Is Your Business Ready for the Corporate Transparency Act? by Michael Kuzminski
New Rules go into effect 1-1-2024
Significant new national reporting obligations are in store for business entities across the United States due to the implementation of the federal Corporate Transparency Act (the “Act”). On January 1, 2024, after years of policy review and rulemaking, the Act goes into effect nationwide, establishing wide-reaching reporting obligations for many, if not most, small business entities across the United States. The Act requires certain business entities to report information about the owners of the business, termed the “beneficial owners” under the Act, to the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Failure to report can result in criminal penalties, including fines and imprisonment.
The Act was adopted by Congress during the Trump administration over President Trump’s veto. The main purpose of the Act is to establish a central database of beneficial owners of corporations, nonprofit corporations, limited liability companies (“LLCs”), arguably some forms of partnerships, and possibly similar entities that file documents with a state’s Secretary of State or similar office, such as the Division of Corporations and Commercial Code in Utah. The information in the database will be available to law enforcement, but not the public, in an effort to provide proper authorities with information regarding the ownership of such entities. Similar laws exist in the European Union, which has been complaining for years that the United States’ failure to require the disclosure of beneficial owners results in anonymous U.S. shell companies being able to shield the identities of their owners from the U.S. government and law enforcement. The Act is Congress’s attempt to address these complaints.
After much delay, on September 29, 2022, FinCEN adopted final rules to implement the beneficial ownership reporting requirements of the Act. Rather frustratingly, however, reporting forms and methodology are still being finalized today. What is known is the Act currently requires, with some important exceptions, that all U.S. registered corporations, nonprofit corporations, LLCs, arguably some partnerships, and similar entities report beneficial ownership information to FinCEN. These “reporting entities” must provide the names, birthdates, addresses, and identification documents of individuals who own at least a 25% equity stake in the entity or exercise “substantial control” over the entity. In Colorado, most business entities that file documents with the Colorado Secretary of State will be considered a reporting entity under the Act, and are therefore subject to the Act’s reporting requirements.
The factors used to determine whether an individual is deemed to have direct or indirect ownership of a reporting entity are broad, and may arise from a contract, agreement, arrangement, relationship, understanding, or otherwise. The factors used to determine if an individual exercises substantial control over a reporting entity are also broad, and include: holding a senior management position; having authority over the appointment or removal of senior management; directing, determining, or having substantial influence over decisions made by a reporting entity; or (rather generically) whether an individual has any other form of substantial control over a reporting entity.
There are 23 exceptions to the reporting entity requirements that can be found in a simple internet search, most of which do not apply to most small businesses. Of the 23 exceptions, the ones potentially most likely to apply to small businesses include: tax-exempt entities; larger operating companies (entities with 20 or more employees and $5 million in gross annual receipts); and inactive entities (an entity that (1) existed on or before January 1, 2020, (2) is not engaged in active business, (3) is not owned by a foreign person, (4) has not sent or received more than $1,000 in the prior 12 months, and (5) does not hold any type of assets).
Unless an entity is exempt, each reporting entity must file a report with FinCEN disclosing each beneficial owner’s name, birthdate, residential or business street address, and unique identifying number from an identification document. All non-exempt reporting entities formed on or after January 1, 2024, must submit a beneficial ownership report to FinCEN within 30 days after formation. Existing non-exempt entities formed before January 1, 2024, must submit a beneficial ownership report to FinCEN by January 1, 2025. Any change to a previously submitted report (including with respect to beneficial ownership, substantial control, or exemption status) must also be reported to FinCEN by submitting an amended filing within 30 days of the change.
Reporting entities will be required to submit the required information via a standardized form expected to be available on FinCEN’s website by January 1, 2024. Reports cannot be filed before then. FinCEN’s website is a work in progress, but as of this writing includes some useful information, particularly the FAQ section, which can be found at:
The Colorado Secretary of State is reportedly working to provide links on its website to assist Colorado entities with filing their beneficial ownership reports, but as of this writing no such links appear to be available. If and when the Colorado Secretary of State has updated its website with useful links to FinCEN filing information, the information should be available at:
The Act establishes civil and criminal penalties for individuals who “willfully provide, or attempt to provide, false or fraudulent beneficial ownership information” or who “willfully fail to report complete or updated beneficial ownership information.” Willful failures to report complete or updated beneficial ownership information are punishable by civil penalties of up to $500 per day and, in certain cases, criminal penalties of up to $10,000, two years’ imprisonment, or both. Nobody yet knows how stringently these penalties will be enforced, but because of their severity it is strongly recommended that non-exempt reporting entities comply with the filing requirements and deadlines outlined above.
Because of FinCEN’s disclosure requirements for parties that assist businesses with filing their entity documents, beginning January 1, 2024, Dufford Waldeck will no longer file documents for non-exempt reporting entities with the Colorado Secretary of State or any similar agencies. Dufford Waldeck will also be unable to file beneficial ownership reports with FinCEN. Dufford Waldeck will, however, continue to provide advice regarding any such filings and reports. The main difference will be that clients will complete the actual filings and reports themselves.
In summary, most small business entities in Colorado and elsewhere formed before January 1, 2024, will be required to file a beneficial ownership report with FinCEN by January 1, 2025, unless otherwise exempt. Most small business entities formed in Colorado and elsewhere on or after January 1, 2024, will need to file a beneficial ownership report with FinCEN within 30 days after formation, unless otherwise exempt.
The attorneys at Dufford Waldeck can provide advice regarding these filings.