(This column originally appeared in The Inquirer)
A new law may require business owners to share more information with the federal government — and if you fail to comply, you can face fines of $10,000 per violation or even criminal charges. The legislation, known as the Corporate Transparency Act, went into effect this year and is likely to impact millions of small businesses.
“The law’s intention is to combat illegal activities and help to find bad actors and criminals that are potentially hidden behind corporate shell companies” said Alex J. Phinn III, an attorney with Pritchard Law in Colmar. “It affects the smallest of companies, and that’s been a surprise to many of our clients.”
Is your company impacted by the Corporate Transparency Act? Quite possibly. Here are five things you should know.
What needs to be reported.
Impacted businesses will need to report the company’s legal and trade names or its “doing business as” name and street address. Post office boxes are not allowed.
The state where the company was formed and relevant tax and employer identification numbers are also required along with an image of the articles of incorporation.
Proprietors also have to disclose who owns the company, including “beneficial owners.”
A “beneficial owner” is someone that owns at least 25% of the entity through profit interest, options, warrants and other instruments like convertible debt. However, other senior managers that exert “substantial control” over the decisions of the company may also need to be included.
Sometimes determining how much control a manager has can be difficult. Phinn is recommending his clients err on the side of caution.
“If it’s an important decision maker, we generally recommend disclosing the information about that person,” he said.
Each beneficial owner will need to furnish their full legal name, birth date, home address (again, post office boxes are not allowed), and an image of either their current passport, driver’s license, or document issued by a state, local government or Indian tribe.
Exclusions apply.
The act covers corporations, pass-throughs, partnerships, estate and benefit plans, and foreign companies registered to do business in any U.S. state or Indian tribes. Sole proprietorships would not be included. There are, however, at least 23 exceptions to the act that are listed by the Treasury Department, which range from companies employing more than 20 people and having more than $5 million in revenue to accounting firms, credit unions, banks and certain nonprofits.
Phinn says that although some corporate entities may be exempt because of their size or type of business, it’s common for their individual clients who own or manage these companies to also have interests in “smaller entities like real estate holdings or partnerships,” which may require reporting.
The law is being contested, but it’s very much in effect.
Recently, a federal court in Alabama upheld a small business association’s claim that the law “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress policy goals.”
However, the case was not a class-action lawsuit, so it only impacts the approximately 65,000 members of that association. That means all other businesses are still responsible for reporting their beneficial owners. The Treasury Department is appealing the ruling and says it will continue to require the remaining 32 million small business entities to report their beneficial ownership as planned.
Some attorneys feel that an ultimate decision on this case may not come until 2025.
Other lawsuits have also been filed, and the House Committee on Small Business recently held a hearing on the law’s impact. It’s still unclear what will happen with the legislation.
Phinn warns against companies that wait to file until after the November presidential elections with the hope that if former President Donald Trump wins, he would overturn the ruling.
“That will be difficult,” he said. “This isn’t an executive order. It’s legislation passed by Congress.”
This is not a one-time thing.
You can do the reporting on your own by filing here. More than a million small entities have already filed the required reports.
Updates need to be reported whenever information about a company changes. That could include new owners, or the change in address or marital status, or even when a beneficial owner obtains a new driver’s license.
Hire a professional.
Because the reporting process can be complicated and needs to be updated each year, an attorney or accountant should be responsible for the filings.
Phinn says that a firm like his would perform the necessary analysis to see that all entities owned by their clients are compliant.
“The penalties can be quite steep and can even be criminal if you don’t file or willfully disclose incorrect information,” he said.
