If you are a small business person, then this article is for you. A new Federal law called the ‘Corporate Transparency Act’ (CTA) goes into effect at the end of this year. The CTA was first enacted in 2020 for the purpose of combatting money laundering.
“But wait,” you say, “I’m a small business person. Some giant Federal money laundering regulation can’t possibly apply to me.”
Wrong, wrong, wrong.
You and your small business are EXACTLY the targets of the CTA, because, apparently, the drug cartels hide their money laundering enterprises behind small businesses.
The CTA requires that each ‘reporting company’ report and update the name, address, and taxpayer ID number of its ‘beneficial owners.’ A ‘reporting company’ is any business organization created by or registered with a state or tribe (including corporations, LLCs, LLPs, and foreign corporations registered with a state). General partnerships and sole proprietorships are not ‘reporting entities.’ Pretty much every other business organization must report and must keep its reports up to date within very short timeframes or its managers and beneficial owners face civil and criminal penalties. There is no de minimus exemption – no business is too small to avoid reporting.
Once an organization qualifies as a ‘reporting entity,’ twenty-three specific exceptions apply. Those exceptions include financial institutions, banks, securities dealers, investment advisors, insurance companies, accountants, public utilities, non-profits, “large operating companies” (more than $5M on last year’s tax return and more than 20 employees, not counting affiliates), and “inactive entities” (no ongoing business and did not receive or send over $1,000 in the last year).
So who is a ‘beneficial owner?’ A ‘beneficial owner’ is anyone who has ‘substantial control’ over the business or who owns at least 25% of the business. Every ‘reporting entity’ will have at least one ‘beneficial owner’ and may have multiple ‘beneficial owners.’
The initial reporting deadline for existing businesses or businesses formed during 2024 is January 1, 2025. The Federal government estimates that the initial number of ‘reporting entities’ required to report will be over 36 million, with over 5 million new entities added each year. There are bills pending in Congress to modify or eliminate these requirements, but they currently are set to go into effect.
Failure to report, reporting false information, or failing to update changed information can result in civil (non-criminal) penalties of $500.00 per day for the period that the violation continues – and criminal penalties of two years in prison and up to $10,000.00 in fines. In general, the business managers who fail to report, or who fail to update, or who report the false information, or the beneficial owners who provide false information or fail to update information to the managers will be personally liable. That is PERSONALLY LIABLE. They are NOT protected by the corporate form. These are serious penalties for what are essentially paperwork violations.
Our alternative title of ‘nibbled to death by ducks’ is a bit misleading. Failure to meet the reporting obligations could cause you to be devoured by wolves. It is absolutely essential to your personal well-being to understand these reporting obligations, to report under the CTA, and to keep your report updated.
We suspect that the CTA was intended to create add-on charges – the FBI would discover a business operating a criminal money laundering operation, the cartel beneficial owners would not have registered or submitted false information, and then could be personally tagged for criminal and civil penalties. All well and good, but the reporting obligations can be complex. In the wrong hands, the CTA could be an instrument of oppression of operators of controversial organizations or of political opponents.
For more information, here’s a link to guidance from the U.S. Department of the Treasury on reporting under the CTA and a link to an in-depth article on the CTA.
— Robert Yarbrough, Esq.