Tag: Corporate Transparency Act irrevocable trust

  • The Corporate Transparency Act: What Small Businesses Need to Know

    Image from FinCen Facebook Page.

    If you have a business in the U.S. with less than 20 full-time employees, add the term “Corporate Transparency Act” (CTA) to your vocabulary. This new law requires small businesses in the U.S. to submit a report about the company and its Beneficial Owners (BO) to the Financial Crimes Enforcement Network (FinCEN). 

    This federal law was likely created to prevent people committing crimes through shell companies and identify those who are doing this.

    I’ve filed the Beneficial Ownership Information Report (BOIR) for my two companies and filed BOIRs for a few others. It’s not hard, but the penalties for not doing it or not keeping your BOIR up-to-date are steep.

    Which Companies Need to File a BOIR?

    If you had to file documents with your state in order to create your business entity, such as with the Secretary of State or the Corporation Commission, you need to file a BOIR with FinCEN.

    In Arizona, this means corporations, LLCs, LPs, PCs, PLLCs, and LLLPs. Sole proprietorships and general partnerships don’t need to file anything to be formed in Arizona, so they are not required to file a BOIR. However, running a business as a sole proprietorship or general partnership is a problem waiting to happen, so don’t do it.

    Aren’t Some Companies Exempt?

    Yes.

    Some industries are already regulated by the federal government, like banks and insurance companies, so they don’t have to file a BOIR. FinCEN provides a list of the types of companies that are exempt from filing a BOIR.

    The binary code spells “fincen.”

    What About 501(c)(3) Entities?

    You are exempt if the company has its approval letter from the IRS. If you’re waiting on IRS approval, you’ll need to file a BOIR if you don’t receive it by the end of the year. Once the company’s 501(c)(3) status is approved, you can re-submit the BOIR to FinCEN and indicate that the company is not exempt.

    Who Counts as a Full-Time Employee?

    A full-time employee is someone who works an average of 30 hours per week.

    That means a person might not be full-time according to your company’s policies, but they are for the purposes of the CTA.

    What Information Does FinCEN Need About the Company?

    The company needs to provide the following information on its BOIR:

    • Its legal name,
    • All d/b/as (doing business as),
    • Its employer identification number (EIN) or tax identification number (TIN),
    • The state where the company was initially formed, and
    • The primary address from which it operates in the U.S.

    The company’s primary address must be a street address, not a mailbox. So, if your company’s official address is a box at a UPS Store or at virtual office, but you actually work from your home office, the company’s primary address is your home address.

    If you’re the only owner of your company and you’re using your Social Security number (SSN) as the company’s EIN, use your SSN as the company’s EIN or TIN for its BOIR.

    Who Can Be a BO?

    Only humans can be BOs.

    A BO is someone who owns at least 25% of the company OR has substantial control over the company.

    A person who has substantial control over the company could include, but is not limited to, the company’s senior officers (e.g., anyone whose title starts with “Chief”), board of directors, and the company’s internal general counsel.

    Ooohhh … this just got a lot more complicated.

    If no one in the company owns at least 25% of the business, but there are company decisions that require unanimous approval by all the owners, then every owner is a BO.

    FInCEN has useful information that could help you determine who is a BO of your company and you can also consult your lawyer to assist you with determining who are the company’s BOs.

    There’s no penalty for claiming someone as a BO who turns out not to be one, but penalties can apply if you don’t include someone who is a BO on your BOIR. When in doubt, include the person on your BOIR.

    What If the Company’s Owners are Other Business Entities?

    Work backwards until you identify the humans who have at least 25% ownership interest in the business or who have substantial control over the company.

    What If the Company is Owned by a Trust?

    If the owner is a living revocable trust, list the trustees as the BOs in addition to the people who have substantial control over the business. If the owner is an irrevocable trust, you only need to list the people who have substantial control over the company as the BOs. 

    What If the Company has a Subsidiary Company?

    If both companies meet the requirements set in the CTA, then each entity needs to file a separate BOIR. A person can be a BO for multiple companies.

    (Image by Vantes duke, Creative Commons)

    What Information Does FinCEN Need About Each BO?

    Here’s what you need to provide for each BO:

    • Their legal name,
    • Date of birth,
    • Residential address, and
    • A copy of their unexpired driver’s license, passport, or state-issued ID.

    How is this not an invasion of privacy?

    Don’t worry, this is information the federal government already has about you. BOIR information is not kept on a publicly accessible database.

    Pro Tip: Check the expiration date on your license and passport and use the one that expires the latest.

    How Much Is the Filing Fee to Submit a BOIR?

    $0

    Do You Need a Lawyer to File a BOIR?

    No. You can absolutely file it yourself. Here’s the video I used when I filed the BOIR for my first company, to make sure I was doing everything correctly:

    Here’s the Video I USed to make sure I Filed my first BOIR correctly.

    If You Live in a Community Property State, Is Your Spouse also a BO?

    This is a good question to take to your lawyer. If the company’s primary address is in one of the 9 community property states (including Arizona), if you are a BO because you own at least 25% of the company, and you’re legally married, you should name your spouse as a BO as well.

