Why you Need to Pay Attention to the Corporate Transparency Act
The Corporate Transparency Act was enacted in 2021 and became effective as of January 1, 2024. It affects most small businesses in the US and while you might think you don’t operate a small business, if you own an investment property or a summer house in an LLC or some other entity, the CTA affects you. If you do operate a small business, then the CTA definitely affects you.
Unless they are exempt, all small businesses must report Beneficial Ownership Information (or BOI) to the Financial Crimes Enforcement Network (FinCEN), a branch of the US Treasury Department. The CTA was passed in order to find businesses and individuals who are involved in crimes such as money laundering or evading US sanctions. Under the CTA’s authority, FinCEN is collecting beneficial ownership information to create more transparency in understanding the ownership of business entities. The information collected has to trace back to individual people, not trusts or other business entities.
Exemptions
There are many exemptions under the CTA. These include publicly traded corporations and non-profits. You also do not need to file if you do not have an entity such as an LLC, partnership, or corporation. If your company is a sole proprietorship, which means you report your business income on a Schedule C on your 1040 tax form without using an LLC or corporate entity, then you don’t need to worry about the CTA. You only need to report if your business is run in an entity. FinCEN has information on exemptions on their website.
How do you report?
You can file your BOI report on the FinCEN website: https://boiefiling.fincen.gov/. There are FAQs and compliance guides available on the website.
When do you need to report?
If your business existed prior to January 1, 2024, then you have until December 31, 2024 to report. If your business was formed after January 1, 2024, then you have 90 days from business formation to report BOI.
What happens if you don’t comply?
Like many FinCEN regulations, the penalties for non-compliance are severe. If you don’t comply and they deem it willful non-compliance, you could be fined up to $10,000 and face imprisonment up to 2 years. What is willful non-compliance? That is not clear right now.
But my LLC is defunct, and I am not doing anything with it
Maybe you had an LLC which held a rental property, and you sold the rental property, but never closed the LLC. Maybe you just closed an LLC last month. In both cases, you still must make a BOI report. It does not matter whether you have income or have any activity within the entity. If it existed at any time during 2024 (or later), you need to report.
How difficult is BOI reporting?
If your entity is owned by individuals, it may be very easy to do the BOI reporting on the FinCEN website. But if you have more complex ownership, then reporting may be quite complex and there are many corner cases. You might need help to do this reporting.
Unfortunately, you will probably need an attorney to help you. The NJ Bar Association has voted that helping with BOI reporting is the practice of law and practicing law without being an attorney is illegal. This decision may not apply to other states, but its likely other Bar Associations will feel similar. The only exception is if reporting BOI is very simple, but they don’t define what makes it simple. That will probably keep CPAs and other advisors from helping business owners with the filing. The truth is, if you have a business entity which is owned by a trust or foreign entity, you probably need an attorney to help you.
Is there ongoing reporting?
Yes. You need to file a report any time ownership changes or if an owner changes their address. As part of the BOI reporting, you must submit an ID such as a driver’s license or passport. You also need to refile if the submitted documents expire. These updates are due within 30 days of the change.
Wow, this stuff seems hard and bureaucratic
The CTA has not been highly advertised and many business owners may not know about it. There was a court case which declared the CTA unconstitutional, but it only applied to the plaintiffs in the case. It has also been appealed by the government and might take considerable time to work through the courts. At this point, everyone still must comply. Remember the December 31, 2024 deadline. It’s coming up fast. If you are unhappy with this law and its requirements, you should complain to your senator or congressional representative.