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Yesterday I posted a Corporate Transparency Act (CTA) update advising that a 3-judge panel of the Fifth Circuit Court of Appeals had cancelled the nationwide injunction on CTA enforcement issued by a district court. FinCEN then quickly announced a new January 13 compliance deadline.

Well . . .

Stop‘Twas the night after Christmas, when all through the house, not a creature was stirring, not even a mouse . . . BUT, BOY HOWDY, the Fifth Circuit in New Orleans was stirring. Last night, just hours after sending my latest update another 3-judge panel reinstated the nationwide injunction until the full 17-judge court can hear the matter.

I regret the confusion, but believe I have an obligation to keep my affected readers informed.

For the time being, CTA is back on hold (you may voluntarily comply, if you wish). Stay tuned.

Earlier Updates

Original Background on CTA

Update #1

Update #2

 

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Last Monday, December 23, the Fifth Circuit Court of Appeals stayed the nationwide injunction issued by a Texas federal district court against enforcement of the Corporate Transparency Act (“CTA”). English translation: The CTA is back on.

Rather than sticking to the original January 1 deadline, the Financial Crimes Enforcement Network (“FinCEN”) has extended the reporting deadline to Monday, January 13.

If you are an affected LLC, S corporation, or C corporation (most small businesses are) and you do not report information regarding the entity and the “beneficial owners” you will be subject to fines of up to $591 a day and potential federal felony prosecution come January 14.

For more background on the CTA read this. Then read this update. Please take this seriously.

My recommendation: Ask your accountant, attorney, or financial advisor if they can help (the answer will likely be “no”). At Mason Law, PC, we made the decision that we could not efficiently offer reporting services. I have been advising people to use Perfect Form, LLC. Mason Law, PC has used them. The pricing is quite reasonable. The data entry portal is very user-friendly. And, no, I don’t have any connection with them. Perfect Form, LLC.

The CTA was enacted over a presidential veto on December 11, 2020. It was actually buried deeply in the huge National Defense Authorization Act of 2021. Supporters say that it will be a tool for policing money laundering, terrorist financing, and other nefarious financial conduct. It will also bring the US in line with other European-style enforcement measures.

We aren’t Europe. Over 32 million small businesses, the vast majority of whom are law-abiding, will be forced to divulge information and keep it updated. I believe in cracking down on money laundering and such, but is this overkill?

If you agree, take it up with Senators Tillis and Budd. Congress could always repeal it (or tighten it up) and President Trump might be amenable to signing the repeal (after all, he was the president who vetoed it the first time around).

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Extremely Important Update

On November 19, 2024, I posted information about the Corporate Transparency Act (“CTA”). The CTA requires almost all small businesses organized either as a corporation or an LLC to report detailed information regarding both the entity and personal information about the “beneficial owners.” I reported a January 1, 2025, filing deadline for existing entities. The CTA provides harsh civil penalties and also criminal (felony) penalties for willful failure to file.

Think: Just about every small business lining your town’s business streets. For more background, read my earlier piece here. Then come BACK. There have been some significant new developments.

On Hold. For Now.

StopBut maybe not for too long. On December 3, 2024 (four days ago, as I write this), the United States District Court for the Eastern District of Texas issued a preliminary nationwide stay against FinCEN enforcing the CTA.

In Texas Top Cop Shop, Inc. v. Garland, the court held that the CTA likely violated the Constitution on a number of grounds. One of the requirements for a plaintiff (in this case, Texas Top Cop Shop, Inc.) to meet when securing a preliminary injunction against an opposing party (in this case, FinCEN) is to convince the court that the plaintiff stands a likely chance of prevailing. The preliminary injunction will then apply until the court has an opportunity to hear the full case.

The preliminary injunction prohibits FinCEN from any enforcement action and suspends the January 1, 2025, filing deadline for all reporting entities nationwide.

FinCEN has filed an emergency appeal of the injunction to the Fifth Circuit Court of Appeals in New Orleans. The Fifth Circuit could completely reverse the District Court or perhaps narrow the scope of the injunction to the parties to the litigation. In this case, however, one of the parties (in addition to Texas Top Cop Shop) is the National Federation of Independent Business (NFIB), which has over 300,000 members (many readers of this column may be members). The District Court reasoned that with so many members, a nationwide injunction would be appropriate.

Well. Now What? What to Do?

My crystal ball is in for repairs, so I am not sure. You do have options.

