How FinCEN’s Corporate Transparency Act Impacts LLCs
Congress recently passed the Corporate Transparency Act of 2020, which mandates corporate entities to disclose Beneficial Ownership Information every year. If you own a business, you may be subject to new reporting requirements of crucial information to FinCEN (Financial Crimes Enforcement Network).
The specifics of the regulations filing forms haven't been finalized or shared publicly yet. We are expecting the details to be issued in early 2023. The new law includes both civil and criminal penalties for not filing the Beneficial Ownership paperwork (more on that below).
We plan to keep this post updated with the most recent information on this topic. We suggest bookmarking this page and checking back in January 2023 for an update.
What is the Corporate Transparency Act?
On January 1, 2022 Congress passed the Corporate Transparency Act into law. However, the law won't entirely go into effect until FinCEN issues final regulations (expected in early 2023).
The Corporate Transparency Act is a new federal regulation FinCen expects will affect over 32 million businesses in the United States. Most of these will be small businesses, single-owner LLCs, or other types of companies with less than four beneficial owners.
The Corporate Transparency Act is designed to stop criminals from using small businesses in the US as anonymous shell companies to hide their illegal activities.
Financial Crimes Enforcement Network (FinCEN) enforces the CTA. FinCEN is the federal department in charge of shielding US financial systems from money laundering, theft, terrorism financing, or other illegal activities.
The CTA requires reporting "Beneficial Ownership Information" for all "Reporting Companies" to the FinCEN.
FinCEN estimates the compliance cost will be approximately $5.6 billion annually and $21.7 billion for the first year.
What is a Reporting Company?
A Reporting Company is defined by the CTA as:
"A Corporation, Limited Liability Company (LLC), or other similar entity that is created by the filing of a document with a Secretary of State or a similar office under the law of a State or Indian Tribe."
Meaning the Corporate Transparency Act will impact every US business structure, including:
- Limited Liability Companies (LLC)
- Limited Partnerships
- Limited Liability Partnerships
- Corporations
- Any other entities created by filing a document with any Secretary of State
- Any foreign entity formed in a foreign country and registered to do business in the United States
Generally, Sole Proprietorships and General Partnership are not subject to the The Corporate Transparency Act regulations.
A company must file a Beneficial Ownership Information Form if it is considered a Reporting Company, according to the Corporate Transparency Act.
What information is required for the Beneficial Ownership Information Form?
Each Beneficial Owners is required by FinCEN to report the following information:
- Full legal name
- Date of birth
- Residential or Business Address
- If you use a residential address make sure to use the same address used on your personal tax return. - Unique identifying number
- A government-issued unique number (e.g., social security number, passport number, state driver's license number, or military identification card) must be used as identification.
Companies are required by FinCEN to report the following information:
- Company name
- DBA name or trade name
- State of Formation
- Company Address
- EIN
- If a company has not been issued an EIN from the IRS, it can use its Dun & Bradstreet Number (DUNS) or a Legal Entity Identifier (from the Secretary of State) instead.
What is a Beneficial Owner?
Beneficial Owners are defined by the Corporate Transparency Act as any individual who directly or indirectly:
- Owns or controls 25% or more of a Company, or
- Exercises substantial control over a Company
The term "substantial control" is broad and may include third parties but is generally defined as someone who:
- Serves as a senior officer in a Company, or
- Has authority over the appointment or removal of senior officers or a majority of the board, or
- Has "substantial influence over important company decisions" or
- Has any other form of substantial control
Examples of individuals not considered Beneficial Owners include:
- A minor child (if the information of the parent or guardian has already been reported)
- The term "minor" is defined by the state where the Company was formed. - An employee (non-owner) of the Company
- An individual whose only interest in the Company is through a right of inheritance
- A person acting as a nominee, custodian, intermediary, or agent on behalf of another individual
- Creditors of the Company
Are there penalties for not reporting Beneficial Ownership Information?
The CTA includes both civil and criminal penalties for failing to report or for submitting false information.
