The new beneficial ownership disclosure rules, mandated by the Corporate Transparency Act, will have an immediate impact on new businesses formed after the start of the year. Along with other Treasury requirements, the penalty for failure to comply is severe. And while small businesses are often favored in other regulations with a small-business exception, in this case the exception favors large businesses.
Beginning Jan. 1, 2024, companies have to file beneficial ownership information with the Treasury's Financial Crimes Enforcement Network, or FinCEN. Existing companies must file within the year 2024, while a new company started during the year will have 30 days to file. It is estimated there will be 32.6 million filings in 2024, and 5 to 6 million filings each year thereafter. The penalty for failure to comply can result in a $500-per-day penalty, capped at $10,000.
FinCEN released initial guidance on beneficial ownership on March 24, 2023, and will continue to issue guidance in the coming months, including a small-business compliance guide.
"For existing businesses that have a year to comply, this is way in the distance," observed tax attorney Barbara Weltman, author of "Small Business Taxes 2023." "But new entities formed after the first of the year will be faced with a 30-day deadline, with extremely severe penalties if they miss the deadline. My guess is that they won't be too harsh about imposing penalties at the beginning. The point is that CPAs and attorneys who are advising startups will have to include this as part of their package. It applies to any entity that is created by a state — corporations, LLCs and any other entity that is formed under state law. But it won't apply to partnerships or sole proprietorships. And it's one more factor to consider in deciding what type of entity to use."
"Other than the unbelievable penalties, it's similar to FBAR," she noted. "It uses the same portal to file, and the information you provide is so minimal — it's not onerous. You just have to do it."
A beneficial owner is one who directly or indirectly exercises "substantial control" over the reporting entity, or who directly or indirectly owns or controls 25% or more of the "ownership interests" of the reporting entity. Failure to do so can result in both civil and criminal penalties. Filing will be done electronically through the Beneficial Ownership Secure System, which is currently under development.
Although the CTA has been law for several years, only now are people becoming aware of the impending effective date.
People who regularly interact with financial professionals will likely be advised as to the requirements, but there will be a large number of companies that won't know they have to comply, according to Niles Elber, a member at law firm Caplin & Drysdale.
"Many businesses just off the shelf don't want to pay for a lawyer or CPA," he remarked. "If someone at our firm does work for a client, of course we will make sure that clients are in compliance. But there will be untold numbers who don't have regular interaction with professionals and have never heard of the CTA. There will be people who miss their obligation almost from the get-go. It's at least as impactful as FBAR, because not that many have foreign accounts, but a huge number of small businesses will be required to comply."
Ignorance isn't bliss
Roger Harris, president of Padgett Business Services, agreed. "I have never seen something this important that impacts this many businesses that so few people know about," he said.
The biggest problem is that very few small businesses are aware of the requirement, according to Harris.
"There is a huge awareness gap," he said. "And when they are alerted to it, they think it doesn't apply to them because they're small — but actually it does apply to them. Large entities, such as publicly traded companies, are exempt because they already know who you are. But a small company, such as a plumber with an LLC, could be caught unaware."
"Where people do not use a lawyer or a CPA to set up their company, all of a sudden they could be faced with massive liability. And there's no reason to believe that they [the penalties] will be imposed lightly at first," he said. "Most important right now is to bring it to light. Part of that is to adequately fund FinCEN — it's similar to the IRS when Congress was underfunding it — it's hard to get them to accomplish much when they're not adequately funded."
Harris foresees other potential issues. "If someone owns over 25% of a company, we know that they're a beneficial owner," he said. "But it also applies to someone who exercises substantial control over a company. The exercise of control can be a gradual event and may not be top of mind. If an individual gradually acquires banking authority and the ability to fire the chief executive, in essence they can be running the company but not be on the books as an owner. When they cross over that threshold, they have 30 days to report even if they aren't aware of it."
The person who fills out the form is considered a company applicant and has to be disclosed as well, Harris noted: "If we as practitioners take on the obligation of forming or servicing the entity, are we liable for the penalty? If our name is on the document it seems that we are."
There are a number of issues not immediately clear, according to Harris. "If the practitioner is on the form as the company applicant, and then disengages from the client or is fired by the client, how do they remove themselves from the filing?
"What if the preparer sees the client once a year and is told that the client brought in two 25% shareholders back in June?" he asked. "Are there procedures for filing late and not reporting the penalty when you don't have a relationship that allows you to know this in real time?"
"If they're not going to assess penalties, then why are we going through this?" said Harris. "You have to assume they will impose the penalties, although there may be a first-time abatement for reasonable cause."
"Of course, the answer for tax practitioners is not to do this at all," he suggested. "At first glance it looks like a very simple task, but filling out the form is the easy part."
Raising awareness
A number of professional groups have joined with the American Institute of CPAs in a coalition to make taxpayers and practitioners aware of the new reporting requirement.
"We are highly concerned that many business owners are unaware of this filing requirement. Small businesses are the backbone of our economy, and we want to ensure they understand their reporting obligations," said Melanie Lauridsen, director for tax practice and ethics with the AICPA. "We have collaborated with the organizations represented to ensure we have the largest scope possible to reach millions of affected taxpayers. This collection has come together because we all feel awareness is critically needed."
The coalition includes the following organizations: the AICPA, Latino Tax Pros, the National Association of Black Accountants, the National Association of Enrolled Agents, the National Association of Tax Professionals, the National Conference of CPA Practitioners, the National Society of Accountants, the National Society of CPAs, the National Society of Tax Professionals, Padgett Business Services, the Diverse Organization of Firms, H&R Block and Prosperity Now.
