Startup and small business owners take note: if your company has 20 or fewer full-time employees and gross annual sales of less than $5 million, there’s a new federal filing requirement that you need to know about.
Next year a key component of the Corporate Transparency Act comes into effect, requiring companies to report to the U.S. Treasury Department the names of their “beneficial owners.” The primary goal of the rules is to bring transparency to anonymous shell companies used to hide money laundering, finance terrorism and engage in other illegal activities.
Congress passed the legislation in 2021 and the reporting requirements are estimated to apply to some 30 million entities. The data will reside in a confidential database kept by Treasury’s Financial Crimes Enforcement Network, or FinCEN. Law enforcement will have access to the information in the pursuit of criminals.
The U.S., it appears, is overdue for shining some light into shady business dealings. Last year the nation was ranked “the most secretive financial jurisdiction in the world,” according to the 2022 Financial Secrecy Index.
The new rules could be a start to improving that standing.
“A lot of people either forget or don’t realize that the U.K. and other countries already have similar types of information gathering, so the U.S. is just catching up,” said Gary Kocher, an attorney with Seattle’s K&L Gates.
Reporting companies include most entities that register with a state, such as limited liability companies (LLCs), limited partnerships and corporations. There are 23 categories of exemptions, including larger businesses, nonprofits, banks and credit unions; many of these are excluded because their ownership information is captured through other means.
At a high level, the reporting requirements are simple, but for some individuals and organizations it gets tricky. Here’s a summary of how the rules work:
- Companies that form in 2024 will have 90 days to report essential information on their beneficial owners. Existing companies will have until Jan. 1, 2025 to report. (Update: Eighty members of the House and Senate sent a letter this week to Secretary of the Treasury Janet Yellen and FinCEN Director Andrea Gacki requesting they delay by one year the implementation of the rules.)
- Companies must report their beneficial owners, which includes individuals in leadership who have “substantial control” over a company or individuals who own or control at least 25% of the company.
- For each beneficial owner, the companies must provide their name, birth date, current residential address, and a unique identifying number from a document such as a driver’s license or passport, plus a copy of that document.
- When that information changes — someone moves, is hired or fired, etc. — the company has 30 days to file an update.
- Non-compliance can trigger penalties of $500 per day up to a maximum of $10,000, and criminal penalties of up to two years’ imprisonment. However, enforcement is focused on “willful violations,” as opposed to unintended filing errors and those making an effort to comply.
Supporters tout the Corporate Transparency Act as important to safeguarding national security.
Sen. Sherrod Brown of Ohio hailed its passage, saying in a statement that it “will provide new tools to crack down on opioid and human traffickers, terrorists, weapons dealers, and others who use anonymous shell companies to launder the proceeds of their crimes, and on big banks that enable criminals or have lax anti-money laundering compliance programs.”
Critics are less sure of its likely impact.
“I think mostly it’s going to catch people who have small businesses who didn’t know about filing obligations or forgot about them or couldn’t afford lawyers to get advice on how to comply,” said Joseph Wallin, an attorney with Seattle’s Carney Badley Spellman.
“I think it’s far more likely to catch those people than oligarchs and money launderers,” he added. “But we’ll see.”
The rules could get challenging for people involved with multiple entities, who perhaps own property through LLCs or have significant investments in multiple companies. It could also be unclear in some circumstances as to who qualifies as a beneficial owner.
But the issue that seems to draw the biggest worries is the requirement for filing updates within 30 days of a change.
Most reporting requirements occur on an annual basis, said Aaron Finn, CEO of SingleFile, a Seattle startup that automates the process of managing and submitting corporate filings. But under these requirements, he said, if a beneficial owner moves, if their driver’s license or passport expires, or if a businesses’ revenue goes above or below $5 million, that triggers a filing.
The Corporate Transparency Act, Finn said, “is unique in the fact that [filing] doesn’t just happen on a regular basis, that it happens at any change. And so what we believe is technology is really going to have to be the one that solves this monitoring.”
SingleFile is preparing a compliance tool that aims to automatically monitor a customer’s administrative and other information to detect changes in addresses and leadership positions and trigger a prompt for an update. The Treasury Department has yet to finalize some important pieces on its end, so SingleFile and others are not yet able to complete their products.
And there will likely be tweaks and clarifications by regulators in how the reporting rules work.
“It’s going to be a learning process,” said Wallin. “People are probably going to miss some things, people are going to forget… There’s obviously going to be things that happen during the rollout of this that take people by surprise.”