- Civil penalties are up to $500 per day for each day the violation persists or is not resolved.
- Criminal penalties are up to 2 years in prison or up to a $10,000 fine (or both).
Ensure you comply with the new requirements to avoid these potential consequences. Not knowing the CTA requirements is not an acceptable excuse for not following them.
Is the FinCED reporting database available to the public?
No, the Beneficial Owner Information data is not available publicly. Access to the database is only available to:
- US government
- US federal law enforcement
- US banks State and local law enforcement may access the data with a court order
How to file the Beneficial Owner Information Form
As of October 2022, FinCEN has not released the final regulations or the reporting forms. Therefore, we suggest bookmarking this page and check back in January 2023 for an update.
FinCEN is expected to share final regulations and forms in early 2023.
When to Do FinCEN Reports Need to be Filed
The CTA is expected to go into operation on January 1, 2024. Existing business should expect to submit their initial BOI report to FinCEN by January 1, 2025.
Any company registered after January 1, 2024, must file its BOI report within 30 calendar days of registration.
Reporting requirements: Newly formed business
Beneficial Ownership Information must be submitted for newly formed businesses within 14 calendar days after FinCEN publishes the final regulations.
You may need to file a Beneficial Ownership Information Form with FinCEN if you're starting an LLC or other business in 2022. Talk to your attorney or other tax professional.
Reporting requirements: Existing business
Beneficial Ownership Information Form must be submitted for existing business within a one year of FinCEN's final regulations being published.
Reporting requirements: Beneficial Ownership changes
If a company adds or removes any Beneficial Owners, it must report the changes to FinCEN within 30 days.
Reporting requirements: Exemption status changes
If a company gains or loses its exemption status, it must report the changes to FinCEN within 30 days.
What businesses are exempt from reporting Beneficial Ownership Information?
Because this information is already provided to the government by these institutions, the following types of businesses are exempt from reporting:
- Tax-exempt entity
- Subsidiary of certain exempt entities
- Governmental authority
- Public utility
- Bank
- Credit union
- Depository institution holding Company
- SEC reporting issuer
- Broker or dealer in securities
- Securities exchange or clearing agency
- Commodity Exchange Act registered entity
- Other Exchange Act registered entity
- Pooled investment vehicle
- Financial market utility
- Investment advisors or investment company
- Money-transmitting business
- Venture capital fund advisor
- Insurance company
- Accounting firm
- Large Operating Company
- Operating in the US with over $5M in gross sales and with more than 20 employees - Inactive entity
-Is not engaged in active business,
-Existence before January 1, 2020,
-Has not had any change in ownership in the prior 12 months,
-Is not directly or indirectly owned by a foreign person, either wholly or partially,
-Has not sent or received more than $1,000 in the prior 12 months,
-Doesn't hold any U.S. or international assets, and
-Doesn’t hold ownership interest in any Corporation, LLC, or other similar entity, either wholly or in part.
For more details on the summary above, please see the exemptions to the proposed Corporate Transparency Act regulations.
Conclusion
Awareness of the new reporting requirements for LLCs and other business entities is essential. In addition, understanding the regulations will help you avoid any penalties or fines associated with non-compliance. If you have questions about these regulations as a small business owner, please consult your business attorney or certified accountant.
Corporate Transparency Act FAQs
Does this affect my LLC?
Simply put, all LLCs (Limited Liability Companies) are required to file a Beneficial Ownership Information Form with FinCEN. The Corporate Transparency Act affects all LLCs, regardless of the following:
- How many owners the LLC has, or
- How the LLC is taxed, or
- The amount of money the LLC makes
Is a Beneficial Ownership Information Form Required for my DBA?
It might be depending on the owner of the DBA (Doing Business As) Name.
A DBA Name is considered a "nickname" used by an LLC or Corporation or by a Sole Proprietorship or General Partnership.
If the DBA is owned by a an a business entity you are required to file a Beneficial Ownership Information Form.
A DBA owned by Sole Proprietorship or General Partnership does not have to submit a Beneficial Ownership Information Form.
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