This year, the U.S. Senate voted to approve new changes to the National Defense Authorization Act (NDAA), which includes the Corporate Transparency Act. The Act is designed to ban anonymous shell companies from performing illegal money-laundering activities, but it may also have a significant effect on small businesses. 

Corporate Transparency Act

The newly passed CTA requires corporations and limited liability companies that are formed after January 2021 to, upon formation or registration, file a disclosure report with the Financial Crime Enforcement Network (FinCEN) to report their “beneficial ownership” and provide other information. Congress attempted to pass the CTA last year, but the bill didn’t pass. Instead, the Act was wholly subsumed into the NDAA bill passed this year.

The term “beneficial owner” is defined in the Corporate Transparency Act as being an individual who: exercises “substantial control” over the entity, or “owns or controls not less than 25 percent of the ownership interests of the entity.” There is a two-year grace period from the date that the bill was passed in which corporations and LLCs need to come into compliance with the Act (passed January 1, 2021).  A reporting company that is subject to these requirements must update its report with the FinCEN within one year after a change in the beneficial ownership of their company. It remains to be seen whether this will need to be a separate process by the company or whether a company can provide this information yearly through its accountant along with its tax forms.  

Exemptions of The Act

Like most laws, the devil is in the details, and there are several exemptions, none of which help small businesses. Banks, credit unions, bank holding companies, money transmitting businesses, investment advisers, insurance companies, and public accounting firms are all exempt, among others. In terms of broader exemptions, a reporting company does not include any entity that:

–         Employs more than 20 employees on a full-time basis in the United States,

–         Filed in the previous year Federal income tax returns in the United States demonstrating more than $5mil in gross receipts or sales in the aggregate, including receipts or sales of other entities owned by the entity; and other entities which the entity operates, and

–         Has an operating presence at a physical office within the United States.

Additionally, a reporting company does not include a corporation, LLC or similar entity that:

–         Has existed for over 1 year,

–         Is not engaged in active business,

–         Is not owned by a foreign person,

–         Hasn’t experienced a change in ownership over the last 12 months or sent or received greater than $1,000, and

–         Doesn’t hold any kind or type of assets.

There is also a catch-all category that allows the Secretary of the Treasury to exempt a company from reporting requirements if it is not in the “public interest” to require them to report and it would not be useful for the purpose of preventing crime. It remains to be seen what process companies will have to take to request such an exemption.

Impact of The Act

With no mention of exemptions for small or family-owned businesses, these restrictions will likely hurt small businesses the most by imposing more paperwork requirements on mom-and-pop shops with less than 20 employees, while exempting larger firms and professional organizations such as banks and accounting firms. The purpose of exempting businesses with more than 20 employees is likely because the law is targeting individuals that form LLCs and corporations for specific illegal transactions and dissolve them immediately afterward, and companies with more employees are not likely to be engaging in such conduct. However, the Act may have a significant impact on smaller, private companies and LLCs that are further burdened with regulatory requirements. Individuals that use single-member LLCs as a liability protection tool for real estate investment properties may be affected as well. 

The NDAA states that these reporting requirements are necessary because “malign actors” seek to hide behind LLCs and corporations anonymously to facilitate illicit activity, including money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption, harming the national security interests of the United States and allies of the United States. 

Contact Fausone Bohn, LLP Today for Guidance

FinCEN has just recently issued an advanced notice of proposed rulemaking to solicit public comment on the implementation of this law, the first step in developing regulations to help carry it out. Contact Fausone Bohn, LLP today to discuss the impact that the Corporate Transparency Act will have on your business, (248) 380-0000.