New reporting requirement for most businesses

Article by Evans & Davis attorneys Katie MacKenzie & Landon Long

On January 1, 2024, the Corporate Transparency Act (CTA) became effective and provides new regulations for many small and medium sized businesses in the United States.  For the first time, most companies in the United States are required to file a new report with the FinCEN, a bureau of the U.S. Department of Treasury. 

This report must disclose, among other things, the identity of the owners of an entity, their addresses, their photo identification, and certain information about each business. Although the CTA only necessitates one initial filing, unless certain aspects of your business change in the future (such as certain ownership changes), some business owners are finding this reporting requirement cumbersome. For example, individuals who own several limited liability companies that may hold their residential rental properties could be responsible for reporting for each limited liability company, depending on their individual circumstances.

There are twenty-three (23) categories of exemptions that may apply to a business owner, exempting them from the filing. While the vast majority of the exemptions will not apply to most businesses, the two most common exemptions are:

1. The “Large Operating Company” exemption
2. The “Inactive Entity” exemption

Before you stop reading and assume your business qualifies for either of those two exemptions, know that the title of the exemptions, on their face, may be deceiving. 

To qualify for a “Large Operating Company” exemption from reporting, you must generally have all of the following:

1. More than twenty (20) full-time employees in the United States
2. Have an operating presence at a physical office within the United States
3. Have filed a Federal income tax return for the previous year demonstrating more than five million ($5,000,000.00) in gross receipts or sales

The “Inactive Entity Exemption” can be especially misleading, given the title. Clients may assume that if they have an entity they haven’t used in a while, or ever, they could automatically be exempt from reporting. However, in order to qualify for this exemption, a business must meet all six of the elements that follow:

1. The business must have been in existence prior to January 1, 2020
2. The business cannot be engaged in active business
3. The business cannot be owned by a non-citizen, even a small percentage
4. The business cannot have sent or received money in excess of one thousand dollars ($1,000.00) in the last twelve months
5. The business cannot currently be holding any assets
6. There cannot have been any change of ownership of the business in the last twelve months

If the business meets all six criteria, it may be exempt from reporting requirements, but one should be very careful and seek professional advice if they are not confident in their exempt status. 

We often get the question: “What if I just dissolve my business or inactive entity, do I still need to report?” The short answer is that you’d probably be required to report unless you met all six (6) elements above. 

If your business does not qualify for an exemption, you are likely going to have to report. For businesses formed before January 1, 2024, the deadline for reporting to FinCEN is January 1, 2025. Although this grace period provides clients plenty of time to become compliant, we encourage each business owner to take action sooner rather than later so they do not forget to file as the deadline approaches.  For businesses formed after January 1, 2024, but before January 1, 2025, the business has ninety (90) calendar days after formation of the business to file. 

I bet you are thinking: “Okay, what if I don’t report, what happens?” The penalties are steep for willfully failing to report. As of today, the penalties for willfully deciding not to report could result in a fine of $591 per entity, per day. If you own more than one entity, this could become very costly for your businesses. Criminal penalties could also be imposed, including up to two (2) years imprisonment and a fine of up to $10,000.00. 

For the last year and a half, our Firm has been gearing up to help our clients with these filings. There may be other professionals, such as Certified Public Accountants, who are completing these filings for their clients as well.

If you are unsure whether you qualify for an exemption or you need help reporting, we highly recommend consulting with a trusted professional to guide you through the process.