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Did you ever put off studying for a final, until the night before the final?

That’s pretty much how the planning community is feeling about the Corporate Transparency Act (CTA), which will go into effect January 1, 2024.

Congress passed the devilish law several years ago over Trump’s veto. CTA creates massive new reporting requirements impacting small businesses and anyone else that set up an LLC or other entity, for whatever purpose, whenever it was set up, no matter how old the entity. There are some exemptions, but the exemptions are generally for larger, more regulated businesses. Pretty much all business entities set up for small business (even single member LLC’s that are disregarded for tax purposes), or for non-business purposes such as investment and asset protection, will need to comply with this law. There is no exemption for the couple who owns a rental property and forms an LLC to protect against lawsuits. There is no exemption for the siblings who form an LLC to manage the family vacation home. And the penalties for willful violation are huge. There is no provision for negligence penalties, but willful violation can be punished by a fine of $500 per day, up to a maximum of $10,000, or imprisonment up to two years.

Statutory business trusts are often considered entities and may be required to report, but most trusts will not be considered reporting companies. However, where a reporting company is owned by a trust, the individual fiduciaries or power holders of that trust may be considered beneficial owners for reporting purposes.

I’ve been warning about this kind of thing since long before Trump’s veto. While statutory entities such as LLC’s and corporations have an important role in business management and estate planning for asset protection and tax avoidance, they are often overused. Occasionally I will encounter someone using an LLC for their estate planning, without even using a trust to own the LLC. One big problem with using LLC’s or other statutory entities is that they are regulated creatures of the state, and lack the privacy protection traditionally found in trusts.

Trusts are traditionally more private than state-chartered entities because they are typically arrangements between family members as settlors, fiduciaries, and/or beneficiaries. While the state may try to intrude on this relationship, and has to some extent (though not nearly as much as in the UK or other countries), such intrusion is less likely to succeed because of the high level of trust between family members. Thus, the traditional trust arrangement is an important bulwark of family power and freedom in Western society, or at least in the US.

Any “reporting companies” created in the US (or foreign companies registered to do business in the US) before January 1, 2024, have until January 1, 2025, to file their required report to the US Treasury’s Financial Crimes Enforcement Network (FinCEN). In addition to information on the reporting company itself (single member LLC’s without a TIN may need to get a unique identifier from FinCEN), including an image of the formation document, this report must include Beneficial Owner Information (BOI). A “beneficial owner” is someone who, directly or indirectly, exercises “substantial control” over the entity, or who “owns” or “controls” at least 25% of the ownership interests (defined broadly to include any equity interest, may even include something labeled as debt if convertible to equity) of the entity. There is always at least one individual with “substantial control” of the entity. 

Reporting companies formed on or after January 1, 2024, must also report identifying information on up to two “company applicants” which means the individual who filed the paperwork (or online submission) to create the entity, and the person who is primarily responsible for directing or controlling the filing, if applicable.

Every beneficial owner and company applicant must be identified with full name, date of birth, home address (or business address if in the business of entity formation), plus an identifying number and image from a government ID. (To give you an idea of the Orwellian impracticality of the authors of the legislation, the law originally required identifying information on “company applicants” for all reporting companies already in existence! Impossible, obviously.)

Under CTA, reporting companies formed after January 1, 2024, face a deadline of only 30 days to file an initial report, but under a proposed reg the deadline is extended to 90 days for the first year (companies formed after January 1, 2024, but before January 1, 2025).

Reporting companies must also report any changes to the information within 30 days.

Many questions remain about how this unwieldly bit of tyrannical nonsense can be enforced. Reporting of minors as beneficial owners is not required if parent or guardian info is reported. If parents are divorced, will the parent with a reporting company have to report info on the guardian, and should this be a subject of marital settlements? There is also uncertainty about who is not reportable as an “inheritor” of a future interest, or who exactly is reportable where a trust owns the reporting company, especially where the trustee is a corporate trustee, and whether trust protectors may be reportable. A trust may furcate powers between several trustees, and may also provide powers to other individuals. There may be no communication with these persons for decades. The list of ambiguities for reporting duty, especially in the trust-owned LLC arena, is quite extensive in professional literature but beyond the scope of this blog post.

You might want to run south, while there is no border.