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 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.