Within the next week or so the Fifth Circuit might reverse the nationwide injunction or narrow it to NFIB members. If it does not provide an extension of the January 1 filing deadline that will not leave much time to assemble the appropriate entity and beneficiary owner information (Merry Christmas!). In that case, an owner may elect to move forward with collecting the information (rather than taking a “wait and see” approach).

In fact, FinCEN may still accept voluntary filings, so an owner may elect to simply file.

On the other hand, if the Fifth Circuit sustains the District Court’s nationwide injunction, it will be a case of how quickly the Supreme Court takes it up (in this case, they almost certainly would).

There is another similar case bubbling up out of the Northern District of Alabama. The Eleventh Circuit, in Atlanta, is hearing FinCEN’s appeal of the Alabama district court decision now. The injunction there, however, is limited to the parties only (which also includes a much smaller trade group than the mighty NFIB).

Finally, there is a political calculus. Unless your name is Rip Van Winkle, you know the government will be changing hands next month. It remains to be seen how enthused the new administration will be to employ FinCEN’s full enforcement array.

Bottom Line: Please be on the lookout for updates in my email newsletter. I promise to keep readers updated. Sorry if that results in more emails, but for people affected the information is too important.

A Few Legal Observations

The Texas Top Cop Shop opinion is 75 pages (yes, I read it; it’s a ‘lawyer thing’) of good legal reasoning. There are nearly 33 MILLION businesses subject to the CTA. As the judge notes, “the Commerce Clause does not justify regulating all companies based on nothing more than the fear that a reporting company might shelter a financial criminal.” Regulating 33 million businesses (which, the court noted, traditionally has been the province of the states) to ferret out the wrongdoing of a small group is overkill.

Thank you, judge, I have felt that way about the CTA since I first began to dig into a year or two ago.

Now for the downside of the decision. No reflection on the judge who has plenty of precedent on his side, but I personally take issue with the ability of a single federal district court judge to issue a nationwide injunction.

In these political tense times, separating the rules (procedure) from desired ends (substance) is important. Rules and procedure are guardrails to protect both sides of a political issue. The Senate is an example. Many Democrats likely rue the day that Democratic Senate leader Harry Reid decided to suspend the filibuster (generally a Senate rule requiring 60 senators to agree on a course of action or a nominee) for federal judicial nominees. A year or so later, the Republicans controlled the Senate and the judicial pipeline was open. When it comes to rules, “what goes ’round, comes ’round.”

Back to nationwide injunctions. Currently, there are 677 authorized federal district court slots. Due to vacancies, there is never that amount serving. Perhaps at any time there are 550 to 600 serving. That is a bit more than the 535 members of Congress. The difference, however, is that each of those judges sitting in a narrow geographic area can issue a ruling having nationwide impact.

Congress could address that. Perhaps there could be a requirement for approval by a small panel of appellate court judges before a nationwide injunction could issue. Just a thought.

Again, stay tuned.

 

 

 

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If you are at all involved with a small corporation or limited liability company, you MUST read this. Your life may be about to change. Especially if you would like to avoid a potential $10,000 fine or a two year stay at Club Fed. You have until January 1, 2025, to comply. Seriously.

This covers just about every small business out there.

Background

Sometimes bad actors pay other shady actors for favors or other illegal goods and services. The shady actors don’t want to get caught taking those dollars, so they set up limited liability companies (LLCs) to take the dollars from the bad actors, then the LLCs can distribute those dollars to other LLCs, and eventually the dollars will make it into the hands of the shady actors. Hopefully those dollars will be “clean” of their tainted past. This is a form of “money laundering.”

Or perhaps a hungry terrorist needs some dollars to pay for bombs, guns, and ammo. A misbegotten (but wealthy) dupe believes in a supposedly righteous cause and contributes to a socially active LLC, which then moves those contributions around between various LLCs and corporations until – BOOM! The terrorist gets the funds.

The Solution: Transparency

A glass houseA few years ago, Congress thought it would be a great idea if the feds had some way of tracking these LLCs and the folks who were really behind all of them. If these entities could only become “transparent.” Thus, Congress passed the Corporate Transparency Act (the CTA).

The CTA will require most small corporations and LLCs to furnish to the Financial Crimes Enforcement Network (FinCEN), an arm of the Treasury Department, personal information on most of their owners (direct and indirect) and officers and managers. That way FinCEN can make all that information available to law enforcement investigating money launderers and terrorist funding.

What could possibly go wrong?

Heads Up!

Effective January 1, 2025, all “reporting companies” must furnish personal information (names, addresses, birth dates, and an image of a government issued ID such as a driver’s license or passport) on “beneficial owners” to FinCEN (read on for what FinCEN is) within thirty days of formation. Existing companies have until the end of this year (2024) to report.

