Corporate Transparency Act Update

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"Welcome to a special presentation by Wegman Hessler Valore. We will be digging into new reporting requirements for US-based small businesses and LLCs. And to explain things, we have two amazing attorneys from the firm. Kyle Baird and Jay Carson. Kyle, would you like to introduce yourself? Sure, Patti. Thank you.

My name is Kyle Baird. I'm a corporate attorney here at Wegman Hessler Valore, and I am handling the Corporate Transparency Act. And I'm Jay Carson. I do a lot of work in the business litigation field, including, dealing with federal regulations, frequently challenging, the propriety or step of federal regulations, and how businesses can better deal with them.

Kyle, why don't you tell us a little bit about what's happening?

Sure. So with the Corporate Transparency Act coming into play here at the beginning of 2024, this is Mark's the very first time in American history that the federal government is building a massive database of small business ownership information. Energies of all kinds will soon be required to report specific identifying information on their business owners and partners. Now this is not simply listing people on a form. It includes gathering and providing government-issued identification documentation for each beneficial owner. The penalties will be severe for those who willfully provide false information or fail to report complete ownership information. This includes any failures to update changes to your beneficial owner information within thirty days of any change.

Any violations of the Corporate Transparency Act are going to be subject to substantial civil penalties of up to five hundred dollars a day capping out at ten thousand dollars or criminal penalties, including up to two years in prison. Now the government says its goal is to enhance national security and arm itself with better data and tools, that will help with fake crimes such as money laundering, cyber scams, drug trafficking, etcetera.
But as you might expect, it's unclear how exactly the information will be made available to other agencies for use in the future, such as the IRS. Regardless, business entities are expected to comply. I'm going to get into the details in a moment, but it's worth noting that it would take a bit of work to sway the government from exercising its rights under the Corporate Transparency Act. In light of that, there are things that you can do as a business owner or leader of your company before the new roles go into effect to help ensure you're positioned correctly and properly protected.

So the Corporate Transparency Act was originally passed, by the House of Representatives in 2019 as part of the Anti-money Laundering act of 2020. As Jay mentioned, the stated purpose of the act is to address the issue of shell companies.

In order to achieve this, the act will soon impose unprecedented reporting requirements on corporations, partnerships, and unlimited liability companies in every state. This will require the disclosure of reporting of beneficial owner information commonly called BOI directly to the Financial Crimes Enforcement Network commonly called FINCEN, which is a division of the US Department of Treasury. This is going to create the very first US government database of private ownership information used for law enforcement purposes.
The specific reporting mechanism will be online, but it has not been fully revealed yet. So we don't know exactly what the process is going to entail with the actual reporting, but it is expected that initial reporting will be somewhat complex and time-consuming. So Jay, why is the government doing this? Why is this happening? Well, the estimated goal, is to make it harder to hide money and shell companies and corporate entities. The idea being that, you know, shell companies, these are these are our companies that don't do anything, don't make anything. And while there could be many legitimate purposes, which we'll get into later, They can also be used for tax evasion, money laundering, etcetera.

It's going to remain to be seen how this data is actually going to be used. Right? Because this is such a new program, and there is likely to be in addition to the statute, numerous rules that go into effect regarding the use and the collection of this data. So what exactly is a shell company? So a shell company is a company that doesn't actually make or sell anything. It exists on paper, but it doesn't have any real offices or employees.
Now shell companies exist for some really good reasons. For example, to keep control over all parts of a large business. For example, holding companies is the typical example that has been around for forever. Another is to pay less taxes. And, to make complicated deals like mergers easier. In cases, for example, if you want to buy a company that owns several other companies, it's easier just to buy the shell company you're holding company, than to have multiple transactions.

But there are also some bad reasons that people rely on shell corporations.

That is to hide money that was earned illegally, essentially money laundering, to hide who actually owns the company in order to set up sort of a fake liability shield. Right? One company cannot be a bad actor, but they have to follow up the chain in order to find someone who's actually responsible. And this makes shell corporations useful for people engaging in these kinds of improper activities.

That said, most shell corporations are used for normal business purposes. But because they can be used to hide business information, they can also be used by criminals.

Obviously, something I counsel clients with all the time is they need to be careful when they're dealing with shell corporations, you want to be able to make sure that that whoever you're dealing with can't actually be accountable. Should the deal go bad and you have to go to court? And, if you're using a shell corporation, you should follow all the rules and be transparent about what the company is for. In that way, you can get the benefits of the Shell Corporation without the risks.

Great. So what about business entities? Let's take a look at what the businesses need to do in order to comply. Sure.

