On January 1, 2024, the Corporate Transparency Act went into effect. The law creates a nationwide central registry whereby “beneficial owners” of all legal entities, including limited liability companies (LLCs) will be reported. Under the Act, a beneficial owner is defined as “any individual who directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25% of the ownership interests of such reporting company.”
The Act requires anyone with a beneficial ownership interest to report their interest. Importantly, trustees will be required to comply with the Act if the trust of which they are a Trustee has assets that include a beneficial ownership interest in an entity. If you are a trustee, it is critical to consult an attorney to understand your obligations under the Act.
Why Was the Corporate Transparency Act Passed?
The intent of the Act is to provide authorities with beneficial ownership information in order to combat criminal activities such as money laundering and tax fraud. Currently, the reporting of entity owners differs widely from state to state. Further, in many cases, states only require entities to report the most basic information, such as the principal place of business and an address for service of process. Many states do not require entities to provide information regarding the owners of an entity. This has allowed some individuals to hide assets and ownership interests.
The Act will create a new system initially only accessible by the government and financial institutions in limited circumstances.
What Are the Reporting Obligations Under the Corporate Transparency Act?
Information for each “beneficial owner” of a company must be provided to the Financial Crimes Enforcement Network (FinCEN) through electronic filing using FinCEN’s secure system.
The filing must provide each beneficial owner’s:
- Full legal name,
- Date of birth;
- Current residential or business address; and
- Unique identifying number.
Are There Penalties For Not Reporting?
There are serious penalties for noncompliance. The Act provides for a maximum civil penalty of $500 per day up to $10,000 and a criminal penalty of imprisonment for up to two years.
What Are the Deadlines for Reporting?
The reporting requirement begins January 1, 2024. However, a reporting entity has until January 1, 2025, to file its initial ownership information report if the entity was formed prior to January 1, 2024. For entities formed in 2024, the report must be filed within 90 days within formation of the entity. In 2025 and subsequent years, the report must be filed within 30 days. A report must be filed each time a new entity is created or the beneficial ownership structure changes.
How Does the Corporate Transparency Act Affect Trustees?
Many trusts have alternative assets with beneficial ownership in an entity covered by the Act. In such a case, the trustee is responsible for complying with the Act, including initial reporting and amended reports each time a new entity is created or there are changes to the beneficial ownership interests.
Importantly, when a settlor (the creator of the trust) passes, the beneficiaries or inheritors may then have a beneficial ownership interest that will trigger a reporting requirement.
Next Steps for Trustees
It is the trustee’s responsibility to stay up to date with all reporting requirements or face potential personal liability. Accordingly, trustees should seek legal advice regarding their obligations.
Smith Legacy Law is well-versed in the new Act and can counsel trustees to ensure they are in full compliance with all laws. Contact us for a consultation.
