FinCEN Proposes Extension of Deadline for New Company Corporate Transparency Act Reporting
Grace notes are small musical notes that are played before the regular note. How grace notes are played depends on the genre, composer’s directions, musical era of the music, and how the composer notates the grace note. Although they are small in size, musicians must pay close attention to their execution.
Grace notes with a slash through them are called acciaccaturas. Acciaccaturas are played before the beat, with the main note following quickly on the beat, with the emphasis being on the main note. On a keyboard instrument, the notes may be played so quickly that they sound almost simultaneous. No matter how fast an acciaccatura is played, it takes a little time away from the note that proceeds it.
Grace notes without a slash are called appoggiatura. Appoggiaturas are usually played on the beat, with the main note played after. So, appoggiaturas always take time away from the main note. The appoggiatura, rather than the regular, often note receives the most emphasis. In music from the classical era, an appoggiatura generally is the same length as the large note that follows it.
Although they appear tiny, more goes into grace notes than meets the eye. The same is true of the Corporate Transparency Act (CTA), which takes effect in 2024.
The concept sounds simple: The CTA requires companies to report the human beings behind them, making it easier for the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) to detect and prevent money laundering and other crimes. However, implementation of the CTA is proving more challenging than meets the eye.
Recognizing challenges with CTA compliance, on September 28, 2023, FinCEN recently proposed a rule (Proposed Rule) that would temporarily extend the time allowed for new companies to file reports. The Proposed Rule followed a 56-page Small Business Compliance Guide issued by FinCEN earlier in September. This article discusses the proposed rule, as well as CTA requirements generally.
What is the Corporate Transparency Act?
Congress passed the CTA in December 2020 as part of the National Defense Authorization Act (NDAA). The NDAA went into effect in January 2021 after Congress overrode President Trump’s veto. In 2022, FinCEN adopted final reporting rules under the CTA. The law takes effect on January 1, 2024 for new entities and January 1, 2025 for existing entities.
The CTA was supposed to detect money laundering through “shell companies” or companies without significant operations. However, many companies with small, but significant, operations or otherwise aren't typically thought of as "shell companies" fall under the CTA.
The CTA defines “reporting company” as any corporation, limited liability company (LLC), or "similar entity" that is created by a filing with a federal, state, or tribal government or which is authorized to do business in the United States. There’s an exception for entities that meet these requirements:
have over 20 full-time employees in the United States;
report more than $5 million in gross receipts or sales to the Internal Revenue Service and
have an operating presence at a physical office in the United States.
There are also exemptions for “dormant” companies and companies already regulated under federal law.
Many small businesses don’t fall under the exemption despite having significant operations. A small bakery or boutique retailer is hardly a shell company, but it’s unlikely to have $5 million in gross receipts or over 20 full-time employees.
Real estate investment companies also usually won’t qualify for the exemption even though they have significant assets. An LLC may own a large apartment complex or strip mall and generate more than $5 million in gross receipts. Yet, the LLC isn't likely to qualify for the CTA exemption because real estate investment companies rarely have employees.
What Would the Proposed Regulation Do?
FinCEN’s Proposed Regulation would apply only to newly formed companies. The CTA requires newly formed reporting companies to file a report within 30 days of formation (or a later date when the reporting company learns a state secretary of state has accepted its filing or makes the reporting company’s formation public).
The Proposed Regulation would not change the 30-day statutory requirement. Instead, the regulation would provide for a “phase-in” of the filing requirement that would extend the due date until 90 days after formation for entities formed in calendar year 2024. Entities formed before January 1, 2024 would still need to make their initial filing by January 30, 2025.
FinCEN notes that the extension would provide more time for newly formed entities to become familiar with CTA’s requirements. FinCEN notes that reporting companies under the CTA include many companies without experience dealing with FinCEN. FinCEN believes the additional time will provide those companies with extra time to determine if they must file a CTA report and gather the required information for that report.
How Much Information Must Reporting Companies Provide?
Reporting companies must report the following information:
Company Name – the reporting company’s full legal name and any trade names or DBAs
Address – the street address for the reporting company’s principal place of business in the United States
Formation Jurisdiction – the state, tribal, or foreign jurisdiction where the reporting company was formed. Foreign companies must also report where they are registered in the United States.
Tax Identification Number – all US reporting companies must provide their tax identification number (TIN), usually an Employer Identification Number (EIN). Foreign reporting companies without a TIN may use a foreign tax identification number and the jurisdiction's name.
This company information should be readily available and not be a burden to reporting companies. The challenges are likely to lie in determining who is a beneficial owner and, sometimes, obtaining the required information about the beneficial owners.
Who is a Beneficial Owner of a Reporting Company?
Beneficial owners whose information must be reported include any individual who directly or indirectly:
exercises substantial control over the entity; or
owns or controls 25% or more of the ownership of the entity.
One challenge with CTA compliance is that entities often are formed in anticipation of a need and have no beneficial owners within 30 days of formation. For instance, a real estate purchaser may form an LLC, knowing their mortgage lender will require it. However, the LLC won't have an operating agreement, nor will individuals contribute capital and become beneficial owners until shortly before the real estate closing. So, an entity might have to make its initial filing before it has beneficial owners.
Who is a Company Applicant?
Although FinCEN's focus appears to be on beneficial owner reporting, the CTA also requires a newly-formed entity to disclose its "Company Applicants." All companies will have Company Applicants, even if they do not yet have beneficial owners.
There are two types of Company Applicants:
· The individual who files the paperwork forming the entity (Direct Filers)
· The individual who directs or controls the filing of that paperwork (Filing Director)
Sometimes, the Direct Filer and Filing Director will be the same individual, but often, that won't be the case.
In the real estate purchase example, the buyer’s attorney, knowing the buyer will need the LLC, might form the company and be the Filing Director. The attorney’s paralegal might be the Direct Filer.
If the LLC has no beneficial owners within 30 days of formation, the CTA report would include only the attorney’s and paralegal’s names. This information isn’t incredibly helpful in preventing money laundering (the stated purpose of the CTA) and could sometimes present a challenge for attorneys where the CTA filing might require disclosure of the attorney-client relationship. Plus, when the LLC obtains beneficial owners, the LLC would need to update its CTA report to disclose the owners.
Conclusion
Grace notes’ small size belies the planning and analysis required to perform them. Likewise, as evidenced by FinCEN’s 56-page small business guide, CTA reporting requires significantly more planning and analysis than meets the eye.
The proposed extension of the CTA reporting deadline would provide needed additional time so new companies likely would not have to immediately update their initial filings. However, since the CTA requires the filing within 30 days, absent an amendment by Congress, the Proposed Regulation would not eliminate the inherent challenges in the CTA’s new company reporting requirements.
© 2023 by Elizabeth A. Whitman
Any references to clients and their legal situations have been modified to protect client confidentiality.
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