Act I: The Masquerade Begins
Historically, the U.S. corporate landscape resembled a grand masquerade ball. Behind masks of "LLCs" and shadowy subsidiaries, some took to financial mischief ranging from money laundering to downright fraudulent enterprises. In a move to lift these veils, Congress enacted the Corporate Transparency Act (CTA) in January 2021, a part of the National Defense Authorization Act, aiming to reveal the beneficial owners of an estimated 33 million corporate entities.
Act II: The Dancers and the Wallflowers
Under the CTA, corporations, LLCs, partnerships, trusts, and similar entities are now required to disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). This rule mandates transparency, forcing attendees of the financial masquerade to wear name tags displaying their identity if they have more than 25% ownership or exercise substantial control in a reporting company that is registered with the secretary of state or similar office. By including those who exert “substantial control,” the CTA seeks to unmask senior company officers, directors, managers, trustees, and trust protectors, all as potential individuals whose names may not make the cap table but who might still pull significant corporate strings.
Congress, still unsatisfied with the level of transparency, decided to illuminate even the dimmest corners of the ballroom by also requiring the disclosure of “company applicants,” those who file formation documents with state authorities for the reporting company (e.g., accountants and lawyers). Fortunately, this requirement only applies to those reporting companies created in 2024 and after.
However, not all are thrust into the spotlight. There are 23 exemptions, including nonprofits, banks, credit unions, publicly traded companies, and “large operating companies” which are already monitored by other regulatory bodies and are allowed to continue their operations without these new disclosures. Most small businesses and other entities must comply.
Act III: Compliance Choreography
The compliance process resembles a complex dance, guided by an ensemble of lawyers, accountants, and advisors helping business owners navigate the new regulations.
Entities existing before 2024 must file their initial reports by January 1, 2025. Entities created in 2024 will have 90 days to waltz in their initial report. Those stepping onto the stage beginning in 2025 and after, or for any changes to existing beneficial owners, they will have only 30 days to report.
Personal information of each “beneficial owner” and “company applicant” includes their full legal name, date of birth, residential address, and an identification number from a valid driver’s license, passport, or other state-issued identification (ID), along with a copy of the ID document.
The penalties for missing a step are severe, including fines of $500/day, up to $10,000, and potential imprisonment for up to two years.
Act IV: A Twist in the Tale
A significant subplot unfolded in Alabama this past March, where a federal district court deemed the CTA unconstitutional, arguing Congress overstepped in mandating personal stakeholder disclosures to FinCEN. This ruling currently applies only to the plaintiffs, pending an appeal by the DOJ, which is confident that it has rehearsed this dance well. In the meantime, the CTA's requirements are still active for now.
Epilogue: The Curtain Call
The Corporate Transparency Act stands as a transformative regulation in the U.S. corporate scene. As the corporate world awaits the ruling of the higher courts, the true impact of this legislation will unfold, determining if the Act can indeed unmask those hidden behind corporate veils or if the bi-partisan bill itself is a huge overstep of congressional authority.
Until the legal pirouettes subside, be prepared to remove your mask upon entry. The price of anonymity just became far more costly.
As always, be sure to consult with your own tax and legal advisors prior to acting on any information set forth herein.
Author:
|
Lalit Kundani, Esq. Bridge Law LLP |
Lalit is the managing partner of Bridge Law’s award-winning Trust & Estate Planning group. He focuses his practice on Tax and Advanced Estate Planning Strategies. His clients include high-net-worth and ultra-high-net-worth individuals, judges, public officials, fellow lawyers, physicians, actors, venture capitalists, and business owners. He earned his law degree from UC Berkeley School of Law and his undergraduate degree from University of California, Los Angeles.
Bridge Law LLP is not affiliated with First American Trust, FSB or its affiliates. The information provided is intended for informational purposes only and should not be considered estate planning advice. Please consult an estate planning professional, financial advisor, and/or tax advisor for additional guidance.
First American Trust, FSB, and its affiliates do not provide tax, legal or accounting advice. Any such content provided herein has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal or accounting adviser(s) before engaging in any transaction.