The new rules under the Corporate Transparency Act target small businesses. The act uses the term reporting companies which is defined as any corporation, limited liability company, or any other business entity that is created by filing a document with the secretary of state. Or any similar office under the laws of such a state. This includes entities formed under foreign legal jurisdictions addictions and registered to do business within the United States.

With some exceptions, businesses required to file under the Corporate Transparency Act include all limited liability companies, corporations, and similar entities that meet all of the following requirements. They have less than 20 employees. They show less than five million dollars in reported annual revenue, and they have a physical office in the United States. The government has listed 23 different exceptions to these reporting requirements.

These exceptions include entities registered with the Security Exchange Commission, banks, credit unions, insurance companies, tax-exempt nonprofit corporations, and subsidiaries of otherwise exempt entities. Another thing to consider is that this will include any active entity and may include some non-active entities as well. So here's a quiz. Do you employ more than twenty full-time employees in the United States, or do you have more than five million dollars in annual reported revenue?

If yes, you don't need to file. Are you already registered with the SEC or are you a tax-exempt corporation? Or are you a bank or credit union? If you answered yes to any of these, you do NOT need to file. However, as the list of exemptions includes 23 separate categories, we are not going to cover all of them at this time. But if you are unsure, please contact us and we can go over your individual situation.

Regardless for all of you who are not exempt, which will be the vast majority of small businesses. Let's talk about what information we'll need to be reported.

Now all reporting companies, any companies not exempt will need to provide the federal government with their full name of the company, and the jurisdiction in which they were first formed.
All trade names are doing business as names used by the company.

For US-based companies, you have to provide your complete current address as the primary place of business. And for foreign companies, they have to provide the current address of their primary US location where it conducts business. The companies will also need to provide their taxpayer identification number or EIN. So now Kyle, I'm imagining some of our listeners are saying, well, that doesn't seem like a very big deal.
Right? These are This is information that we already share with the state governments, but not so fast. Right?

Not so fast.

You're absolutely right, Jake. In addition to the reporting company's information, a company will also need to include information regarding each beneficial owner and each company applicant.

For both beneficial owners and company applicants, the reporting company will need to provide the full legal name, date of birth, current residential address, and a unique identifying number from an acceptable government-issued identification document primarily, this is going to be the person's driver's license or passport. And such an identification document will need to have a photograph of that individual.

Additionally, you will need to provide a statement from the beneficial owner confirming that the information provided is true and correct to the best of their knowledge. Please keep in mind that the information for the company and the information for each beneficial owner must be included in the initial report. And if any information changes, you will need to file an updated report with the new information.

This means that if the company changes its name or address, you will have thirty days to report the change or face fines for noncompliance.

This also means that if the information for any beneficial owner changes, you will only have 30 days to report the change. Again, this means that each time there is a new beneficial owner such as hiring a new senior officer. Someone gets married and changes their name. Any of the beneficial owners move addresses and each time any beneficial owner gets a new driver's license, the company must file an updated report with the new information within 30 days of the change.

So I guess, Kyle, the only silver lining here is the, I should mention, however, the requirement to update the information will not apply to company applicants. That is correct, Jay. So let's talk for a minute about company applicants. Companies that exist prior to 2024 do not need to report any information for company applicants.
But new reporting companies formed after January 1, 2024 -- that's an important date -- must also provide reports on company applicants. Now company applicants are individuals who file documents that form entities or register them to do business in the United States.

These company applicants include the individual who did the filing, the individual who directed or instructed the filing of that documentation.

That means various service providers, such as attorneys, and CPAs, are included in the requirements and must be included in the business entities' reporting.

Again, this is something that is brand new and has never been seen in state reporting. If the company applicant filed the formation or registration document in the course of the company applicant's business, then the street address of their business may be reported at the end of the residential address. But in all other cases, the reporting company must provide the residential street address for the company applicant Reporting of company applicant information is only required for initial reporting, which means that changes to company applicant details do not need to meet, the 30-day update requirement. To get a better understanding of who exactly needs to provide their information. Let's talk a little bit about who is a beneficial owner.

A beneficial owner is defined by the act as someone with substantial control of the company or someone who owns an interest in excess of 25% of that company. It is important to note that the beneficial owner information requirement refers to real people. As opposed to an entity or trust, ownership, and control. As it's con stated in the definition of a beneficial owner under the Corporate Transparency Act, must be traced to an actual individual.

Whether or not someone owns 25% or more of a company is fairly straightforward. But the idea that whether a person has substantial influence or control is significantly murkier. So in order to help shed some light on what the government's after with the substantial control. Let's look at how they define substantial control in the act.

