Introduction
A recent federal law, the Corporate Transparency Act (not so affectionately called by the acronym “CTA”) may
have a significant and perhaps disturbing impact on your planning. The CTA mandates a new type of reporting to the government that no one has experienced yet in the U.S. It is all encompassing and despite its name will affect many people who have undertaken estate planning, asset protection planning, own real estate and much more. Complying with the new CTA rules will cost money, be cumbersome, and lots of traps, horrific penalties, and will likely make you very uncomfortable disclosing information that you probably never did before. Although users of this information are supposed to be carefully limited to governing agencies, its breadth and disclosures, will be invasive and will feel rather unpleasant. This article tried to focus on creating awareness of the broad new law, and some of the generalizations that hopefully make it easier to get the concepts may be subject to different interpretations, exceptions and special rules. So, view this as just the menu for the appetizers.
Yoda, of Star Wars fame, would say: “You think Yoda stops teaching about the CTA, just because his student does not want to hear about the CTA? A teacher Yoda is.” You really do not want to hear about the CTA but we have to inform you of it.
Corporate Transparency Act
The new federal law is called the Corporate Transparency Act (the “CTA”). The purpose of the CTA is to create a comprehensive, searchable, national database of companies. The goal is to get through the entity format and identify the puppeteers pulling the strings behind the entities involved. The CTA is part of a growing worldwide effort to combat all sort of nefarious activities including tax evasion, money-laundering, tax fraud, and all sorts of financial crimes. While this type of reporting has grown common in many other developed countries, they are pretty new to the U.S. These rules are radically different than anything that has existed heretofore in the U.S. They represent an effort to catch the U.S. up to reporting standards common in other developed countries. This is very different from any reporting that you have faced previously. This reporting has requirements that are quite different from tax returns and your CPA may not be able to, or perhaps may not be willing to, handle these CTA filings for you (you might need to engage your attorney). These rules and reports will be uncomfortable as well as burdensome. You may have to disclose your name and home address, not office address or P.O. Box, to comply. This is worrisome. For those who are concerned about personal security, kidnapping and other activities, this is another step obviating privacy and confidentiality. More details on the disclosures appear below.
Who Might be Tagged?
The CTA reporting requirements could affect the owners or principles behind or involved in almost all business entities. This includes limited liability companies (“LLCs), corporations, limited partnerships, and other closely held entities. When you engage in estate or asset protection planning, or structure business or real estate investments, these entities can multiply like Tribbles. Most of the entities created as part of your planning may be subjected to the new rules:
· Investment planning might include forming a holding company to aggregate securities other investments. A small business, or a rental real estate property, are typically each segregated into separate entities to avoid a domino effect if there is a lawsuit emanating from the underlying asset.
· Your estate plan might include the creation of one or more LLCs designed to hold other assets or even other entities to facilitate trust funding or trust administration. For example, it might be easier and less costly to transfer a disparate gaggle of assets into an LLC then transfer slices of that LLC’s ownership interests to various family trusts. LLCs are often formed to hold real estate (e.g., a vacation home) or tangible property (e.g., art) that is physically located in a state other than your primary state (domicile) to avoid probate in those other states. A family limited partnership might have been created to hold investment assets for management or estate tax valuation discount purposes, and other reasons. It is also common to form a family entity to own a vacation home (family compound) to integrate into the entity documents operational provisions (which heir can use the home when, who is responsible for which costs, etc.).
· If you are engaged in planning to reduce the risk of a malpractice claimant or other claimant or predator reaching your wealth (called “asset protection planning”) and array of different entities might be created to insulate the underlying assets from claims of creditors. For example, you might transfer assets into a multi-member (more than one owner) LLC in order to take advantage of charging order protection which could limit a claimants ability to reach the underlying assets. Commonly assets may be contributed to an entity and then non-controlling slices of that entity (e.g., 49% or less) or non-voting interests to different trusts to fractionalize the ownership to make it more difficult for a future claimant to realize value.
