On Jan. 1, 2024, a new federal law came into effect, requiring more than 30 million small- and medium-sized businesses to report ownership information to the federal government by Jan. 1, 2025.

If the law applies to your business, you’re running out of time. Failure to timely file the report could result in fines of at least $500 per day, up to $10,000 maximum, and two years’ jail time.

What is it?

The Corporate Transparency Act was enacted to eliminate anonymity in business ownership that previously allowed bad actors to hide illicit financial dealings and launder money, which they sometimes used in terrorist activities. In order to do so, the CTA casts a very wide net.

As directed, the Financial Crimes Enforcement Network (a unit of the U.S. Department of the Treasury, known as “FinCEN”) is creating a massive database of business “beneficial ownership information” (BOI) for use by the government in identifying the individual owners of privately held assets.

What it’s not

The CTA beneficial ownership information filing is not the same as the annual (or bi-annual) statement of information your entity files with the Secretary of State. It’s not on your federal or state tax return.

It is not something your lawyer or your accountant has filed for you before 2024. It’s likely not something they’re filing for you now if you have not asked this of them.

Who must report?

With twenty-four very narrow exceptions, the CTA applies to any business that is created by “filing a document” with a state or Indian tribe. This includes Limited Liability Companies (LLCs), Corporations, limited partnerships, other closely held businesses, and in some circumstances, trusts. Even if your business was dissolved in 2024, you’re required to file the BOI report.

How’s the filing going?

Recently, FinCEN reported to the AICPA’s Town Hall meeting that of the estimated 32 million businesses required to file, only about 6.5 million of them have, in fact, filed.

The failure to file may be because business owners are either unaware of the new law or confusing it with myriad other filings business owners are required to make.

The lack of filings may also be because in March of this year there was an Alabama court case that declared the law unconstitutional.

However, FinCEN was quick to appeal and issued a notice that they would continue to implement and enforce the Corporate Transparency Act, except as to the specific plaintiffs in the Alabama court case. So, unless your name is Isaac Winkles or you were a member of the National Small Business Association as of March 1, 2024, your business may be among the over 25 million businesses required to file who have not yet done so.

What has to be reported?

Reporting Companies must report to FinCEN certain information—the kind we generally work hard to keep private—with respect to the “company applicant” and the “beneficial owners” of the company. The reporting company must provide the following information for each “company applicant” and “beneficial owner” and must keep the information current:

—Full legal name

—Date of birth

—A copy of a valid photo ID (driver’s license, state ID, or passport) that has the same name and date of birth)

—Residential address (no P.O. boxes, no business address, no using your lawyer or accountant’s office address).

Reporting companies will have to collect this information from each “beneficial owner” — a term not as straightforward as it sounds — and then file the required report with FinCEN. Reporting companies formed on or after Jan. 1, 2024, will need to report “company applicants,” as well.

Furthermore, anytime there is a change in the beneficial ownership or in the information provided by the company applicant or beneficial owners (e.g., someone moves their residence), the reporting company has 30 days to file an updated report.

After the initial filing, the filing requirements are event-driven, rather than on a specific timeline, which effectively puts the burden on the reporting companies to regularly check with their beneficial owners as to when an update is needed.

Who is a “beneficial owner”?

The term “beneficial owner” is more complicated. In general, a beneficial owner is someone who owns or controls, directly or indirectly, 25% or more of the entity’s ownership interest, or exercises “substantial control” over the entity. What constitutes “substantial control” is the kind of thing litigators love to argue about. And here, the regulations included a lengthy list of non-exclusive examples and gave themselves a giant loophole by saying “and any other forms of substantial control over the reporting company.”.

When must the report be filed?

Reporting Companies formed before January 1, 2024, will have until January 1, 2025, to file the required report.

Reporting Companies formed on or after January 1, 2024, will have 90 days from the date of formation to file the report.

What now?

If you own a business entity, whether the business is active or not, whether it’s in California or elsewhere in the U.S., and whether you’re a small, medium, or large business, and have not filed your BOI report, act now. See your attorney or accountant about what your CTA reporting requirements are, if any.  This is a new law—preparation of the filing is not likely covered by any retainer agreement you have with your advisors, and it would be impossible for advisors to reach out to every business entity they’ve formed or worked with over the years.

It may take some time to gather the required information, and your advisors may have holiday vacation plans. It behooves you to act sooner rather than later. And take note, FinCEN has learned of fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the Corporate Transparency Act. Make sure you are working with your known advisors.

Then you can enjoy your holidays without fear of a $500-a-day late filing penalty.

Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles, CA. She is also the #1 New York Times bestselling author of “The Dog Lived (and So Will I)” and “Poppy in The Wild.”  You can reach her at [email protected]

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