Re: Corporate Transparency Act – Immediate Action Required

Greetings Clients and Other Friends:

I’m writing today to alert you of a new federal law, called the “Corporate Transparency Act” (“CTA”), that now requires almost all LLC’s, corporations, limited partnerships, and other closely held entities to report the identities of their significant owners and managers to the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) by January 1, 2025. If you have ownership or control of a business entity and you have not already submitted your information, this is not something that can be ignored.

Who Must Report.  Under the CTA, all “reporting companies” are now required to file Beneficial Ownership Information Reports (“BOIRs”) with FinCEN, providing information about the companies and their “beneficial owners” – the humans behind the companies. While certain large (including publicly traded) and tax-exempt companies are exempt, this new law affects virtually all small businesses created by filing a form with the Secretary of State of any state. Even if an entity has only one owner and that entity is ignored for federal income tax purposes (such as a single-member LLC), that entity still must file reports with FinCEN.

If you have 25% or more ownership interest in a closely held entity, such as an LLC, corporation, or limited partnership, or if you exert significant control over any such entity (which might include being an officer, director, manager, or chief financial officer), then you are required to provide your name, birthdate, address, and copy of your government-issued identification (such as your driver's license or passport) to the company to facilitate its report.

If one spouse owns 25% or more of a business, the other spouse may also have a legal interest in the business under community property laws. This means that both spouses may need to be reported as beneficial owners, even if only one is actively involved in the business.

It is the responsibility of the reporting company and its senior officers to identify its beneficial owners[1], and to report those individuals to FinCEN. Each reporting company is required to certify that its report is true, correct, and complete.

 [1] For companies formed on or after January 1, 2024, the reporting company must also identify its “company applicants” – i.e., the individual who directly files the document that creates or registers the company, and, if more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing. For example, both a legal assistant who submits the registration forms to the Secretary of State as well as his or her supervising attorney would be “company applicants.”

Deadline for Compliance.  For entities that existed prior to January 1, 2024, their initial reports are due by January 1, 2025. For entities created in 2024, their initial reports are due within 90 days from the creation of the entity. For entities created on or after January 1, 2025, the report is due within 30 days. As of now, there are no extensions available. There are stiff civil and criminal penalties for failing to file ($500 per day, up to $10,000, and up to two (2) years in jail).

Penalties.  Both individuals and the reporting company can be held liable for willful violations. This can include not only an individual who files false information with FinCEN, but also anyone who willfully provides the filer with false information to report. Both individuals and the reporting may also be liable for willfully failing to report complete or updated beneficial ownership information; in such circumstances, individuals can be held liable if they either cause the failure or are a senior officer at the company at the time of the failure.

Trust Reporting.  While a trust is not a reporting company, the trustee of the trust can be a beneficial owner of a reporting company if the trust owns 25% or more of the company, or if the trustee has “substantial control” over the company. If multiple trusts own interests in the reporting company, the interests would be aggregated so that if the same trustee is serving as such for each of the ownership trusts, these interests would be aggregated to determine the 25% ownership. To determine if a trustee has “substantial control” over the company, the particular facts and circumstances relating to the trust must be reviewed to “determine whether specific trustees, beneficiaries, grantors, settlors, and other individuals with roles in a particular trust are beneficial owners of a reporting company whose ownership interests are held through that trust.” (FinCEN FAQ D.15.)

In addition to the trustee, the trust’s beneficiaries’ identifying information may also be required. The reporting company must report the identity of any trust beneficiary who:

· is a sole permissible distribute of the trust’s income or principal, whether discretionary or mandatory, including the surviving spouse-beneficiary of a Bypass or Marital (QTIP) Trust; or

· holds a lifetime power of appointment over the trust assets; or

· holds the power to remove and replace the trustee who has substantial control of the reporting company or who has authority to dispose of trust assets.

 If multiple trusts own interests in the reporting company, and the beneficiary of each of those trusts is the same, those interests would be aggregated to determine the 25% ownership of a trust beneficiary.

