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Corporate Transparency Act: What It Means for Your Small Business

May 11 | 2021  by

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 aims to prohibit illegal money-laundering activities performed by anonymous shell companies, potentially impacting small businesses significantly.

Corporate Transparency Act

The recently enacted CTA mandates that corporations and limited liability companies formed after January 2021 must file a disclosure report with the Financial Crime Enforcement Network (FinCEN) upon formation or registration. They need to report their “beneficial ownership” and include other required information. Congress attempted to pass the CTA last year, but the bill didn’t pass. Instead, this year’s NDAA bill fully incorporated the Corporate Transparency Act.

The Act defines the term “beneficial owner” as an individual who either exercises “substantial control” over the entity or possesses ownership or control of at least 25 percent of the entity’s ownership interests. Corporations and LLCs have a two-year grace period from the date of bill passage (January 1, 2021) to achieve compliance with the Act. 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 the company. It is yet uncertain if the company will have to carry out a separate process or if it can provide this information annually through its accountant when submitting 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 in 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.

Corporate Transparency Act Impact

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, smaller, private companies and LLCs may face additional regulatory burdens due to the Act’s significant impact. 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 of those who anonymously hide behind LLCs and corporations to facilitate illicit activity, including:

  • Money laundering
  • Financing of terrorism
  • Proliferation financing
  • Serious tax fraud
  • Human or drug trafficking
  • Counterfeiting
  • Piracy
  • Securities fraud
  • Financial fraud
  • Acts of foreign corruption, and
  • Harming the national security interests of the USA and/or allies of the USA. 

Contact Fausone & Grysko, PLC today or call our office at (248) 380-0000. We would be happy to discuss the impact this Act could have on your business.