This blog post is not legal advice. For how new legislation affects your small business, consult with a lawyer. Information here is general and may not apply to your specific situation.
Some people are terrified of flying. Others are scared of snakes. But what should keep owners of family-owned businesses up at night is an obscure yet powerful law named the Corporate Transparency Act (CTA).
This is a new, groundbreaking federal reporting law for business entities that may force you to pay enormous penalties (both civil and criminal) for failing to properly register your entity with the federal government within the arbitrary timelines set out in the law and regulations regarding it.
Take this article — written by a lawyer — as a warning and make sure you share it with friends and family members in similar situations.
Here’s what you need to know:
What Is the CTA?
The Corporate Transparency Act (CTA) became effective on January 1, 2021, but has just now entered its implementation phase. It is a federal law that imposes stringent reporting requirements on business entities.
You’re likely thinking, “Which ones?” The answer is most of them.
In fact, it applies to any business entity formed with a state’s Secretary of State (a “reporting company”) with few exceptions (i.e. more than $5,000,000 of annual revenue, more than 20 employees, etc).
This is an enormously wide net. It catches everything from corporations and limited partnerships to a family-owned limited liability company that holds a rental property. This law also applies to Professional Corporations (PC), Professional Associations (PA), and Professional Limited Liability Companies (PLLC), such as medical and dental practices as well as attorneys and accountants.
Not only does the company have to report, but its “beneficial owners” must report as well. A beneficial owner is defined as: (A) anyone with a 25% ownership stake; or (B) someone else who has substantial control over the company (i.e. directors, officers, etc.). You will not be alone if you think this definition is vague. For example, who needs to report if a trust is a beneficial owner? All the trustees? What about primary or contingent beneficiaries? While we wait for more guidance on this topic, it may be best to err on the side of caution.
Lastly, “applicants” of a business entity have a duty to report also. This would be the individual who filed the company’s formation documents with the Secretary of State. While this would include the beneficial owners at times, it could also include lawyers, CPAs, and financial advisors. Many people create their own LLCs online, which means if they are also the beneficial owners, they will have to report both as an applicant and as a beneficial owner.
It looks as though more than a few members of Congress must have gotten caught up in too many international conspiracy theories as the CTA’s stated purpose is to increase transparency in order to prevent money laundering, drug dealing, and similar illicit crimes. Unfortunately for some hard-working business owners, this may destroy the very privacy protections that led them to form these entities in the first place.
What to Report?
Reporting companies must provide the company’s:
- Legal name (including trade names)
- Address for the principal place of business
- State of formation
- Tax identification number
- And an identifying document from the issuing jurisdiction (i.e. certificate for formation)
The beneficial owners and applicants must provide their full legal name, date of birth, home address, and government-issued photo ID. Individuals cannot use another entity to mask who really controls the company.
Where to Report?
Reporting will be to the Financial Crimes Enforcement Network (FinCEN), which is a bureau under the U.S. Department of Treasury.
Its website is https://www.fincen.gov.
When to Report?
Reporting requirements for the CTA began on January 1, 2024. However, when to initially report depends on the reporting company’s formation date. Reporting companies formed after January 1, 2024 have 90 days after formation to report. Reporting companies formed before January 1, 2024 have one year (until January 1, 2025) to satisfy reporting requirements.
Beginning on January 1, 2025, all reporting companies are subject to a 30-day deadline to report newly formed companies and changes in information previously provided to the federal government. What if an owner moves? The reporting company has 30 days to report the new address. What if the owner gets married and changes their last name? Again, the company has 30 days to report the name change.
To avoid problems, make sure every person who needs to report understands their reporting obligations, complies with them, keeps reporting, and maintains a FinCEN Identifier number (which can be obtained from the FinCEN website). By obtaining a FinCEN Identifier, the responsibility for failure to make a change shifts from the company to the individual.
Remember: Simple things like a change in residence, a name change, a new drivers license, or a passport renewal can trigger a need to report within 30 days of the change. A beneficial business owner’s failure to do so could mean that they face serious consequences, as outlined in the next section.
What Are the Penalties for Failing to Report?
If you’re the owner of an entity covered by the CTA, your failure to comply with the new law may result in severe penalties for you — as well as for any of your family members who are owners or have company leadership roles.
Consequences include civil penalties of up to $500 per day and criminal penalties of up to $10,000 and two years in jail!
Here’s an example: If you’re the CFO of a reporting company and you move to a new home on November 15, 2025, but fail to notify FinCEN until April 15, 2026, your delay may result in a roughly $60,000 fine.
Here’s another example: If you are the sole member of a limited liability company that owns a rental property, you get married on March 21, 2025, change your last name and don’t report your name change until April 15, 2026, you could face a roughly $180,000 civil fine.
And finally, here’s another example: You own a reporting company, renew your driver’s license and get a new picture taken for it. If your old license was used as the photo ID for the original reporting, and you neglect to send a copy of your new license to FinCEN for two years, you could be fined as much as $365,000.
Under what circumstances might you risk jail time for failing to comply with the CTA’s reporting requirements? We don’t know yet.
What Can You Do?
It would be prudent to start complying with the CTA processes now in light of not complying. And if you have friends or family members who will be affected by the CTA, alert them now to their compliance issues!
If you need help complying with the CTA, contact your CPA. However, some CPAs may be reluctant to assist because they don’t want to be blamed if you or someone else associated with your reporting business fails to comply with the CTA.
Also, educating anyone associated with your business about the CTA and the consequences of not meeting its requirements is a good idea. And contact your Congress member and U.S. Senator about the problems you may be facing because of the CTA. Your information could lead to positive change.
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