Corporate Transparency Act

The Corporate Transparency Act Is, Well, Opaque

You might not have read much about the Corporate Transparency Act (usually referred to as the CTA). The law, adopted by Congress on January 1, 2021, was part of a much bigger legislative package. Actually, its history is even more interesting than that, and worth mentioning before we describe the CTA and how it might affect you. Yes, you.

Congress first adopted the National Defense Authorization Act by lopsided votes in late 2020. It included $741 billion in defense spending and a number of other defense-related items. It also included the Corporate Transparency Act.

Then-President Donald Trump vetoed the Act on December 23, 2020. Was he concerned about the CTA? Apparently that was not his primary concern. He specifically mentioned the Defense Act’s requirement of renaming military installations still honoring Confederate officers. He also referred to what he called a “gift” to China and Russia. And he complained that big tech companies should be brought to heel by changes in the law. But the Corporate Transparency Act does not seem to have been on his — or much of anyone else’s — radar at the time.

What is the Corporate Transparency Act?

The CTA, simply described, mandates the principals behind virtually all small business entities to register with the federal government. The stated purpose? To provide a clearinghouse of information that the government can use to find money launderers, terrorism funders, crime kingpins and other bad people.

The devil, of course, is in the details. And the details are pretty devilish.

First issue: the definition of entities covered by the CTA. The definition is not yet final, but it looks like it will include all Limited Liability Companies (LLCs), Limited Liability Partnerships, Limited Partnerships (LPs, including Family Limited Partnerships), and closely-held corporations. Sub-chapter S companies? You bet. All are covered by the Corporate Transparency Act.

Second issue: who has to report? All “beneficial owners.” And that definition is very broad. It boils down to anyone who has management control or directly or indirectly owns more than 25% of the entity.

Next up: who gets all these reports? Not the FBI, or the NSA, or the Defense Department. There’s a 30-year-old agency under the Department of the Treasury you’ve never heard of. It’s the Financial Crimes Enforcement Network (FinCEN), and it expects to receive 30 million reports when final rules become effective. It anticipates 3 million new reports each year after that, too. They promise all that information will be protected, and it won’t be shared with anyone. Except law enforcement. And national security agencies.

Does every entity have to report? No. There are several exemptions. You aren’t on the exemption list, though. Most large companies won’t have to report. Why not? Apparently, they are more reliable.

Well that’s pretty scary

It might be, if the penalties are severe. But it’s just an administrative filing, right? And your best effort will be good enough?

No. The consequences are draconian. If you are supposed to report and you don’t, or if you file an inaccurate report, you are liable for up to 2 years in prison and a $10,000 fine. Oh, wait — there’s a get-out-of-jail-free card for anyone who corrects their own form within 90 days. But not if they point it out to you first.

The Corporate Transparency Act could be a huge problem for the 30-million-or-so entities that need to file within one year of its full effective date. It will also cause a major headache for many lawyers, accountants and financial advisers.

So when did this become effective?

Good news! It hasn’t become (fully) effective yet.

On December 7 last year, the FinCEN published its proposed rules for reporting. It promised to have finalized rules by the end of this year, and to give everyone one year to comply.

But the handwriting is on the federal regulatory wall. Expect to have to file for every LLC, FLP, corporation (including Sub-S) and other entity you might have created already. Even entities that you haven’t used in years, or possibly even those that have been closed down administratively, might have to file. And expect the filing to be a madhouse, since you’ll be in line with about 30 million others.

What does this have to do with my estate plan?

Oh, we are so happy you asked. Do you have rental real estate held in an LLC? Or maybe three LLCs, each holding a separate property? Or a partnership with your brother? Maybe a vacation cabin you own with your sister? Each of those may require you to file — as well as your brother and your sister.

And as your lawyer, we’re going to be very wary of helping you create LLCs or other entities. Why? Because we might end up being treated as the “applicant” if we help (or helped) you create the entity. That would mean we have to report, too. Not instead of you, but in addition to you. That same limitation will also apply to your accountant, your financial planner and all manner of other professionals you work with.

And many of our clients would like to reduce their public image. The Corporate Transparency Act might make that harder — or even impossible. Even if you don’t launder money, fund terrorism or even pick up nickels on the sidewalk.

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