Have you heard of the Corporate Transparency Act (CTA)? This law became effective at the beginning of this year and requires registration with the federal government in addition to the paperwork LLCs and corporations file at the state or tribal level. Some are concerned about the law’s reach as entity owners will have to provide the federal government with their government identification, a residential address, and a social security number.
For the first time ever, the CTA requires business registration with the federal government. Traditionally, this type of registration has been a matter of state law. Federal registration will be free, but business owners must report more personal information than they must with state business annual reporting. Federal Crimes Enforcement Network (FinCEN) is the federal agency that will host registration and enforce this new law. The registration site is here.
Often, small businesses enjoy exemptions from complex federal business regulations. However, this law is the inverse of that typical scenario. In this case, large entities are exempted, not small ones. To understand why, look to the purpose of the Act.
The CTA cracks down on shell corporations that protect the identity of corporate criminals who, for example, launder money or evade taxes. Before the CTA, business owners could register businesses within businesses, providing only PO boxes or other non-residential addresses as contact information. With the comparatively lax state reporting requirements, entity owners could create shell companies that made it nearly impossible to determine the business’s operator. This way, corporate criminals could shield their identities and elude enforcement. “Shell” companies are named as such because they generally have little to no assets. As a result, the law focuses on small businesses that may or may not have much by way of assets.
Who needs to register?
Small businesses must go through the federal registration process if they have a business entity that they registered with a state or tribe. All LLCs and corporations are registered with a state or tribe in order to form them, so folks with one of these entities fall under this law. Individual tribes will have different rules about when or what entities will need to register with the tribe, but some tribes require even sole proprietors to register with the tribe before conducting business. In tribes with these rules, the CTA is written so that those individuals would also have to register with the federal government. Furthermore, some states require that trusts register with the state. In those states, trusts will also have to register with FinCEN.
There are 23 exemptions to the CTA, but as discussed, there is no exemption for small businesses. Tax-exempt entities, such as non-profit organizations, are exempt. And large businesses with over 20 employees that gross over $5 million are exempt. Note that businesses that have multiple entities cannot combine the number of their employees and gross income to reach this threshold; each entity must be considered separately. If you think you fit under an exemption, it is a good idea to study the exemption list carefully and speak with an attorney to confirm your exemption.
What information do businesses need to provide?
If a business owner needs to register under the CTA, the next task is to file personal information about individuals considered “beneficial owners.” There are two ways one can become a beneficial owner, either 1) the person has “substantial control” over the business and/or, 2) the person who owns 25% or more of the company.
Business owners that have substantial control are senior officers, who have the authority to appoint or remove senior officers or have a say in the company’s important decisions.
During the registration process, the company itself must provide the company’s legal name, any trade names (“doing business as” or DBA), current business address, where the entity was formed (state or tribe), and the taxpayer identification number of the business.
Each beneficial owner of the business must provide their:
- Full legal name,
- Date of birth,
- Complete current residential address, and
- Image of a government-issued identification.
When do I have to comply?
What if I don’t comply?
If a person knows they need to comply but digs in their heels and refuses to give up the necessary information, this can be considered willful non-compliance. Consequences for willful non-compliance are severe. Civil penalties accrue at the rate of $500 for each day not in compliance. Criminal penalties include up to two years imprisonment and a $10,000 fine. Of course, we haven’t seen what enforcement looks like or how they will prove willful noncompliance. These penalties have sharp teeth, though.
What about the constitutionality of this Act?
There is an active court case challenging the constitutionality of this law. The plaintiff’s members- the 65,000 Americans who are members of the National Small Business Association- don’t have to comply while the case is being litigated. Everyone else must still register or deal with the potential consequences of noncompliance.
Other courts may agree with the Federal District Court Judge in Alabama who found the CTA in violation of the Constitution, but most analysts suspect the law will be found constitutional and enforceable. Farm Commons will monitor this situation and will have more resources on how to comply with the law later this year.