Coming January 2024 – the Corporate Transparency Act: What it is and what the real estate industry needs to know
Small business owners of legal entities, new or existing, that are part of the real estate industry need to be aware of the Corporate Transparency Act (the “CTA”), a new federal law regarding reporting requirements that takes effect Jan. 1, 2024.
The CTA will require broad categories of domestic or foreign legal entities created or doing business in the U.S. to file reports on themselves, their beneficial owners and company applicants.
What is the CTA?
The CTA was created to combat terrorism, money laundering, tax abuse and other financial crimes and seeks to fill in the beneficial ownership gap present in existing U.S. anti-money laundering laws.
The CTA seeks to resolve the beneficial ownership gap by requiring entities to electronically submit with FinCEN information on all of the direct or indirect beneficial owners of the entity.
What Entities are Required to Report?
The CTA requires certain existing and new domestic and foreign corporations, LLCs, LLPs, LLLPs, most limited partnerships and other business entities, including any entity that is created or registers by filing a document with the Secretary of State or a similar state agency (each a “Reporting Company”), to report certain Beneficial Owner Information (“BOI”). General partnerships, sole proprietorships, common law trusts and any entity that does not file with the Secretary of State’s office are not considered Reporting Companies.
The CTA, however, excludes 23 types of entities that may fall under the definition of a Reporting Company, so business owners are encouraged to review the CTA to determine if their entity qualifies for an exception(s). Many financial institutions (such as banks, credit unions, broker/dealers, investment companies, etc.), insurance companies, tax-exempt entities (e.g., 501(c)(3), etc.), governmental authorities and “large operating companies,” defined as companies that employ more than 20 full-time employees operating at a physical office in the U.S. and having a taxable income of more than $5 million gross receipts or sales, fall within one of the 23 exceptions.
After considering the exceptions to the Reporting Company definition, which then may be subject to further conditions and disqualifications, the CTA is focused primarily on small, closely held entities.
Who is Considered a Beneficial Owner?
Beneficial owners are individuals that, directly or indirectly, either exercise substantial control over the company or own or control at least 25% of the ownership in terms of such entity. This can include multiple individuals; there is no maximum number. Substantial control means those individuals holding positions or exercising authority having ability to renew or appoint senior officers or board of directors, having substantial influence over important decisions made by the company (business, finance, structure, etc.), and other substantial control over the company.
For a trust, ownership interests may include trustees with authority to dispose of assets, beneficiaries who are sole recipients of income and principal or can denote distribution of assets, and grantees with right to revoke trusts or withdraw assets. Beneficial owners are not individuals that are acting on behalf of another (nominee, intermediary, custodian, etc.), minors, future unvested interest holders through inheritance, employees acting solely as an employee and not as a senior officer, or creditors.
What Information Needs to be Reported?
Reporting Companies will report the BOI, which includes the Beneficial Owner’s legal name and birthdate; residential address; and universal identification photograph from a passport or driver’s license. The obligation to report the BOI is an ongoing requirement, which means if the Beneficial Owner changes its name or its residential address, the BOI needs to be updated within 30 days to FinCEN.
Once the BOI of an individual is reported with FinCEN, a single identifier will be issued to the individual, which can be used for purposes of subsequent BOI reporting for other reporting companies in lieu of resubmitting the required personal information. Additionally, the individual or individuals who participated in the entity’s formation or registration will be required to report similar information, as the company applicant.
The BOI filed with FinCEN will not be available to the public but will be disclosed only to federal, state and local law enforcement agencies in national security, intelligence and civil and criminal law enforcement; the Department of Treasury in connection with tax administration; and with the Reporting Company’s consent, to financial institutions in connection with their anti-money laundering compliance (e.g., know-your-customer) obligations.
When are Reporting Companies Required to Report?
New entities created on or after Jan. 1, 2024, will need to report the information required by the CTA within 30 days after the entity is formed; however, a proposed amendment (yet to be adopted) may change this deadline to 90 days. Existing entities formed prior to Jan. 1, 2024, will need to report the information required by the CTA no later than Jan. 1, 2025.
Potential Impacts of the CTA
Many entities involved in the real estate industry may have to file the BOI with FinCEN. For example, if a homeowner association does not fall within the tax exemption category, or if an entity is a business trust that files with the state, each may have to report to FinCEN. The BOI has to come from an individual – if an entity owns 50% of a Reporting Company, the reporting requirements fall to the beneficial owners of the entity owning 50% of the Reporting Company.
Any individual that willfully provides, or attempts to provide, false or fraudulent BOI, or willfully fails to report or update BOI to FinCEN may be liable for a civil monetary penalty up to $500 per day that the violation continues, and for a criminal penalty of a fine up to $10,000 and/or imprisonment for up to two years.
The CTA will change the way entities are formed, creates ongoing compliance obligations and will significantly impact liability for prior noncompliance specific to mergers and acquisitions.
While owners of companies are not required to have an attorney file the BOI with FinCEN, doing so may help navigate the complex rules and assist in mitigation or avoidance of serious penalties.
This article is an overview of the CTA, does not constitute legal advice and does not provide an in-depth, entity specific discussion. Please contact the business law attorneys at Monroe Moxness Berg PA with questions relating to the CTA.
This article was published in REjournals.
