For many small-business owners, there are many required reports, filings and other bookkeeping items that are often missed. It is common to find a new client’s company minute book to be neglected or even completely missing.
Required reports that are often missed may include annual registration reports, recording annual meetings of stockholders and directors, and maintaining corporate books on transfers of ownership. Many small-business owners may be surprised to learn of a new reporting requirement that if not followed could carry harsh penalties.
Beginning Jan. 1, 2024, many existing corporations, limited liability companies and any other entities created by filing registration documents with a state agency will be required to file a report providing personal information to the federal Financial Crimes Enforcement Network. The Corporate Transparency Act, enacted by Congress in 2021, will create a central database and collect information on individuals and owners of business entities to help law enforcement prevent money laundering, terrorism and other financial crimes. Failure to timely file a report can lead to a civil penalty of $500 for every day of noncompliance (up to $10,000), and up to two years in jail.
The essential concept of the act is that reporting companies must file a beneficial ownership report with FinCEN. So, let’s look at the definition of a reporting company, what must be included in a beneficial ownership report and the associated deadlines.
Corporations, LLCs and any other entity created by the filing of a document with a secretary of state or any similar office is considered a reporting company. However, there are several exemptions from the definition, most commonly: public companies; those with more than 20 employees and more than $5 million in annual revenue; 501(c) entities that are exempt from income tax; Federal Deposit Insurance Corp.-insured banks; credit unions; insurance companies; and dormant companies that are not actively engaged in business and own no assets. However, there are many entities that will not fall into an exemption, including small businesses with fewer than 20 employees or less than $5 million in gross revenue, entities that hold real estate and family limited partnerships, among others.
Beneficial ownership reports
The information required to be included in the beneficial ownership report is extensive. The report requests the name, trade name, address, jurisdiction and tax identification number for the reporting company. Most importantly, the report also must include the following information for its beneficial owners: the legal name, date of birth, address and unique identifying number (state driver’s license, valid passport or other government ID) with an image of the document. The act and its underlying regulations define a beneficial owner as any individual who, directly or indirectly, either exercises substantial control over the reporting company or owns/controls at least 25% of the ownership interests. In addition, for companies created after Jan. 1, 2024, the report will require information on the individual who files the paperwork with the state agency to create the company.
Although there is no periodic filing requirement, the reporting company’s obligations do not end with the initial report. New reports are required to be filed within 30 days after the occurrence of any change in the information provided in the initial report. This would mean on the death of a beneficial owner, after a gift or any kind of sale or other transfer of beneficial ownership, a new report would need to be filed. When a minor beneficial owner reaches the age of majority, that also would require a new report.
Know the rules
For companies formed prior to Jan. 1, 2024, the initial beneficial ownership report is due no later than Jan. 1, 2025. For any reporting company formed on or after Jan. 1, 2024, the initial beneficial ownership report is due 30 days from creation.
If you are an individual connected directly or indirectly with a small business or any type of LLC, corporation or other business entity, you should study the rules to learn how and when their business entities are subject to reporting.
David Olive is an estate planning and business attorney with Carnahan Evans PC. He can be reached at email@example.com.
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