    This assumes you don’t have a prenup or post-nup that excludes your ownership interest in the company from the marital estate.

    Geez, this is starting to sound like a question on a bar exam.

    What’s the Deadline for Filing Your Company’s BOIR?

    If your company was created before January 1, 2024, you have to file it by January 1, 2025. If your company was created in 2024, you have 90 days after the date your articles were approved to file your BOIR.

    At a recent training about CTA, the instructor reported that only 3 million of the expected 33 million companies that need to comply with CTA had filed their BOIR. She expects the FinCEN website will crash during the week between Christmas and New Year’s when everyone who waited until the last minute it trying to submit their BOIRs.

    Unless there’s a BO in your company whose information will change before the end of the year, it’s better to file your BOIR sooner than later.

    What Are the Penalties If You Don’t Comply with CTA?

    The civil penalty is $591/day, and there’s no upper limit for this fine.

    The criminal penalty is a fine of up to $10,000 and up to 2 years in prison.

    These penalties will apply to the BOs personally, not to the company.  

    Oooohhh … that could be bad.

    When Do You Need to File an Updated BOIR?

    Once you’ve filed your BOIR, if the company’s or a BO’s information changes, you have to file an updated BOIR within 30 days. This means if the company moves, gets a new BO or a BO leaves, a BO moves to a new residence, or the driver’s license or passport a BO used for the BOI is expired or renewed, you have 30 days to update FinCEN.

    Oh sh*t!

    And that’s 30 calendar days, not business days. If your due date falls on a weekend or holiday, that’s the latest your can file the updated BOIR without risk of penalty.

    Pro Tip: Amend your company’s operating agreement and/or bylaws to include that all BOs must update the company when their residence changes and provide a copy of their driver’s license or passport when it’s renewed. Ditto for the employment contracts for anyone whose role gives them substantial control over the company.

    Does the Company Need to Update the Information that Changed or File a New BOIR?

    You have to submit a new BOIR with all the pertinent information about the company and all its BOs. The only difference is you’ll be checking a box indicating that it’s an updated report instead of the initial filing.

    Unsolicited Advice: Figure out a system for checking in with your BOs on a monthly basis to see if any information has changed, so you can file the updated BOIR with FinCEN in a timely manner if needed.

    For my clients for whom I’ve submitted their BOIR, I created a spreadsheet with the company’s and each BOs information. When I reported to the client that the BOIR was filed, I informed them of which BO’s ID was going to expire first and provided the corresponding month and year. 

    Who is the Company Applicant?

    The company applicant is the person who files the BOIR for the company, meaning the human being who put fingers to keyboard to submit the report.

    image created by dall-e

    What If You Have a Company That’s No Longer in Business?

    If you have an established business entity, but the company’s gone out of business, the best thing you can do, from a CTA perspective, is to shut the entity down. File the appropriate articles of dissolution or termination with the Secretary of State or Corporation Commission that oversees such things in the state where the entity exists.

    FinCEN amended its rules and added that “inactive” entities are exempt from filing a BOIR, but your company has to meet all 6 of the following requirements:

    1. The entity must have existed prior to January 1, 2022.
    2. The entity is not currently engaged in business.
    3. The entity has no foreign owners.
    4. The entity has had no change in ownership in the last 12 months.
    5. The entity has not received funds in excess of $1,000 in the last 12 months.
    6. The entity does not hold any assets. (I suspect this includes intellectual property.)

    I’m telling all my clients if they have any entities that they’re not using anymore, they should shut them down. An entity that does not exist anymore does not need to file a BOIR.

    What If the Company’s Information Doesn’t Match What’s Filed with the State?

    The company information you file with FinCEN should match what’s on file with your state’s Secretary of State’s Office or Corporation Commission, wherever businesses are filed.

    In Arizona, LLCs are somewhat set-it-and-forget-it entities. Unlike corporations, LLCs don’t have to file an annual report, so it’s not uncommon for LLCs to have outdated information on file with the Arizona Corporation Commission (ACC).

    Before you file your company’s BOIR, check the information in your state’s records. If  anything isn’t accurate, file an Articles of Amendment (or its equivalent) so the information on file with your state and FinCEN will match.

    There is one exception to this recommendation: If your state allows it, it’s ok to use a box at the UPS Store or a virtual office as the company’s address and the owners’ addresses for your state-level filing. You only need to report the address from which the company conducts its business and the BOs residential addresses on your BOIR.

    In Arizona, company filings with the ACC are public. This is why many companies use a mailbox or virtual office for the address for the company and its owners, officers, and directors. Conversely, BOIR information is not public.

    Final Thoughts

    Complying with the Corporate Transparency Act is not hard to do, but it’s part of having a small business in the U.S. The main challenge I’ve run into so far is getting copies of all the BOs’ driver’s licenses or passports. Given that many people take off the last week of the year, this is another reason to file your company’s BOIR sooner than later.

    If you need help determining who are the BOs for your company or if you want to outsource your BOIR filing, please contact a lawyer who is knowledgeable about this subject to assist you. (Many lawyers do not know about this new law or are not doing these filings for clients.)