verify their obligation to adhere to the CTA with a knowledgeable attorney.

What did Congress do now?!

On January 1, 2021, Congress enacted the CTA to address issues of money laundering, financial crimes, and misuse of shell companies.  The CTA is designed to provide enforcement agencies and regulatory bodies with increased access to ownership information relating to business entities.  This means that effective January 1, 2024, “Reporting Companies” (see below) will be required to disclose the identities of their ultimate beneficial owners, specifically including all individuals who hold a significant ownership stake in or exert substantial control over, the entities.  The goals of the CTA are to (a) foster greater accountability by ensuring that the individuals who are responsible for an entity’s activities are known to regulators, (b) provide a deterrent to fraudulent activities, and (c) improve overall corporate governance.  Although the CTA serves an honorable purpose, it creates compliance hurdles for entities, including privately held businesses and entities that are owned by family members.

What if I don’t comply?

Failing to comply can result in severe penalties, including a civil penalty of up to $500 per day until the violation has been remedied, and criminal fines of up to $10,000 and/or imprisonment of up to two years.  This is serious.

According to the regulations, “any person” who causes the reporting company to fail to report, or is a senior officer of the reporting company at the time of the failure to report, may be personally liable for reporting violations.  Additionally, reporting companies, beneficial owners, and company applicants are all potentially liable for willfully providing false information.

Who does this impact?

Reporting Companies that are not exempt must now collect, verify, maintain, and report accurate information about their “beneficial owners.”  Beneficial owners, under the CTA, are individuals who directly or indirectly (a) exercise substantial control of a reporting company or (b) own or control at least 25 percent of the ownership interest in a Reporting Company.  In addition, similar information must be reported about “company applicants.”  Company applicants are those individuals who file or help to prepare the documents creating the reporting company or that qualify it to do business (including attorneys, accountants, and others who may assist in the formation process).  Reporting Companies include any domestic entity created by, or any foreign entity registered to do business in any state by, the filing of a document with the Secretary of State or similar office of any state within the United States.  So, for example, if your entity filed Articles of Organization or similar formation documents with the Secretary of State, it is likely that it is subject to the CTA. Even if you own a single member disregarded California LLC, your LLC is a Reporting Company and is subject to the CTA.

What information is required to be reported?

The Reporting Companies are required to file reports with the Financial Crimes Enforcement Network (“FinCEN”) bureau of the U.S. Department of the Treasury to disclose basic information.  A Reporting Company must report: (1) its full legal name, (2) any trade name or DBA, (3) its current street address, (4) the jurisdiction of its formation, and (5) its IRS taxpayer identification number.  In addition, Reporting Companies must report the following information about each of their beneficial owners and company applicants:  (a) their full legal name, (b) date of birth, (c) current residential address, (d) a non-expired U.S. identification document (e.g., driver’s license or passport) or, if not available, a foreign passport, and (e) an image of the documents used in (d).

Are there exemptions?

Most companies will be required to comply with CTA’s reporting requirements; however, entities that are already subject to some other form of reporting requirement may be exempt.  For example, publicly traded companies and “large operating companies” (i.e., companies that (a) employ more than 20 employees on a full-time basis in the U.S., (b) have an operating presence at a physical office in the U.S., and (c) generate more than $5 million in annual gross receipts or sales) are exempted from the CTA.  Some other exempted companies include:  Certain 501(c) charities, charitable trusts, political organizations, registered public accounting firms that are subject to Sarbanes-Oxley Act, governmental entities, issuers of securities that are required to file information reports under 15(d) of the Securities Exchange Act, securities brokers and dealers, FDIC insured banks and credit unions, insurances companies, and regulated public utilities.  Although there are many types of exempted companies, most companies will be required to adhere to the CTA’s reporting requirements.  It is important to note that there is no minimum size for a Reporting Company.  Even if you own a single member disregarded California LLC, your LLC is a Reporting Company and you must provide your personal information to FinCEN as outlined above.  Bottom line: business owners should verify their obligation to adhere to the CTA with a knowledgeable attorney.

When are reports due?

For Reporting Companies created or registered on or after January 1, 2024, reports must be filed within 30 calendar days of (1) receipt of notice that the entity is effective or registered to do business or (2) when the secretary of state or similar office provides actual or public notice that the reporting company was created or registered, whichever is earlier.  For companies created or registered before January 1, 2024, reports must be filed by January 1, 2025.  Any changes to the information reported to FinCEN will need to be updated within 30 days after (a) there is a change to previously reported information or (b) a Reporting Company becomes aware of, or has reason to know of, an inaccuracy in a prior report.

Conclusion

It is time to start preparing for this new regulatory compliance standard.  Most companies and partnerships will be impacted, and the penalties for non-compliance are very serious.  More information related to the CTA, including a rule fact sheet, can be found on the FinCEN’s website (linked here).  The corporate and estate planning attorneys at Hoge Fenton are ready to help you understand how you are impacted, who in your organization is impacted, and what you need to do to comply with the CTA.