Mark Pestronk
Q: I read that a new federal law called the Corporate Transparency Act took effect on Jan. 1. It apparently requires disclosure of previously confidential ownership information. Does the law apply to travel agencies and other travel companies in the U.S.? If so, what do we have to do to comply? What are the consequences of noncompliance?
A: Until now, business ownership of most private companies has not been reported to government agencies. With few exceptions, corporations and limited liability companies (LLCs) have never needed to name their owners when they are set up or when they file their annual reports with the state.
For most U.S. businesses, all that changed on Jan. 1. Under the Corporate Transparency Act and regulations issued by the Treasury Department, businesses existing on that date need to file a list of "beneficial owners" with the Financial Crimes Enforcement Network by no later than Jan. 1, 2025.
The purpose for the law is to combat money laundering and the concealment of illicit funds through "shell" corporations or other entities in the U.S. However, the filing requirements are a burden on all law-abiding small businesses.
The "beneficial owners" that have to be listed are any individuals who directly or indirectly own at least 25% of the stock or equity as well as any individuals who exercise substantial control over the company, even if they are not a stockholder or equity owner. So, oddly, you can be a beneficial owner even if you don't own anything.
For each beneficial owner, the report must contain their full legal name, home or office address, date of birth and the number on a government-issued document such as a driver's license or passport. You do the filing online.
You certainly can have your accountant or attorney do the filing for you. They in turn must file their own applicant reports.
New companies set up during 2024 have 90 days to file their reports. After 2024, newly set up companies must file their reports within 30 days after they are established. You will also need to file a follow-up report within 30 days whenever there are changes in beneficial ownership.
Interestingly, the law exempts "large operating companies," which are defined as those that have more than 20 full-time employees located in the U.S. and more than $5 million in gross receipts or sales as shown on the top line on its tax return. The law focuses on smaller companies because the government believes that those are the ones that are typically involved in money laundering and other financial crimes.
Another interesting aspect of the law is that it also applies to foreign companies that are registered to do business in any U.S. state. The same size criteria apply to them.
If you don't comply with the new law by the deadlines, you could be subject to fines of $500 per day and up to two years in prison.
You can find out a lot more about the requirements by downloading the small-business guide.
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UPDATE (Dec. 13, 2024): In his Dec. 12 column, Mark Pestronk provided an update: "Update:
A Legal Briefs column early this year, "A new hurdle for small businesses
to clear," covered the new federal Corporate Transparency Act, which
required businesses with fewer than 20 employees file a list of "beneficial
owners" with the Financial Crimes Enforcement Network by no later than
Jan. 1, 2025. Then, in early March, a federal judge held that the law is
unconstitutional, but the government took the position that the injunction was
limited to the parties in the case. On Dec. 3, another federal judge expressly
extended a new injunction nationwide. This means that you do not have to comply
with the law, at least for the time being. It is possible that a court of
appeals will lift the injunction, but I wouldn't count on it, since the case
would go to the most conservative federal appeals court. Even if the filing
requirement is reinstated, there would be a new filing deadline in the future."
UPDATE: In early March, a federal judge held that the Corporate Transparency Act is "unconstitutional because it cannot be justified as an exercise of Congress' enumerated powers." The government has appealed, and experts caution that the deadline shouldn't be ignored.