A reporting entity is any entity that requires a filing with a secretary of state to become active and which either employs 20 or fewer employees OR has less than $5 million in US-based revenue. This covers all LLCs, S corporations, and C corporations that are small employers (big outfits are exempted).  Example: Snow White, LLC has two employees (Snow White and Grumpy) and $150 million in revenue. Snow White, LLC is a reporting company because it has fewer than 20 employees.

A beneficial owner is anyone or anything (like a trust — actually the trustee’s information is reported) that owns (directly or indirectly) 25% or more of the reporting company, as well as officers, key managers, and directors.

Also, “company applicants” must furnish the same information. A company applicant is the person that causes the reporting entity to be formed. For my clients, that would be ME. And my paralegal involved in the filing.

The information must be reported within 30 days of corporate formation AND within 30 days of any change in information. For example, Maude Dimwiddy, a beneficial owner of Dimwiddy, LLC, marries Sam Brightstar and moves with him across town. This information (name change and address change) must be reported.

The January 1 deadline (as in this coming New Years Day) applies to ALL reporting entities. NEW entities formed thereafter have 30 days to comply.

What is FinCEN?

Financial Crimes Enforcement Network is a group of law enforcement agencies based out of the U.S. Treasury Department. Most law enforcement agencies have access to the database which will include information on millions upon millions of LLCs, S corporations, and small C corporations. It is primarily an investigative tool to track down the “bad guys” hiding behind their structures.

I doubt if any business owner will have her door kicked in at 3am simply for failing to file a report. But it will also be a handy little tool to throw in the prosecutor’s box. Take, for example, Larry.  Federal and state authorities suspect Larry is up to something (just pick something) but there isn’t quite enough to nab him. Except, wait . . . Larry’s Lawn Service, LLC hasn’t made the required FinCEN filing.

Existing Reporting Entities

For existing LLCs and corporations, relax. But just a little. Existing reporting entities have until January 1, 2025, to report. Entities formed after that have thirty days to report.

Examples

Ed Smith and his sons own Smith Hardware in Smalltown, NC. Smith Hardware is an S corporation. Smith Hardware, Inc., Ed, and any son who owns 25% or more are covered.

Ilene Jones is sole owner of Ilene’s Interiors (an LLC). Covered.

Ilene’s sister, Imelda, runs Imelda’s Hang Nails (a nail salon) as a sole proprietorship. Not covered.

Small Town CPAs, owned by Jake Jones and two others (a North Carolina professional corporation). Small Town CPAs is registered with the Public Company Accounting Oversight Board (about 80% of public accounting firms are).  Not covered. Public accounting firms are exempt. WHAT?!

Mason Law, PC (a North Carolina professional corporation). Covered. Law firms are not exempt. Take that, you lawyers! The accountants must have a better lobbyist.

Frank and Berta Furter set up an LLC to hold three rental properties and put the LLC ownership in a trust that they are the beneficiaries of. Frank, Berta, the Trust, and the LLC are all covered.

So What?

For those out there who decide to ignore these requirements or balk at coughing up the info, you may be thinking, “so what?”

Continued noncompliance can cost you a civil penalty of $591 PER DAY of noncompliance. If they’re feeling really annoyed the feds can go after you with criminal charges that could cost you $10,000 and up to two years in the slammer, that’s what.

What To Do?

For the brave, you can log in to the FinCEN website and try to sort through it. But there is a better way. There are a growing number of private companies that have popped up that can painlessly handle this for you. First, we at Mason Law, PC (a reporting entity, by the way) have decided we will NOT be offering this service because we could not find a way of handling filings efficiently. First, check your current attorney (if it is not us) or your accountant to determine if they will handle it.

Some months ago, I became acquainted with Paul Formella and his business partner Jared Schrader. Paul is a former Big Law corporate attorney. He (like I did) fled the Big Law Firm environment. Paul and Jared have setup Perfect Form based in Davidson, NC. They have a great website, it is easier to navigate and read, it explains compliance steps in understandable English, and they can walk you through every step. It is who I use, and I have referred them to many folks. Go to Perfect Form, LLC and check them out.

I’m not kidding, if you do not go to Perfect Form, go somewhere. Also keep in mind I do not handle criminal law.

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Get a prenup! Get a will! You’ve been warned.

