The Corporate Transparency Act and Your Small Business

If you own a small business or family office, you could soon be required to report ownership details to the federal government—or face stiff penalties and possible jail time. Here's what you need to know.

The Corporate Transparency Act (CTA), which goes into effect on January 1, 2024, requires otherwise unregulated companies to report information about "beneficial owners"—those who own at least 25% of or exercise substantial control over the reporting company—to the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN). Failure to comply could result in fines of up to $10,000 and imprisonment for up to two years.

The substantial control attributed to beneficial owners could be serving as a senior officer, having the authority to appoint or remove senior officers, serving on a board of directors, having rights associated with financing arrangements, or overseeing intermediary entities that exercise substantial control over the business.

While this means a trust technically could be beneficial owner, the CTA states that beneficial owners must be individuals. Therefore, the trust document would need to be reviewed to determine whether the grantor, trustee, or beneficiaries are considered beneficial owners.

The immediate impact of the CTA on a small business is that owners will incur the administrative costs associated with compliance. Some business owners claim the law will affect their privacy because the FinCEN will receive their personal information.

In addition, the CTA may have implications for mergers and acquisitions. Potential buyers may require access to the beneficial ownership information as part of their due diligence process, which could make it difficult to attract buyers or negotiate favorable terms.

The law attempts to close a loophole in corporate regulations that enables criminals to hide their identities using shell companies. However, the legislation may affect almost every small business in the U.S., including family offices, independent contractors, and the limited liability companies (LLCs) commonly used by mom-and-pop shop owners.

Family LLCs, in particular, are often used to transfer ownership of a business from one generation to the next in a tax-efficient way. By retaining a small interest, the original owner can claim certain discounts that reduce the value of the transfer for tax purposes. The CTA doesn't prohibit this type of transaction, but new IRS rules will require these entities to report ownership information. Individuals who value privacy may forgo the use of LLCs in favor of other structures that still allow for some level of anonymity, such as irrevocable trusts.

Entities created on or after January 1, 2024, must report beneficial owner information to the FinCEN website within 90 calendar days of creation. Existing entities have until January 1, 2025, to comply with the statute, unless they undergo ownership changes—such as those triggered by a sale or minor children reaching the age of majority—in which case they have 30 days from the date of change.

The law exempts 23 types of businesses, including accounting firms, banks, charitable entities, and large operating companies that meet certain requirements.

If you're a business owner, familiarize yourself with the CTA's reporting requirements and meet with your accountant or attorney to discuss whether the new law affects you. Don't wait for the government to come knocking—the stakes are just too high.