Hi, thank you for tuning into today’s Emerald GEM, which stands for Get Educated in Minutes. I’m Kerry Reeves, director of Wealth Strategies for Wilmington Trust Emerald Family Office & Advisory® and your host for today’s podcast. In today’s GEM, I’m going to discuss a new law known as the Corporate Transparency Act.1 Before I get started, I would just like to remind you that Wilmington Trust does not provide legal advice, and that this podcast is brief. I will only be going over this topic at a very high level, touching on the items that I believe will be most important for you to understand before this new law goes into effect.
I will start with a brief background.
Believe it or not, compared to our counterparts, the U.S. has been slow to adopt initiatives to combat money laundering, terrorist financing, and other illicit activities associated with certain business entities within the U.S. In response to these illicit activities, in 2021 Congress enacted the Corporate Transparency Act.
In short, the Corporate Transparency Act will require certain entities, known as Reporting Companies, to report Beneficial Ownership and Company Applicant information to the Financial Crimes Enforcement Network (which you may know as FinCEN). The objective is to create a national database containing identifying information on the individuals that own or control certain types of domestic and foreign entities.
Let’s get into the details.
Under the Corporate Transparency Act and as described in the final regulations, a Reporting Company will be required to provide certain identifying information on (i) the entity itself, (ii) its Beneficial Owners, and (iii) Company Applicants. The identifying information to be reported on a Reporting Company will include, without limitation, its legal name, any DBAs (doing business as) associated with it, identifying tax information, and contact information. The identifying information to be reported on Beneficial Owners and Company Applicants will include, without limitation, legal name, date of birth, a physical contact address, and other identifying information and documentation.
It is very important to know how a Reporting Company, Beneficial Owner, and Company Applicant are each defined so that we can comply with this new law.
The term “Reporting Company” means a corporation, limited liability company, or similar entity that is (i) 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. It also includes entities formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with one of these agencies.
There are 23 exemptions from the definition of a Reporting Company. Most deal with very large organizations that are already heavily regulated and otherwise reporting this type of information. To name just a few of the exempt organization, we have “Large Operating Companies,” which, in short, is defined as an entity with 20 or more U.S. employees, more than $5 million in U.S.-sourced revenue, and a physical operating presence in the U.S. In addition, exempt organizations will also include banks, credit unions, insurance companies, registered investment companies, issuers registered with the Securities and Exchange Commission, public accounting firms, and tax-exempt organizations. Again, this list is not exclusive.
So, you can see by the definition of a Reporting Company, the target of the Corporate Transparency Act is small organizations that may be used as shell companies to facilitate unlawful activity. Both operating and passive entities will be subject to this new law.
Some examples of a Reporting Company could include:
- The LLC you established to hold investments, planes, boats, real estate
- A small family business (having fewer than 20 employees)
- The LLC you established to hold rental property for purposes of liability protection
Turning to the term “Beneficial Owner,” this means, with respect to an entity, an individual who, DIRECTLY or INDIRECTLY, through any contract, arrangement, understanding, relationship or OTHERWISE: (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interest.
You see this definition is very broad and includes more than just an “owner” in the traditional sense of that term. For instance, in addition to the individuals having a traditional ownership interest in a Reporting Company, entity officers, general counsel, board members, and others may be considered a “Beneficial Owner” due to their substantial control over a Reporting Company. In addition, with regard to a trust that holds an ownership interest in a Reporting Company, multiple individuals may be deemed to own or control the same interest (trustees, grantors, beneficiaries, etc.).
The term “Company Applicant” means an individual who, (i) DIRECTS OR CONTROLS the filing of an application to form a corporation, limited liability company, or other similar entity under the laws of a state or Indian tribe; or (ii) DIRECTS OR CONTROLS the registration of or filing of a foreign entity to do business in the United States.
For instance, a lawyer and his/her paralegal—in the case the lawyer forms the entity and directs the paralegal to file. Entities established prior to January 1, 2024, will not need to provide information on Company Applicants. That would be quite tricky if we had to go back in time.
So when is this new law going to go into effect?
This law will take effect January 1, 2024.
Reporting Companies created before January 1, 2024 must report the necessary information with FinCEN no later than January 1, 2025. Reporting Companies formed on or after January 1, 2024 must report the necessary information with FinCEN within 30 days.
It is important to note that this is not an annual filing requirement, but an “as needed” filing requirement. Generally, updates to FinCEN must be reported within 30 days of a change to the information submitted.
So, what happens if you fail to comply with this new law? Bad things.
There are both financial and criminal penalties associated with non-compliance. This might include civil penalties of up to $500 a day and criminal penalties that could include up to two years imprisonment for those who willfully fail to report or provide fraudulent information.
The bottom line is that the Corporate Transparency Act will go into effect on January 1, 2024 and it will impact roughly 36 million existing entities and over five million newly established entities each year2. Most wealth planning and tax professionals, as well as business owners, need to understand the compliance obligations under the Corporate Transparency Act well in advance of 2024.
Thanks for joining us today. Please contact your Wilmington Trust advisor if you have any questions about the Corporate Transparency Act. We would be glad to help you.
1 31 U.S.C. § 5336
2 Federal Register / Vol. 87, No. 189 / Friday, September 30, 2022
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