Fred

Fred

Sally, now 82, has been with Fred, now 83, for 10 years. They married last year against the advice of her children, her minister, the neighbors, and every human within a 5-mile radius. Fred, something of a seedy character who showers at least once a month, has his charms, especially when he has been drinking (thus, he is always charming unless passed out). His daughter is a money-grubber, but his son isn’t (mainly because he lives at NC Central – the prison in Raleigh, not the university in Durham).

Sally had a massive stroke a week ago, and son Tom tells me the docs are saying she won’t last long. He wants to know what will happen next.

I answered by throwing out questions. Any land? Yes, $200,000 with the home I was raised in on it, and all of it Sally’s. Any cash, investments, annuities, and the like? Yes, about $300,000, and all of it Sally’s. Does she have a will? Yes, it leaves everything to me. Did they get a prenup? No.

“So, what happens next, Bob?”

“Are you sitting down?”

The Year’s Allowance

First, I explained that old Fred would be entitled to a “year’s allowance” of $60,000 off the top. North Carolina law allows that amount to a spouse free of any creditor claims (and before any other estate plan scheme kicks in) to help the surviving spouse “keep it together” for a year.

Of course, that can be waived in a good prenuptial agreement (which Sally and Fred didn’t bother with).

The Intestate Share

Sally will not die “intestate” because she has a Will (that’s why we say she will die “testate”), Fred will not be entitled to a spouse’s intestate share.

Because I am trying to convince you how important a will is, let’s look at what would happen if Sally had no will. Fred would have been entitled to one-half of the real property (assuming Tom was Sally’s only child; if he had one or more siblings Fred would be cut down to one-third of the real property).

We’re not done. If Sally died intestate, Fred would be entitled to an additional $60,000 of the personal property and one-half of the balance (if Tom had any siblings, Fred’s share would drop to one-third). And that is AFTER he receives his $60,000 year’s allowance. So, based on $300,000 in personal property, Fred’s share would be $120,000 ($60,000 + $60,000) PLUS $90,000 (one-half of the remaining $180,000 after satisfying the two $60,000 hits). A grand total of $210,000. Son would get $90,000. Fred’s share would drop to one-third if Tom had any siblings.

Also, consider this: If Fred took this route (because Sally had no will), upon his death the grubby daughter and his NC Central son would take Fred’s share. I’m sure Tom will love sharing the homeplace with these characters.

By the way, all of that could be waived in a good prenuptial agreement.

So, cheer up, Tom! Your Mom had a will. But hang on. I’m not done.

Elective Share

If Fred is not happy with the will (and he won’t be when he realizes there is nothing in the will for him, and after his daughter gets through with him), he has a choice: File a petition to take an “elective share” of Sally’s estate, or claim a life estate against the real estate (he can’t do both; he must choose one or the other).

Because Fred and Sally have been married less than five years, Fred would be limited to 15% of Total Net Assets (I’ll get to that below). Between five and ten years of marital bliss, it jumps to 25%. Ten to fifteen, and it jumps to one-third. And once they’ve been married fifteen years or more, it climbs to 50%.

What are Total Net Assets? Basically, add everything up and subtract anything he may have received from Sally through other sources. When adding everything up add the total value of any real property, including any life estate in the property created after the marriage and to which he did not consent. Also, add in the value of any gifts made within a year of death.

In Fred’s case, he would have to settle for $75,000 (plus $60,000 year’s allowance, or a total of $135,000).

That’s better than the $210,000 intestate share, so it is good Sally had a will – and kept it in a safe place. There would have been problems had Sally’s will developed legs and gone MIA.

And, yes, all this could be waived in a prenuptial agreement.

Elect a Life Estate

As an alternative (sorry Fred, you can’t have both), Fred could elect a full life estate in the residence and a life estate of “one third the value” of the other real property. I have never seen that “one third the value” in my 24 years of practicing law in North Carolina. Nor could I find a colleague who had.

I believe that with respect to a large farming operation (for example) the surviving spouse would be entitled to one-third the annual proceeds of that operation.

He also gets everything IN the residence free and clear. I hope Tom had gotten his 1970s baseball card collection out of there.

The downside is that Fred would be responsible for property taxes (full on the residence), maintenance, and insurance. Tom could also sue him for it if he failed to do that.

If I were advising Fred, and unless he really needed a roof over his head, I’d advise him to “take the money and run.”

Finally

Tom

At the end of our meeting Tom (now quite shaken) asked me, “What if Fred had a bad accident

before Momma passes?”

I’m kidding! He did not ask that. But, not being the Lord, I have no way of knowing what might be in a man’s heart.

Final note: Look here at other late in life second marriage issues.

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