The government has identified three criteria that they believe define substantial control of the reporting company. The first is whether or not the individual serves as a senior officer of that entity. This will include any company presidents, CEOs, chief financial officers, general councils, or anyone else who holds any kind of similar senior position.

The next bullet they would have would be whether or not that individual has authority over the appointment or removal of any senior officer.

Or the appointment of any majority of board members or any similar governing body for the company.
And finally, as kind of a catch-all, they have that anyone who has substantial influence over any important matters of the reporting company is also included as a beneficial owner. But this begs the question as what does the federal government mean by important decisions?

So according to FINCEN, examples of important decisions as it relates to substantial control would include decisions regarding compensation, the nature and scope and activities of the business, any approval of operating budgets, any approval of any major transactions, entity changes to governing documents or the structure of the company. It is important to note that this control can also be established through board representation, ownership, and rights associated with any financial agreement or interest.

So what makes someone a beneficial owner might not always be straightforward. Ownership interest is interest by CTA definition can include equity interest, capital and profit interest, convertible instruments, options, warrants, arrangements related to voting, proprietorship interest, future conversion, or ownership interest, or any other instrument contract arrangement, understanding relationship or other mechanisms to establish ownership.

That's a broad list and it's a vague list. So the government is obviously trying to cast as wide a net as it can in order to get information on beneficial owners.

So now you probably ask, what if they just don't do it. Kyle, what happens?

Well, Jay, it's not good. The penalties for noncompliance are going to be severe. Anyone who provides false information or fails to report whether that failure is willful or through ignorance will be subject to penalties. This applies to both the initial reporting and also includes any failure to provide updated reports of any changes within the 30-day window.

Again, violations are subject to both civil fines of five hundred dollars a day up to ten thousand dollars. And criminal penalties of up to two years in prison. This means that if you fail to timely file within the 30-day window and are late by twenty days, you may be subject to a max penalty of ten thousand dollars. Now, not all trusts are going to be exempt from the reporting requirements.

While most trusts will not qualify as a reporting company based on this Corporate Transparency Act's definition, If the trust is registered with the secretary of state, it is a reporting company in its own right and must report. Additionally, if a trust owns 25% or more of a reporting company, or in some other way, has substantial control of the reporting company It is a beneficial owner and will have to report its information.
A trustor trustee fiduciary or non-fiduciary office holder, power holder, or trust beneficiary may qualify as a beneficial owner if they beneficiary own at least 25% of the entity. Or possess substantial control over it. So what does substantial control look like within a trust? The regulations outline that individuals having substantial control of a reporting company held by a trust can include an individual, including a trustee that direct or indirectly has substantial control over a reporting company based on any of the following board representation, such as serving as a member of the board, ownership and control of a majority of the voting rights or voting powers of the reporting company that are held in trust, rights associated with any financing arrangements or financial interest in a company.

Having control over one or more intermediary entities that alone or combined have substantial control over a company that must report, arrangements, including formal and informal financial or business relationships with an individual or entities acting as nominees, or as a catchall, any other contract arrangement, understanding, relationship, or otherwise, that leads them to have substantial control of making important business decisions for that reporting entity. So any individual viewed as having at least 25% of the ownership interest in a reporting company held in trust may have to report their beneficial owner information, whether or not the person directly or indirectly owns or controls an ownership interest of the reporting company through any contract arrangement, understanding, or otherwise.

This definition of control includes the authority to dispose of trust assets a beneficiary who is the sole recipient of income and principal from the trust or all of the help from the trust or an individual who is a grantor or settler with the right to revoke the trust or otherwise withdraw the trust assets. Note that an individual's overall ownership is also considered as are the various ways a person may be deemed to own an interest. Also, more than one person can qualify as a beneficial owner of a trust interest in a reporting company. So all individuals who have interests in the trust holdings and have power over it must be considered for Corporate Transparency Act reporting.

This includes certain trust stores, trustees, office holders, power holders, and beneficiaries who fall within the definition of a beneficial owner provided they possess the powers and ownership described here and provided in greater detail in the actual regulation.

Of course, all this can be complicated by legal tools and trust instruments themselves.
For example, those that limit the right to information and silent trusts. So be sure to consult with Wegman Hessler Valore to apply the CTA regulations for your unique circumstances.

So, obviously, one of the big questions with this new statute is how will the information be used.
Now the expressed goal is to enhance national security and criminal law enforcement by preventing the use of corporations and LLCs for criminal activities, such as money laundering.

And FINCEN is only authorized to disclose beneficial ownership interest information collected for two purposes.

