The Corporate Transparency Act
Effective: January 1, 2024
As of January 1, 2024, there is a new federal reporting regime with the Financial Crimes Enforcement Network or FinCEN as it is referred to. The new regime took effect on Jan 1, 2024, and the new forms were only made available on New Year’s Day. Up until December 21, 2023, the reporting details were still being finalized.
Corporate Transparency Act (CTA) Compliance
The impetus of the new reporting regime comes from the Corporate Transparency Act that was passed by Congress back in 2021. It is designed to bring the US into compliance with international standards for anti-money laundering rules. The US Government, FinCEN to be specific, will require the individuals behind companies operating in the U.S to report various information about themselves. Its intention is to stop money laundering, illegal activities, tax evasion that heretofore is believed to have been done by opaque corporate structures. The impact is, however, far reaching.
I have attended hours of continuing education on this subject already and I will attempt to alert our clients and partners to just a few of the salient points. FinCEN’s page on beneficial ownership information is now well organized and has lots of frequently asked questions. See link below for more detailed and official information:
Beneficial Ownership Information Reporting | FinCEN.gov
Key Definitions
The key terms are Reporting Company, Beneficial Ownership, and a Company Applicant.
- Reporting Company. A reporting company is nearly every small to medium sized business entity whether operating or not. It is defined as an entity created by a filing document with a Secretary of State or similar office. 31 CFR §1010.380 ( c). There are 23 exceptions, but mostly for large companies that are already reporting to the government for other reasons.
- Beneficial Ownership. An individual or entity that owns in aggregate 25% or more of a reporting company or controls at least 25% of the ownership interest of a company is a beneficial owner. This is thought to be senior officers, individuals with powers to remove senior officers, directors or managers or an individual or entity that has power over important decisions for the company. These terms are widely defined and far reaching. Legal authorities are discussing how this will apply to everyday trusts and other entities requiring disclosure of trustees, beneficiaries, trust protectors and others with powers in a trust that owns or controls 25% or more of a business interest.
- Company Applicant. The rules apply to anyone who files the documents that create the reporting company or who is primarily responsible for filing the documents. This is designed to force attorneys, accountants and any other professionals who are setting up companies for clients to undertake due diligence on the parties involved and ensure compliance with the reporting regime. This is going to require looking at operating agreements, By Laws or their equivalent and trust documents to evaluate the control tests.
Information to be Reported
The Report filed with FinCEN discloses: 1) The Company’s name, address and EIN and importantly 2) Name, address, date of birth and valid photo ID of each beneficial owner. The latter being the objectionable requirement to most owners and managers of companies. Investors, attorneys and companies with multiple entities will want to create a FinCEN ID. The onus is then on the holder of the FinCEN ID to keep their information current or face penalties for failure to update within 30 days of any changes.
A Reporting Company will need to keep its reporting information current and report any changes within 30 days. Whether there will be coordination with Secretary of States or Corporation Commissions by the end of this year is unknown, but we have started to see notices coming out of the state agencies warning of the need for compliance with CTA.
Any new entity established in 2024 must report to FinCEN within 90 days and all existing entities must file before the end of this year. They anticipate 33 million filings this year.
Penalties are Severe
As you might expect, with such a far-reaching law and reporting regime there are severe penalties. There are both civil and criminal penalties and the headline grabbing one is a $500 a day penalty per infraction without a cap or end.
Conclusion
All owners, principals and control persons involved in almost all companies, partnerships and other entities that are established by a Secretary of States or similar government agency must comply with this new reporting regime. If you have any companies, regardless of whether they transact, this means you.
We are not excited about this change, especially since the reporting forms and details all came out at the last minute. Please note we will now have to undertake more extensive due diligence with each client that we are forming a new entity for. We will not undertake FinCEN compliance for our clients unless we are specifically engaged to do so in a written Fee Agreement.
We encourage everyone to go to FinCEN’s Beneficial Ownership Page and register as needed and keep all company data current. If you have idle companies, it may be a good time to terminate them, but you will still have to report this year to FinCEN, but at least you won’t have to worry about forgetting to update records when you move or people change. We also encourage everyone with existing companies to go to the Corporation Commission or Secretary of State’s website and ensure your reporting information is accurate. If not, you should amend it immediately and then file your FinCEN report.
And now introducing the newest members of the team, who bring many talents to our firm, including musical ones!
Saroth Norn joins us as our legal assistant, (aka office ninja). He graduated from the Conservatory of Recording Arts and Science in 2005 as one of the top students in his class, landing him a position at one of the most prestigious recording studios on the Westcoast, Track Record Studios which is owned by Paramount. He has owned several studios in Phoenix, but his most recognized studio is Suite 5 Studios. He was a master recording engineer for over 15 years and has now transitioned into law field, practicing with some of the most accredited paralegals and attorneys in Arizona. He started his career in law at Gurstel Law Firm PC in 2018 as a legal assistant; auditing loan documents such as security agreements, bill of sales, retail purchase agreements, credit card statements, policy statements, APR’s, credit reports, before submitting the evidence for trials and arbitrations.
Saroth joined Tritch Buonocore Law PLLC in November 2023. He hopes to enhance his portfolio in Estate Planning, Probate Matters, Trust, & Corporate Advisory. He has two beautiful daughters, no pets but would love to own a cat one day, loves to travel for food, and go fishing on a lazy Sunday.
Julio Romero is our Practice Manager, (aka Miracle Man), here at TB Law. He is an Arizona Native and is an Arizona State University student who has built a career in the Legal Field for the past 5 years with a diverse range of legal backgrounds and several years in Customer Service. He graduated from Phoenix College with his Paralegal Certificate and will graduate from ASU in the Spring of 2024 with his Bachelor’s Degree in Criminal Justice. Julio is a military kid at heart whose parents both served in the Army and built their careers helping others. He strives to one day become an Attorney and attend Law School due to his passion for helping people and fighting for change in the legal system. He makes music as a vocalist and enjoys artistic activities. His daily quote is, “chase your passions and know no limit is in your way unless you allow it”. Outside of the office Julio is with his dog, Madden, and enjoys quality time with his loved ones.
Lastly, we will be honoring Martin Luther King Jr. Day on Monday and available only by appointment.
“Make a career of humanity. Commit yourself to the noble struggle for equal rights. You will make a better person of yourself, a greater nation of your country, and a finer world to live in.” ~MLK Jr. 1959
