Under new U.S. Treasury Department rules, businesses with fewer than 20 employees and less than $5 million in annual revenue will have to start reporting ownership and control information to the federal government every year.
The requirement, issued under the Corporate Transparency Act (CTA), is expected to affect 32 million small businesses across the country. Starting Jan. 1, 2025, existing firms will be required to file ownership and control information with the Financial Crimes Enforcement Network, while firms established after Jan. 1, 2024 will have 30 days from their formation to file reports.
The majority of affected businesses will be single-owner LLCs and other types of reporting companies with four or fewer beneficial owners. The key to complying with the new rule is to prepare early.
How it works
The CTA is aimed at cutting down on fraud, money laundering and terrorism funding that can run through anonymous business entities.
As mentioned, it applies to businesses that employ fewer than 20 workers and generate less than $5 million in revenue, as well as companies with no physical presence in the U.S. It applies to the following types of businesses that meet those requirements:
- Limited liability companies
- Other legal entities that are created or organized under filing with a secretary of state or similar office.
These entities will be required to file reports identifying their “beneficial owners,” defined as individuals who own or control 25% or more of the equity interest of a company or who exercise “substantial control over its management or operations.”
“Substantial control” can be exercised by someone who is a senior officer in the company, and who:
- Has authority to appoint or remove senior officers or a majority of the board of directors,
- Has “substantial influence over important decisions,” or
- Has any other form of substantial control over the firm.
The Financial Crimes Enforcement Network is currently working on creating the forms that businesses will use to report their beneficial ownership information. The forms are expected to be ready well before the end of the year, according to the Treasury Department.
Businesses that are exempt from the reporting requirements include:
- Issuers registered with the Securities and Exchange Commission
- Banks, bank holding companies, savings and loan holding companies, credit unions, financial market utility entities, and money services businesses
- Registered investment companies or investment advisers, broker-dealers, and registered venture capital fund advisers
- Insurance companies or state-licensed insurance producers
- Accounting firms
- Public utilities
- Certain pooled investment vehicles
- Tax-exempt entities or certain entities that assist tax-exempt entities
- Inactive companies
The filing deadline for reporting will be Jan. 1 2025 for existing entities. Entities that are launched after Jan. 1, 2024 will have 30 days to file reports after their formation.
It’s important that business owners understand their obligations under the new rule. Companies that fail to file their reports face a maximum civil penalty of $500 per day (up to $10,000) and up to two years in prison.
In addition, the law allows for the forfeiture of any property that was used to commit a violation.
Companies should prepare by developing policies and procedures for assessing their reporting obligations.
Businesses involved in mergers and acquisitions will have to ensure that the firms they are acquiring or merging with have been complying with their own reporting obligations. This may be an area that should be part of any company’s due diligence when purchasing another business.
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