Business owners beware: starting this year, individuals seeking to set up a legal entity (LLC or corporation), as well as owners of existing legal entities, should be prepared to provide additional information about the ownership of the entity to the federal government under the Corporate Transparency Act, or CTA. Failure to report could include both civil penalties as well as jail time.

Why the CTA?

Millions of legal entities (LLCs and Corporations) are set up annually. Those legal entities are set up with the Secretary of State in the state where they are formed.

Most legal entities that are set up had no need to file any additional paperwork with the federal government, other than obtaining a tax ID number through a very simple procedure. Furthermore, most states do not require the legal entities to disclose information about the people who own or control the entity.

The concern that prompted the new law was the fact that because of the federal government’s limited understanding of who owns and controls legal entities in the United States, it was ripe for use as a haven for shell companies to engage in money laundering or evading taxes or supporting terrorism or other illicit activities.

Recent events show, for example, the use of U.S. legal entities by Russian oligarchs to avoid U.S. sanctions. This lack of transparency of ownership and financial benefit prompted the CTA.

Who is exempt from reporting?

A large operating company is not subject to the reporting requirements. To qualify as such, the company must have at least 20 full-time employees and $5 million in gross receipts shown on the prior year’s federal income tax return.

There are other exemptions from reporting depending on the type of legal entity, including churches, charities, political organizations, charitable trusts and public accounting firms. Further, banks and credit unions and other similar businesses, subject to federal oversight already, also are exempt from reporting.   

Who must report?

If a legal entity is not exempt, it must report. Many small businesses in the area will not qualify for exemption. Think of the following local businesses – dry cleaners, landscapers, consultants, house cleaners, restaurants, individuals with their own entity for contract work, clothing boutiques, salons, and many more.

Many of the same entities that are required to report don’t have large legal and compliance departments that can advise on this issue. That is why it is important to seek assistance as soon as possible.

When to report?

New legal entities formed this year must report within 30 days of registration with the state. Legal entities formed before this year will need to submit their reports by the end of 2024. The duty to file also includes the duty to update as facts change, generally within 30 calendar days.

What to report? 

The exact reporting requirements are not particularly onerous.

Generally, companies must provide things like: (1) full name of business; (2) principal place of business; (3) jurisdiction of registration; (4) tax ID number.

Further, for each owner, the report must include: (1) full legal name and date of birth; (2) residential address; (3) identifying number and image from a U.S. passport or driver’s license or other government or tribal ID.

What if I don’t report?

The Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury both administers and enforces the provisions of the CTA.  As mentioned above, penalties for non-compliance can be severe and include up to two years of jail time.

The state and federal government may provide notification of CTA reporting requirements, or may have already provided notification by the time of this column’s publication.

Business owners are advised to take the notifications seriously. The main takeaway is that all business owners should consult with their attorney to determine whether they need to comply with the provisions of the CTA or whether they are subject to an exception.

And, if they must file, make it a priority.

More information can also be found at fincen.gov/boi.

Beau Ruff, a licensed attorney and certified financial planner, is the director of planning at Cornerstone Wealth Strategies, a full-service independent investment management and financial planning firm in Kennewick.