Other parties to a trust may be “beneficial owners” as well, such as:

· the settlor of a revocable trust;

· the settlor of an irrevocable trust who holds a swap power;

· a trust protector who holds the power to remove and replace a trustee with substantial control over the reporting company;

· a trust director who holds the power to direct distribution of trust assets; and

· a trust investment advisor who holds the power to dispose of trust assets.

Subsequent Reporting.  There is no annual reporting requirement after the initial report is made. However, if there is any change to the required information about the company or its beneficial owners – even just their address – the reporting company must file an updated report no later than 30 days after the date of the change. These events include:

· Any change to the information reported for the reporting company, such as registering a new business name;

· A change in beneficial owners, such as a new CEO, or a transfer that changes who meets the ownership interested threshold of 25%; and

· Any change to a beneficial owner’s name, address, or unique identifying number previously provided to FinCEN. If a beneficial owner obtained a new driver’s license or other identifying document that includes a name, address, or identifying number, the reporting company also would have to file an updated beneficial ownership information report with FinCEN, including an image of the new identifying document.

What to Do Now.  Given the impending January 1 deadline, if you are an officer, director, manager, chief financial, or other active participant in any privately-owned corporation, partnership, or LLC, you should reach out to the business’ shareholders, partners, or members now to obtain their identifying information – full name, birthdate, address, and copy of their government-issued identification (such as driver’s license or passport) – and submit the BOIR report as soon as possible. Similarly, if you or your spouse own a 25% interest in or exert control over a privately-owned entity, you should contact the business management immediately and provide them with the information they need to submit the report in time for the deadline.

How to Report.  Information about Beneficial Ownership Information reporting is available at FinCEN’s website: https://www.fincen.gov.boi. You can self-report by following the links on that webpage. Within that website is a link to the “Small Entity Compliance Guide”, which can walk you through the reporting requirements. However, if you have any concerns about whether you will be reporting correctly, or need assistance in submitting the report online, you may wish to request assistance from me.

My Role.  I am happy to help in any way I can. However, I will not undertake to prepare the Beneficial Ownership Information Report unless you separately engage me to do so. If you do engage my services for this task, I will not undertake to assemble a list of your privately-held entities for you. Because you may have formed entities years (even decades) ago, I may not have accessible records to identify all such entities. Also, you may have had other advisers form entities of which I am not aware. You may have even formed entities on your own. As a result, I will be relying upon you to provide me with the list of entities and contact information for each entity’s senior manager. From there, once engaged for the task, we will begin the process of determining whether you or someone else will assume responsibility for the reporting.

One Final Comment: The Corporate Transparency Act has been challenged on constitutional grounds by a number of people and organizations. On March 1, 2024, the U.S. District Court for the Northern District of Alabama issued its ruling in National Small Business United v. Yellen, finding in favor of the plaintiffs and prohibiting FinCEN from enforcing the CTA against them (but only them). The government defendants are appealing the district court’s ruling to the U.S. Court of Appeals for the Eleventh Circuit. The appeals process is currently ongoing, with oral arguments heard on September 27, 2024. In addition to the lawsuits challenging the CTA, legislation was recently introduced to repeal the CTA, posing additional uncertainty to the fate of the CTA in the wake of the ruling in National Small Business United.

In the meantime, the FinCEN reporting requirement and failure-to-report penalties remain in place and it is uncertain whether a final ruling on the constitutionality of the CTA, or its repeal, will take place before the January 1, 2025 deadline. For this reason, I nonetheless recommend that you now gather the information and identification documents so you (or we) are ready to submit your report before January 1 of the coming year.

If you think you will need my assistance, please contact me as soon as possible, as I expect that many of my clients will be contacting me as the deadline approaches, and I want to make sure I am able to service everyone’s needs.

If you have any questions, please call.

Very Respectfully,

J. Alan Fagan, CEO

The Mattox Group