First, to support national security intelligence and law enforcement activities. And second, to confirm beneficial ownership information in the database with financial institutions to help them comply with anti-money laundering and customer due diligence requirements.

Even though the federal government stated that it will use the CTA-reported data on a confidential basis, Finsen may disclose information stored in this new database by request in certain circumstances.
This may include requests from federal agencies engaged in national security or law enforcement activities and requests from state or local authorities authorized by a court for use in a criminal or civil investigation.
Request from a federal agency on behalf of a foreign law enforcement agency and request by financial institutions satisfy their due diligence requirements under applicable law.

Of course, aside from the confidentiality of the reporting information, There will always be concerns regarding potential breaches in cybersecurity or other leaks. So the next big question is when does all of this take effect? Thanks, Jay. The date for these things coming into effect depends on when the company is created. For new companies, specifically entities created or registered to do business in the United States on or after January 1, 2024. They must disclose their beneficial owner information details in the FINCEN reporting system within 30 days of receiving notice of their creation or registration.

They must also include any company applicant information when the beneficial owner information is reported and filed. Now please note that the FINCEN has sent out a proposed revision proposing to extend the 30-day requirement to a 90-day requirement But this will only affect companies that are created in 2024. Beginning, January 1, 2025, FINCEN has held firm so far on maintaining their 30-day calendar window in order to report Now existing companies, companies that are already existing or will be created prior to January 1, 2024.

Each of those entities will have until January 1, 2025, to file their initial beneficial owner report. And will not be required to disclose any information on company applicants. Now please note this is very important. All reporting companies will need to stay current on their reported information, both previously existing companies and later created companies are required to keep their reported information current, entities that no longer qualify for an exemption will also be required to file their beneficial owner report within thirty calendar days of the date in which they no longer meet the criteria for exemption or if during the very first year they cease to qualify. They will have until January 1, 2025, in order to file their report.

If a reporting company discovers that reported information is no longer accurate or if the ownership changes, the reporting company has only thirty days from the time it became aware or should have become aware of such inaccuracy to report the changes. In other words, ignorance is not bliss. You must keep your corporate transparency act details up to date or seek help to do so to avoid financial Lties or worse during the 30-day update window that you have. Now please note that dissolved companies and those soon to be dissolved may be included in the reporting requirements.

This is because any company that dissolved during 2023 will not be required to report. But if you wait to dissolve the company until January 1, 2024, or anytime thereafter, you will be required to report on your beneficial owner information.

Now inactive entities may be exempt, but that could change in the future. So the first thing you should do is get help updating your corporate records and minutes. Find out who all the beneficial owners are. Make sure you have proper contact information for them and that you can get in contact with them because you're they are going to have to have their information reported.

You're going to have to get their identifying documents, and they're going to have to certify that the information recorded is in fact correct. You may also want to consider dissolving any entity that you are not using and have no plans to use. And you will want to dissolve those entities before the end of 2023. As I mentioned before, starting on January 1, 2024, even if you dissolve the company at some point during 2024, you will still have to file a beneficial owner report before January 1, 2025.

You'll want to update any details on beneficial owners and others involved in the business filings. This is in preparation for a future statement, in which each of the information provided about them is accurate and true. You wanna seek expertise on business strategies as it relates to corporate structure and distribution of ownership and minimizing the exposure of taxable assets.

And finally, we heavily encourage you to schedule time today to meet with us here at Wegman Hessler Valore, to review your corporate records and your unique situation with our Corporate Transparency Act specialists. So I think what small business owners should take away from this is that this is a change in the relationship between the federal government and small businesses.

This is much more intrusive than file requirements that have been in place for years with state governments, and state entities. And as someone who frequently litigates against governmental entities, their resources are vast, and it's much better to avoid problems in the first place than to try to litigate afterward. So I would echo Kyle's recommendation to sit down a scheduled appointment to review your situation and make sure that your company is CTA compliant.

And if you would like more information for a review of your corporate documentation to make sure that you have everything in place in order to properly file or to get assistance to do so. Be sure to reach out to either Kyle or Jay or any of the business attorneys on the Wegman Hessler Valore team, and you can call us at (216) 642-3342. Again, that's (216) 642-3342. Thank you so much."

Wegman Hessler Valore specializes in business law for business leaders, applying legal discipline to solve business problems to help leaders run smarter. For over 50 years, this Cleveland law firm has provided full-service strategic legal counsel for closely held businesses, corporations, and individuals. Practice areas include: business law; litigation; corporate governance; estate planning and wealth protection; intellectual property; family law for business owners; HR and employee matters; commercial real estate; business acquisition, and more. Get in touch to learn more.

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