New business reporting requirements sure to upset some

It’s getting close! Just a few weeks away. Are you ready? Have you been a good boy or girl? You know he’s watching, right?

Yes, Uncle Sam is watching. And you have less than a month to comply with your FinCEN beneficial ownership reporting requirements.

The Corporate Transparency Act, or CTA, imposes a filing requirement for entities that are formed by filing with the Secretary of State.

That includes entities such as corporations, LLCs, LLPs and limited and general partnerships.

You are required to file and report the entity’s identifying information and information on anyone who holds a 25% or greater ownership interest.

The report must also include anyone who exercises substantial control over the entity. All of this can be done online.

I have written about this before. So have many others. It has been reported in the paper. So, if you haven’t filed, what’s wrong with you?

FinCEN is the Financial Crimes Enforcement Network of the U.S. Treasury Department. The network expects 32 million filings by year end. It has received a fraction of that.

Because I have written about this before, this time I want to focus on why you haven’t filed, and what problems you might encounter.

Some people find the reporting requirement too intrusive. Others object on constitutional grounds. Others argue the government already has the information.

The government may well already have the information. But it doesn’t have it in a single place that FinCEN can readily access.

So, part of the requirement is for you to help the government organize. Some people still don’t know about that requirement.

First, let’s talk about timetables. If you registered an entity before Jan. 1, 2024, the FinCEN report is due by Jan. 1, 2025.

If your older entity was legally dissolved before 2024 you need not file. That means dissolved under state law requirements, not just no longer operating.

If you registered an entity in 2024, the report was due within 90 days of creation. Entities formed after 2024 will only have 30 days to file.

It is possible that many of the entities that have already filed are the new ones. The owners were likely advised of the requirements when the entity was formed.

Once you do file, you must update your filing if any information changes, like a new address.

Second, there are a few dozen exceptions, mostly for entities that are already required to file with regulatory agencies. Nonprofits are also exempt.

If you want to upset people, change things. The CTA changed things and that is a big reason many people are upset about the requirements.

I recently heard a presentation by an international tax lawyer. He noted that in many foreign countries a similar reporting requirement has existed for a long time.

He gave an example of forming an entity in the Netherlands. Say a person goes to an attorney in Amsterdam and asks to set up an entity. The Netherlands requires the attorney to get certain information from the person before a client relationship can even be established. It can include a name, address, the planned ownership of the entity, a passport from each owner and a utility bill from each owner.

He called them “KYC” requirements — know your client. That is the same type of information that FinCEN is asking for. The difference is that the Netherlands entity cannot even be established without the information being provided first.

In countries where information requirements have existed, people do not object. The FinCEN rule is new, and its newness is a major cause of concern.

There are financial penalties for not complying. Some non-filers think that FinCEN will never discover their noncompliance. They are probably right.

But there’s another angle to the risk of noncompliance. Let’s say you have an entity that you use to operate a business. In 2027, let’s say you want to sell the business. The buyer wants to buy the interests of the owners. The buyer’s legal counsel needs to evaluate the potential liabilities of the entity. Buyer’s counsel asks for proof of FinCEN reporting compliance. You don’t have it. Your entity has potential penalty risk with FinCEN. Penalties are significant. No buyer wants to step into that problem.

FinCEN is coming to town. Don’t pout, don’t cry, just comply.