On January 1, 2024, the Corporate Transparency Act (CTA) became effective. Every new corporation, limited liability company (LLC), limited partnership and any entity whose existence is created by a filing with a Secretary of State in any state must file with the Financial Crimes Enforcement Network (FinCEN). More than 32 million entities are estimated to be affected and required to file.
This filing will require the business name, current address, state of information and tax identification number for the entity. The filing will also require the name, birth date, address and a copy of a government-issued photo ID, such as a driver’s license or passport, of every direct and indirect owner. Each of the 32 million or more entities will almost certainly involve a filing by more than one person.
The inclusion of this information for indirect owners creates both complexity and a very broad range of who qualifies as an indirect owner requiring filing of individual otherwise personal information. Penalties for failure to comply are high. (Read more about the CTA in my article Are You Ready for the Corporate Transparency Act?)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
On March 1, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional. The CTA is already deceptively complicated as it applies to both direct ownership and to “beneficial ownership.” The plaintiffs in the Alabama case are members of the National Small Business Association (NSBA). The ruling would appear directly applicable to the members of the NSBA to delay or excuse their filing requirements depending upon the government’s reply. This decision may appear to indirectly lessen the requirement for compliance in the short term to us all. Only time will tell if the federal government will appeal, or if the CTA is revised.
Here are some of the concerns about the CTA:
Private information is required to be filed. One of the issues about the CTA is the requirement to file or provide personal information, such as a copy of a driver’s license or passport, home address and Social Security number. This is always a concern because of the proliferation of identity theft. We are all worried about keeping our personal, private information safe, particularly of this type.
Short deadline. Changes to beneficiaries must be reported within a very short timeframe. For example, if a minor turns 18 and is an owner or inheritor of shares of a company, then this change must be reported within 30 days. The minor turning 18 may not even have knowledge of this inheritance within 30 days. That report is to include personal data such as Social Security number and driver’s license. Name changes from marriages and even moving to a new home would trigger similar updates.
Compliance requirements. Compliance with the CTA can impose a significant burden on small businesses. Small businesses are actually the target for the CTA, and large and public businesses are exempt. This is the opposite for securities filings that impose more complex rules for large and publicly traded companies with exemptions for small businesses.
Heavy penalties for failure to comply. Penalties are severe for failure to comply. The CTA divides penalties into three categories: unknowing violation, willful failures and violations in pursuit or as part of another federally illegal act. Penalties include a $500 daily civil penalty, fines of up to $10,000 and a possible two-year prison sentence for those that do not provide or update beneficial ownership information with FinCEN. Knowingly failing to comply may trigger a $500 per day civil penalty, $250,000 in fines and a five-year federal prison sentence.
These issues are in addition to the constitutional issues addressed by the court, such as whether there was the power to issue the CTA. Part of that argument is whether the federal Congress can regulate intrastate commerce or only interstate commerce.
That said, the ruling appears by its terms to affect only CTA compliance and filing requirements for members of the NSBA. The CTA has a much broader reach than that. Note that law firms and other professionals that form business entities may have an obligation to file under the CTA. The CTA itself requires study and examination to understand the compliance requirements. Moreover, the severe penalties for failure to comply warrant careful consideration.
With all of that in mind, consider using your best efforts to continue to comply with the CTA requirements unless, or until, more definitive guidance becomes available.
Related Content
-
Ten Cheapest Places to Live in TexasProperty Tax Looking for a cheap place to live in Texas? Look no further. These counties have the lowest property tax bills in the Lone Star State.
-
AI Is Missing the Wisdom of Older Adults: What It Means for YouAI will increasingly affect your healthcare and finances, but young workers are primarily designing the systems and getting most of the jobs.
-
The Three C's to Financial Success: A Financial Planner's Guide to Build WealthConsistency, commitment and confidence in your chosen strategy are more critical to your financial success than finding the 'perfect' financial plan.
-
A Financial Adviser's Guide to Solving Your Retirement Puzzle: Five Key PiecesIf retirement's a puzzle you're struggling with, try answering these five questions. The answers will guide you toward a solution.
-
You're Close to Retirement and Cashed Out: How Do You Get Back In?If you've been scared into an all-cash position, it's wise to consider reinvesting your money in the markets. Here's how a financial planner recommends you can get back in the saddle.
-
After the Disaster: An Expert's Guide to Deciding Whether to Rebuild or RelocateHomeowners hit by disaster must weigh the emotional desire to rebuild against the financial realities of insurance coverage, unexpected costs and future risk.
-
A Financial Expert's Tips for Lending Money to Family and FriendsWhat starts as a lifeline can turn into a minefield if the borrower ghosts the lender. Following these three steps can help you avoid family feuds over funds.
-
What the HECM? Combine It With a QLAC and See What HappensCombining a reverse mortgage known as a HECM with a QLAC (qualifying longevity annuity contract) can provide longevity protection, tax savings and liquidity for unplanned expenses.
-
721 UPREIT DSTs: Real Estate Investing Expert Explores the Hidden RisksPotential investors need to understand the crucial distinction between a REIT's option to buy a Delaware statutory trust's property and its obligation.
-
I'm an Insurance Expert: Yes, You Need Life Insurance Even if the Kids Are Grown and the House Is Paid OffLife insurance isn't about you. It's about providing for loved ones and covering expenses after you're gone. Here are five key reasons to have it.
