Buckle Up, Business Owners! Navigating the Corporate Transparency Act Rollercoaster

As we’re hurtling towards the end of 2023, it’s time to chat about something that is causing seismic changes in the business and legal hemispheres – the Corporate Transparency Act (CTA). Now, to be fair, we talked about this earlier in the year, but I know it was just too far away to really mean anything. The denial window is running out though. So, I’m going to try and give you the high-level basics here (it is annoyingly complicated) and some things you should probably think about doing before the end of the year.

Understanding the Corporate Transparency Act

The CTA, effective January 1, 2024, mandates certain businesses (mostly ALL small businesses) to disclose detailed information about their beneficial owners (essentially who is running the show behind the scenes) to the Financial Crimes Enforcement Network (FinCEN). I wasn’t familiar with FinCEN before last year myself, but it’s a little-known bureau of the Treasury Department. The purpose of the law is to assist law enforcement in ferreting out money laundering. Sounds good, right??? But providing this information and its deadlines are a real sea change for small business owners.

Why Should You Care?

Because not caring is going to cost you a lot. FinCEN is happy to tell you that non-compliance can cost you $500.00 a day and jail time. Gulp. There are also many unknowns, like whether the system that will store the data and provide you a FinCEN identifier will be ready to go on January 1. Luckily for most existing businesses though, you will have until January 1, 2025 to comply, and I do suggest that you wait to file at least until we see what happens with the first filers.

If You are an Existing Business, Here’s What You Should Do

Know Your Beneficial Owners: Beneficial owners are any individual (like an owner, member, or shareholders of a business) who “directly or indirectly” either exercises substantial control over a reporting company or controls at least 25% of the ownership interests or shares. For now, make sure you’ve got their names, residential addresses, and a bit of background info handy. FinCEN will also require beneficial owners to submit valid identification images (i.e., a driver’s license or passport).
Designate a “CTA Compliance” Person: I would highly suggest designating a trusted person within your company to handle the pre-work from now until the end of this year, responsible for gathering the information and documentation needed, and then handling the required filing come the new year. See #4 below.
Update Your Records: Make sure all your records are accurate. If anything has changed in your business structure or ownership, make sure you make those changes before the end of the year. Accuracy is the name of the game and will make your FinCEN filing later next year, easier.
Familiarize Yourself with Reporting Form: The CTA introduces a new reporting form that necessitates detailed information about each beneficial owner. Familiarize yourself with the form’s requirements and have your designated “CTA Compliance” person gather the necessary data in advance to streamline the reporting process.
Seek Professional Help: If all this sounds like alphabet soup to you, it’s okay! Consider getting some professional advice. The best process I’ve seen to date is the platform that CT Corporation is working on. I’ve been hearing in the trenches that lawyers and accountants are either not necessarily up to speed on this or are so up to speed that they will no longer do initial filings—that is where I’m falling. I’d rather clients work with an organization like CT Corporation or Capitol Services that will be doing this daily out of the gate—that will be the most cost effective. My work will pick up at the Operating Agreement.
Stay Informed: The legal landscape is ever-changing, and ignorance is not bliss when it comes to compliance. Keep your radar on for updates from regulatory bodies and consider subscribing to relevant newsletters to stay ahead of any modifications or additional requirements.

Other Steps to Take Before the End of the Year.

Here are a handful of other suggestions to do in 2023 to make this go smoother in 2024.

Establish New LLCs before the end of 2023. If you plan to open a new entity in 2024, do it now. Once we cross over into January, you will only have thirty (30) days to do your initial filing after forming a new entity, and I predict that won’t be fun. If you are set up before January 1 though, you will have a whole year to file.
Close Entities That Aren’t Currently Active. If you have entities that you aren’t using, go ahead and close them up. You don’t want to have to provide beneficial owner filings on entities that aren’t doing business.
Stop Filing in States Where they Promote Anonymity. I’m talking to you ND, WY, and NV. I will say here what I always tell clients who ask, “Should I file somewhere else, I hear Wyoming is a good place to incorporate?” Um, no. Do yourselves a favor. File where you are doing business (or in DE if you have investors because that is where THEY want you to file) and embrace the fact that you will not really be anonymous anymore.
If You are Buying or Selling a Business, Don’t Overlook this in Diligence. Just like any other piece of information, whether a target company is compliant with the CTA is going to be an important point for due diligence. We are already working on necessary reps and warranties and making changes to disclosure checklists in preparation for the changes to come.

Conclusion

Buckle up—I’m predicting that the CTA might be a bit of a wild ride come January, but time heals all and with a bit of prep, you’ll be riding that coaster like a pro by the time you actually have to file.

Here’s a link to frequently asked questions created by FinCEN you may find helpful in further understanding the CTA and its reporting requirements:

https://www.fincen.gov/sites/default/files/shared/BOI_FAQs_Q&A_11.15.23_508C.pdf.

As always, please don’t hesitate to reach out if you have any questions.

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