New Federal Law For Corporations Requires Filing With Treasury

In case there were not enough corporate laws requiring disclosures and filings a relatively new federal law passed by Congress and made effective January 1, 2024 will affect many small companies and require disclosure of the company’s “beneficial owners.” The law labelled the Corporate Transparency Act aims to combat illicit activities such as tax evasion or money laundering. It intends to correct the abuse of multiple shell companies shielding their beneficial owners from liability and prosecution. Reporting is directed to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department.

The Act requires affected companies formed or registered prior to January 1, 2024, whether domestic or foreign, to file their initial report with FinCEN no later than January 1, 2025 so there is time yet to learn more and come into compliance. For companies formed on or after January 1, 2024 but before January 1, 2025 compliance by filing the initial report with FinCEN will be required within ninety (90) days of the date when the company was effectively created or registered to do business.

What Are the Affected Companies? Many categories of companies are exempted from filing. A quick review of these exempt entities seems to exempt mostly larger entities such as publicly traded companies, companies that are already subject to mandatory regulatory reporting such as banks, credit unions and securities brokers, tax exempt companies and also entities that employ more than 20 full time employees, filed Federal tax returns that demonstrated more than $5 million in gross receipts or sales, and operate within a physical office in the U.S. Also exempted are subsidiaries of companies that are otherwise exempt and inactive companies not owned by a foreign person. That seems to leave still subject to the law most Sub-Chapter S and C corporations, family businesses that are incorporated or are LLC’s or similar entities that are (a) created through filing documents with a Secretary of State (such as Pennsylvania corporations) or similar offices or (b) are formed under the laws of a foreign country and are registered to do business in the U.S. through filing documents with a Secretary of State or similar office.

What Is a Beneficial Owner? A beneficial owner is (a) an individual who directly or indirectly exercises substantial control over a Reporting Company (President, Chief Executive Officer, General Counsel, Chief Operating Officer) or (b) owns or controls at least 25% of the ownership interests of a Reporting Company. The beneficial owner exercises “substantial control” when he/she serves as a senior officer of the Reporting Company and/or has authority to appoint or remove any senior officer or a majority of the board of directors. There are other categories and exemptions as well.

What Is To Be Reported? The report to FinCENT must contain the company’s full legal name, its trade names, a complete and current address, the jurisdiction where the entity was formed or, for foreign companies, the jurisdiction in which the foreign company first registered its Taxpayer Identification Number. Reporting Companies must also submit information regarding each beneficial owner and company applicant including the individual’s full legal name, date of birth, current business or residential address, a unique identifying number such as non-expired passport, driver’s license, etc. and an image of the document from which it is obtained. Individual beneficial owners and company applicants can submit their information directly to obtain a “FinCEN Identifier” which is a unique number assigned by FinCEN. This latter possibility might permit some streamlining of the process once registration is accomplished. There are understandably many questions to be answered.

Have There Been Any Challenges? A district court in the State of Alabama concluded that the Corporate Transparency Act is unconstitutional on the grounds that Congress does not have the authority to require companies to disclose personal stakeholder information to the Financial Crimes Enforcement Unit. The ruling is interpreted as only affecting the plaintiffs in the particular case and therefore the Act continues as to anyone else. The case is National Small Business United v. Yellen. National Small Business brought the action on behalf of its members. The penalties are severe. Willful failure to report or update beneficial ownership information or providing false or fraudulent beneficial ownership information can be subject to a civil penalty of $500 per day and/or fines up to $10,000 or imprisonment up to two years or both. Stay tuned.

About the Author Janet Colliton

Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.

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