There could be more than 30 million entities that will be required to file!
There are a few exceptions from CTA filing requirements, such as for large active enterprises with 20+ employees and more than $5 million in revenues, or entities such as banks that are already subject to significant federal reporting requirements.
What Will Have to Be Reported:
Companies have to report:
· Legal name and any trade names.
· Street address for company’s principal place of business.
· State of formation.
· Tax Identification Number.
Each Beneficial Owners have to report:
· Full legal name.
· Date of birth.
· Home address.
· PDF of your U.S. passport or state driver’s license.
Changes in Reported Information
Reporting entities must also report changes to any filing within 30 days. This is a very burdensome and easy to miss requirement. If someone with ownership or control (see discussions below) moves or changes their name, that will have to be reported quickly. You may have to assure that all of those people know to inform you of such changes so that you can assure that the required filings are made.
FinCEN
The Financial Crimes Enforcement Network (“FinCEN”) will be in charge of creating and maintaining the database of all the CTA information the government collects. So far this should not be a public record, but it will be available to a variety of governmental agencies, and possibly others in the future. All “reporting companies” will be required to file reports with FinCEN that provide certain information regarding the companies and “beneficial owners” of the companies – the humans behind the companies. Each of the terms in quotation marks has detailed nuanced definitions, but the impact is a broad net that will affect many if not most entities and their owners and perhaps others involved. “Others” might include a chief financial officer, general counsel, trust protector, trustee, and so on, and on.
Who Specifically May be Affected
This new law will affect virtually all small family businesses, including even LLCs and other entities designed only to hold a rental home. Even if an entity has only one owner and is ignored for federal income tax purposes (like a single-member disregarded LLC), it may still have to file reports with FinCEN.
If you have any ownership interests in any closely held entity, such as an LLC, corporation, or limited partnership (any entity that required a filing with a state agency such as the Secretary of State or any similar office), then you may be subject to these requirements. This will even include foreign entities authorized to do business in the U.S. The rules are broad and nuanced.
“Ownership” is not limited to obvious ownership (e.g., you own membership interests in an LLC). It is broadly defined to include any type of equity interests, a profits interests, convertible instruments, warrants, options, puts, calls, and other entity interests. Ownership can be interests owned or controlled through joint ownership, through a trust agreement, or other indirect arrangements (that sounds pretty broad), and all of these disparate rights may be subject to these new CTA reporting rules.
If You Control an Entity You Do not Own You Too May Have to File
If you are not an owner of an entity but you exercise the authority which a senior officer of the entity might hold, you also have to report. If you are not an owner or officer but if you have direct or indirect substantial control over the entity you may have to report. The net is wide.
Effective Date
The rule goes into effect January 1, 2024. For entities that already exist by that date, their initial reports are due by January 1, 2025. For entities created on or after that date, an initial report is due within 30 days from the date of the creation of the entity. As of now, there are no extensions of time are available. There are stiff civil and criminal penalties for failing to file – this is not something that can be missed. While there is time to prepare, everyone should begin that process now to avoid pressure as the deadline approaches. Consider how busy every lawyer or other professional who can help with these filings will be as the deadline approaches. There are severe penalties, including possible jail time, if you fail to comply with these new rules. Remember the quote from Benjamin Franklin: “You may delay, but time will not.” Nor will the CTA!
Action Steps You Should Take Now
If you may be responsible for filing reports with FinCEN start preparing now. The recommended course of action is to start compiling a list of every entity you are an owner of, or involved with, and have your attorney review the reporting implications for that list of entities. You should not assume that any of your advisers, even including the attorney that may have helped form an entity, has the information to identify that entity or evaluate whether a report may be required. This will take a proactive effort on your part. It would seem prudent to assemble a really comprehensive list including any entity that you might even remotely have to report for, and then review that with your advisors and document which entities require reporting and which ones don’t so that you have a record of any decisions made.