If you own or “control” a business, company, or partnership – or advise someone who does – you should know about a new federal law that is going into effect soon that places new reporting requirements on companies and their “beneficial owners.”
Many small and midsize Wisconsin companies and their owners will have to comply with this new law – some as soon as in January 2024.
Here’s a brief introduction to that new law.
The Purpose of the New Corporate Transparency Act
The Corporate Transparency Act (CTA) was passed as part of the federal government’s efforts to combat money laundering.(and other illegal activities) carried out through opaque corporate structures (such as multi-layer shell companies).
Which Entities Does the CTA Apply To?
Not surprisingly for a law intended to deter and discover money laundering, the initial list of the type of companies and entities to which the CTA applies is broad (before exemptions are considered).
Specifically, before exemptions are considered, the CTA applies to any entity:
- formed in the U.S. by the filing of a document with the Secretary of State (or any similar official) of any state or Tribal government; or
- formed outside the U.S. and registered to do business in the U.S. by the filing of a document with the Secretary of State (or any similar official) of any state or Tribal government.1
What are the Exemptions from the Reporting Obligations?
The CTA exempts 23 categories of entities from its reporting obligations.2
Generally speaking, exempt entities are those that are already subject to some form of regulation that identifies the individuals who are the beneficial owners of the entity or who are otherwise in control of the entity. So, for example, banks, accounting firms, publicly traded companies, investment advisors, insurance companies and nonprofit entities are all exempt from the reporting requirements.
Additionally, there is a “large operating company” exemption, applicable to an entity that:
- has more than 20 full time employees in the U.S.;
- has an “operating presence at a physical office” in the U.S.; and
- had more than $5 million in gross revenues as reported on a federal income tax return for the previous year.3
But even when one considers all 23 categories of exemptions, that leaves many Wisconsin-based businesses that will not be exempt from the reporting requirements of the CTA – including many small Wisconsin law firms that are organized, for example, as service corporations.
When Do the Reporting Obligations Start?
For entities first formed or registered on or after Jan. 1, 2024, the initial report will be due within 30 days after formation.4
For entities formed before Jan. 1, 2024, the initial report will be due on or before Jan. 1, 2025.
What Must Be Reported and Provided?
Per 31 U.S.C. § 5336(b)(1) and (2), the required beneficial ownership report must include five specified items of information for each “beneficial owner” of each company applicant:
- full legal name;
- date of birth;
- residential address;
- a “unique identifying number” (from a specified list of documents, including an unexpired U.S. driver’s license or an unexpired U.S. passport); and
- an image file of the document that provides the unique identifying number.
For individuals who are not U.S. persons, the “unique identifying number” must be an unexpired foreign passport.5
Note too that as of the date of this article, the Treasury Department is still in the process of drafting CTA-related regulations, and has not yet finalized the reporting forms.
What If Ownership or Control Changes?
After an initial report has been filed, if the beneficial ownership of the entity changes, the reporting company has an obligation to file an updated report.
Who Is Considered a Beneficial Owner?
The CTA, in general, defines a “beneficial owner” as a natural person who either
- owns 25 percent or more (directly or indirectly) of the equity interest in the reporting entity; or
- has “substantial control” over the reporting entity.
A reporting entity may have more than one beneficial owner.6
What Are the Penalties for Noncompliance?
Per 31 U.S.C. § 5336(h)(3), any person who willfully fails to file a required report or willfully files false information is subject to a civil penalty of up to $500 per day that the violation continues, and may be fined not more than $10,000, imprisoned for not more than two years, or both. Given the substantial potential penalties for providing false information, lawyers should think twice about taking on the responsibility of submitting a report on behalf of a client.
Conclusion: The Charge of One More Regulatory Requirement
The CTA places an administrative burden and cost on a multitude of companies and individuals, in an attempt to find a relatively few bad actors. Only time will tell whether the amount of illegal behavior deterred, will justify the administrative burdens and costs imposed on all of the rest of us “good guys.” But to mangle Lord Tennyson’s stanzas, ours “not to reason why” ours “but to do and” comply; or if not, be at risk of suffer a whopping great penalty. The fact is, owning a business entity brings with it numerous regulatory requirements (and related risks and compliance expenses).
For example, if an individual creates a Wisconsin limited liability company, the individual thereafter (and the LLC), have certain obligations to file an annual report with the WDFI, and to file tax returns or other tax documents with the IRS and the Wisconsin Department of Revenue. Failing to do those things can result in adverse consequences.
The CTA brings with it just one more regulatory requirement that many small to midsized Wisconsin businesses (and their owners) will need to be aware of, and with which they will need to comply.
Disclaimer: The CTA is new and complex, and this article is not intended to be a comprehensive analysis of its requirements (or any regulations issued pursuant to the CTA) as to any particular entity or owner. Because the CTA is broad and carries potential criminal penalties for noncompliance, we encourage businesses and owners to become familiar with the general scope of the CTA, and then to consult with a knowledgeable attorney for further analysis and guidance as needed.
This article was originally published on the State Bar of Wisconsin’s Solo/Small Firm & General Practice Blog of the Solo/Small Firm & General Practice Section. Visit the State Bar sections or the Solo/Small Firm & General Practice Section webpages to learn more about the benefits of section membership.
1 31 U.S.C. § 5336(a)(11)(A). Enacted in 2021, § 6403 of the CTA, among other things, amends the Bank Secrecy Act (BSA) by adding a new Section 5336 thereto, Beneficial Ownership Information Reporting Requirements (codified as 31 U.S.C. § 5336).
3 The currently stated deadline in the statute may change, as the department of the Treasury recently proposed a regulation that would extend the currently stated deadline of 30 days to 90 days (at least in 2024).