If you are at all involved with a small corporation or limited liability company, you MUST read this. Your life may be about to change. Especially if you would like to avoid a potential $10,000 fine or a two year stay at Club Fed.
Sometimes bad actors pay other shady actors for favors or other illegal goods and services. The shady actors don’t want to get caught taking those dollars, so they set up limited liability companies (LLCs) to take the dollars from the bad actors, then the LLCs can distribute those dollars to other LLCs, and eventually the dollars will make it into the hands of the shady actors. Hopefully those dollars will be “clean” of their tainted past. This is a form of “money laundering.”
Or perhaps a hungry terrorist needs some dollars to pay for bombs, guns, and ammo. A misbegotten (but wealthy) dupe believes in a supposedly righteous cause and contributes to a socially active LLC, which then moves those contributions around between various LLCs and corporations until – BOOM! The terrorist gets the funds.
The Solution: Transparency
A few years ago, Congress thought it would be a great idea if the feds had some way of tracking these LLCs and the folks who were really behind all of them. If these entities could only become “transparent.” Thus, Congress passed the Corporate Transparency Act (the CTA).
The CTA will require most small corporations and LLCs to furnish to the Financial Crimes Enforcement Network (FinCEN), an arm of the Treasury Department, personal information on most of their owners (direct and indirect) and officers and managers. That way FinCEN can make all that information available to law enforcement investigating money launders and terrorist funding.
What could possibly go wrong?
Effective January 1, 2024, all NEW “reporting entities” must furnish personal information (names, addresses, birth dates, and an image of a government issued ID such as a driver’s license or passport) on “beneficial owners” to FinCEN.
A reporting entity is any entity that requires a filing with a secretary of state to become active and which employs 20 or fewer employees. This covers all LLCs, S corporations, and C corporations that are small employers (big outfits are exempted).
A beneficial owner is anyone or anything (like a trust) that owns (directly or indirectly) 25% or more of the reporting entity, as well as officers, key managers, and directors.
Also, “company applicants” must furnish the same information. A company applicant is the person that causes the reporting entity to be formed. For my clients, that would be ME. And my paralegal involved in the filing.
The information must be reported within 30 days of corporate formation AND within 30 days of any change in information. For example, Maude Dimwiddy, a beneficial owner of Dimwiddy, LLC, marries Sam Brightstar and moves with him across town. This information (name change and address change) must be reported.
The January 1 deadline (as in this coming New Years Day) applies to new reporting entities.
So far, FinCEN has yet to tell us how the reporting will take place other than through an online portal currently under development.
Existing Reporting Entities
For existing LLCs and corporations, relax. But just a little. Existing reporting entities have until January 1, 2025 (right after the elections) to report.
In future editions of this newsletter, I will keep you posted on what steps to be taking over the next year.
Ed Smith and his sons own Smith Hardware in Smalltown, NC. Smith Hardware is an S corporation. Smith Hardware, Inc., Ed, and any son who owns 25% or more are covered.
Ilene Jones is sole owner of Ilene’s Interiors (an LLC). Covered.
Ilene’s sister, Imelda, runs Imelda’s Hang Nails (a nail salon) as a sole proprietorship. Not covered.
Small Town CPAs, owned by Jake Jones and two others (a North Carolina professional corporation). Not covered. Accounting firms are exempt. WHAT?!
Mason Law, PC (a North Carolina professional corporation). Covered. Law firms are not exempt. Take that, you lawyers!
Frank and Berta Furter set up an LLC to hold three rental properties and put the LLC ownership in a trust that they are the beneficiaries of. Frank, Berta, the Trust, and the LLC are all covered.
For those out there who decide to ignore these requirements or balk at coughing up the info, you may be thinking, “so what?”
Up to $10,000 and up to two years in the slammer, that’s what.
Please pay attention over the next year. I will keep you posted with developments. For the time being, my stock answer to CTA questions will likely be, “I don’t know yet.”