$500 PER DAY PENALTY – 90 DAYS TO FILE FOR ENTITIES
EFFECTIVE JANUARY 1, 2024
The purpose of this post is to review the new Corporate Transparency Act (“CTA”) and its possible impact on you.
- Purpose.
Congress enacted the CTA in 2021 as part of the National Defense Authorization Act. The federal government wants to force entities to thoroughly report ownership and control information to help pursue financial terrorists and other evil doers.
2. Entities Impacted.
The CTA applies to any entity which must file or register with the California Secretary of State (or follow a similar process in another state). This includes:
(i) corporations (whether “C” or “S”);
(ii) limited (not general) partnerships; and
(iii) limited liability companies (“LLCs”).
There are special rules for foreign entities. If you wish to discuss those, please let us know.
3. Government Agency.
The Financial Crimes Enforcement Network (FinCEN) will enforce the CTA. FinCEN, like the IRS, is a part of the U.S. Department of Treasury.
However, the IRS is not involved with the CTA.
Compare the Foreign Bank Account Report (FinCEN 114). Those forms are:
(i) filed with FinCEN; but
(ii) enforced by the IRS.
4. Filing Deadlines.
There are three separate filing deadlines. Entities formed or registered:
(i) before January 1, 2024, have until January 1, 2025, to file with FinCEN.
(ii) on or after January 1, 2024, and before January 1, 2025, have 90 calendar days after receiving actual or public notice that their company’s creation or registration is effective to file with FinCEN.
(iii) on or after January 1, 2025, will have 30 calendar days after receiving actual or public notice that their company’s creation or registration is effective to file with FinCEN.
5. Potential Reports.
There are potentially three categories of information to be reported. That information is about the:
(1) Reporting company (entity) itself.
(2) Reporting company’s beneficial owners who (i) directly or indirectly own 25% or more of the reporting company (e.g., shareholders, members, partners in limited partnerships); and/or (ii) directly or indirectly exercise substantial control over the reporting company (e.g., officers, directors, other key decision makers).
(3) Company applicant or applicants (people who help the new entity file or register with the Secretary of State).
6. Special Rules For Company Applicants.
Only reporting companies created or registered on or after January 1, 2024, must identify company applicants.
A reporting company must report at least one company applicant. Potentially two people could be company applicants:
(1) A direct filer (in every situation).
(2) A person who directs or controls the filing action (not present in every situation).
Example from our firm: a paralegal may be the direct filer and one of the lawyers may be the person who directs the filing.
7. The Report’s Format.
FinCEN released the reporting form on its website on January 1, 2024.
8. Penalties.
A late filed or incorrect report can, in theory, cause a fine of up to $500 per day.
If you willfully fail to file or willfully report incorrect information, the penalty can be $500 per day up to $10,000, plus up to two years in jail.
9. Trusts.
9.1. Estate Planning.
A normal estate planning trust need not register with the Secretary of State and is, therefore, not an entity required to file a report under the CTA. That is true whether the trust is:
(i) a completed gift or an incomplete gift;
(ii) grantor trust (disregarded for income tax purposes) or a complex trust;
(iii) a trust resident in (or formed under the laws of) California or another state.
9.2. Business Trusts.
Few “business trusts” are formed and registered in California. If a business trust, e.g., a Delaware business trust, does business or owns property in California, it must register with the Secretary of State and, therefore, comply with the CTA.
9.3. Complications.
Estate planning trusts often own an interest in an entity (corporation, limited partnership or LLC). Common examples include:
(i) a children’s trust owning:
- a limited partnership interest in a family limited partnership; and
- non-voting stock in the parents’ “S” corporation.
(ii) a marital (also “QTIP”) and bypass (A.K.A. “exemption” or “decedent’s”) trust owning an interest in a family business (corporation, limited partnership or LLC).
When that is the case, it is necessary to:
(i) read the trust;
(ii) understand its ownership of the business;
(iii) determine its control over the business; and
(iv) confirm the beneficiaries.
10. Responsibility.
10.1. New Entities.
For brand new entities we cannot specify a fee at this time, however, for a single owner entity, the additional cost might be between $500 to $1500.
You must decide regarding a new entity quickly because CTA compliance must occur within 90 days of creation or registration.
10.2. Existing Entities.
CTA reports for existing (before January 1, 2024) entities are due January 1, 2025.
You must decide how to handle reporting for existing entities.
Will you handle it on your own?
If you want someone else to handle the reporting for existing entities, it is not yet clear which people and/or businesses will agree to do that.
Of course, we will, if asked, examine the situation and help. However, we may not be able to give you a fixed fee. We will, in many situations, be forced to guess as to the amount of time that will be involved. The hourly rates of lawyers doing the work range between $500.00 and $750.00 per hour.
Some accounting firms may be glad to help you with the reporting for existing entities. Other accountants may be concerned about the:
(i) potential liability;
(ii) difficulty understanding a poorly written law for which there are still many unanswered questions; and/or
(iii) warnings from their malpractice carriers that handling CTA compliance may constitute the unlawful practice of law, as a result of which their policies will not cover their actions.
Perhaps some of the wealth management firms and/or corporate filing services will offer CTA compliance services. It is simply too soon to tell.
11. Conclusion.
First, look into any online services that may be able to help you and complete the filing for you.
Second, reach out to your CPA/Accountant and find out if they, or a group they recommend, can handle the filing for your entities.
Third, contact our office to set up a time to come in for us to discuss the filings, and if you wish to retain us to assist with the filings.
