The Corporate Transparency Act and What You Need to Know

Happy New Year!

We are starting 2024 with a recently added business requirement, the Corporate Transparency Act (CTA), which goes into effect on January 1st. It’s a new report that requires filing with the Financial Crimes Enforcement Network (FinCEN). CTA was included in the nearly 1,500-page National Defense Authorization Act (NDAA) and passed on January 1, 2021.

It’s a controversial bill because of its filing requirements and privacy concerns. The National Small Business Association, NSBS, has filed a lawsuit to stop it because it is unconstitutional.

The reasoning for the law is the same as always: criminals and terrorists use U.S. businesses and LLCs to commit crimes. But criminals also use other things, like iPhones, Facebook, and the internet, to commit crimes. So why are small businesses the target?

The banks are already collecting this information through the Customer Due Diligence rules (CDD) when a business opens a bank account. It works very well. The information is shared with law enforcement when requested. The CTA merely changes the responsibility of providing the information from banks to small businesses so the banks can save money on compliance costs. It pushes those costs onto small businesses, which are not equipped to handle it.

Who has to report

CTA applies to incorporated entities, those businesses whose existence was created by filing with a Secretary of State in any state. Private businesses and unincorporated businesses are exempt.

Generally,? anyone who owns or has a 25 percent or greater interest in a small business with fewer than 20 full-time employees or less than $5 million in gross receipts or sales in the prior tax year (or any entity that is not specifically exempted) or otherwise exercises “substantial control”? over the business. This would include a business’s owners and major investors.

It is estimated that 32 million businesses will be affected. Most of them are small businesses.

Exceptions to the filing are primarily large corporations and entities in the financial field. (large is defined as 20 full-time employees and $5 million in annual revenue) are not required to file.

It is unfortunate that the burden falls, once again, to the small business owner.

What’s to be Included in the Report

Company information:

• Legal names, trade names, and doing business as names.
• Actual street address for the company”s business
• State of Formation
• Identification number
• An identity document from an issuing jurisdiction such as filed Articles of Incorporation or Organization.

Beneficial owner reporting:

A beneficial owner includes both the direct owner and people listed as trustees. A beneficial owner owns or controls at least 25% of the interests of a reporting company. A company may have more than one beneficial owner.

The information required is more personal and invasive than ever in the United States.

• Full legal name
• Date of birth
• Home address
• Photocopy (PDF) of the individual’s passport or driver’s license.

For more detailed information, you can download the latest version of The Small Entity Compliance Guide.

When are the reports required?

For companies in existence as of Jan 1, 2023, initial reports are due by Jan. 1, 2025. New businesses created after Jan 1, 2024, are due within 90 days.

Penalties and oversite

The? CTA imposes criminal penalties for failing to report the requested personal information. The penalty can be $500 per day (up to $10,000) and up to two years in jail.

FinCEN, within the Treasury Department, is the receiver of the information. FinCEN has no way to determine who is properly reporting and who is not, as they will not perform any quality control or review of the database.? As a side note, databases at the Treasury Department have been hacked in the past, and there is a concern about the future security of this information.

Challenges to the law

The National Small Business Association (NSBA) has challenged the constitutionality of the CTA in a case currently in the United States District Court.? Oral arguments took place on? November 20, 2023. The NSBA asserts that the CTA illegally encroaches on each individual state’s power to regulate entity formations:

For a summary, read Are You Ready for the Corporate Transparency Act?

Arguments made in the lawsuit

1 - Federalism. The federal government is usurping powers over entity formation traditionally belonging to the states in violation of the 9th and 10th Amendments and constitutional principles of federalism. Congress has no authority over corporate formation or reporting because it has not engaged in any foreign, interstate, or Indian commerce.

2 - Unreasonable searches and seizures. The requirement to report sensitive, personal information without any suspicion of criminal activity violates the 4th ame.≥ndment, the 5th Amendment protection against self-incrimination, and the right to privacy under the 9th Amendment.

3 – Vagueness and due process. The requirement puts unreasonable burdens on free speech and violates the due process laws. It creates new terms and definitions not used in entity formation or governance.

Options

If you have a small business that is not incorporated, think carefully before you incorporate. Incorporated businesses give the government some control.

If your business is incorporated, you can transition your business from public (incorporated) to private by?de-incorporating.

How you can do it.

File Article of Dissolution with the Secretary of State.

Then, record your business and file a Certificate of Assumed Name, also known as D/B/A, “doing business as” but leaving off the LLC or INC. Remember that you will be a private trade non-commercial business, so use that section if you need to file for an EIN.

Conclusion

You shouldn’t ignore this new law because of the potential penalties.?? However,? you need to watch it carefully. It’s possible the lawsuit will be successful, and the requirements will be thrown out.? Consider waiting until later in the year to file if the case is not won. Otherwise, if you choose to continue with your incorporated business, the law will apply to you.

Published by Create Income Independence 2024

First posted on January 18, 2024, by?Yvonne Gerard

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