Corporate Transparency Act – What You Need to Know

The Corporate Transparency Act (CTA) is here and now in full force and effect. In
2021, Congress passed this legislation that was signed into law by President Biden but
did not become official and enforceable until January 1, 2024. This is the most broad,
overreaching, and invasive federal reporting statute in the history of our government
that squarely and directly impacts every small business owner, entrepreneur, and real
estate investor you know.

If you are a real estate investor, agent, broker, operator, or anyone else who owns a
business, here is what you need to know.

•  Which of your entities are considered “reporting entities” under the CTA?
•  Who are the beneficial owners of each entity?
•  What disclosure information is required?

Using that information, you are now required to timely file your disclosures with the
Financial Crimes Enforcement Network (FinCEN). The regulators at FinCEN changed
and expanded the time frame for a newly-formed 2024 company to report. They have
90 days. If a company formed in 2024 makes any changes to its ownership structure,
such as adding or losing a member or someone different having substantial control, it is
still a 30-day reporting window for that. Entities that existed before the January 1, 2024
effective date are required to report within one year of the effective date.

Let’s start with what entities are considered to be “reporting” companies under the CTA.
The types of entities that must report include C-corporations, Sub-S corporations, LLCs
taxed as corporations or partnerships, and LLCs treated as disregarded or pass-through
entities.

There is a minimum threshold for the entity of owning, possessing, or controlling $1,000
or more in assets. This means if you have an entity, for example an LLC, that has only
been filed with the Secretary of State but does not yet have a tax ID number and does
not yet own or control anything, that entity is not considered to be a reporting company
yet.

When that entity does get a tax ID number and has control or ownership of $1,000
or more of assets, whether directly or indirectly, that entity will then need to report.
What must be reported? Any person who has either substantial control of or an
ownership interest of 25% or more in an entity must be disclosed. You do not report
what is owned by the entity, you report who owns the entity. “Ownership interest” as
defined under the CTA is incredibly broad and covers all sorts of arrangements,
including, but not limited to, equity, certificates, interest in joint ventures, convertible
interest, and bearer shares. Any individual who owns or controls an ownership interest
through various means such as trusts, beneficiaries, grantors, intermediaries, or blocker
MUST be reported.

Under the CTA, the definition of substantial control is distinct from other federal statutes
defining that term, such as securities laws. Under the CTA, an individual is deemed to
exercise substantial control if any of the following are true:

•  they serve as a senior officer or manager of the entity that must report
  beneficial ownership information to FinCEN,
•  they have authority over senior officer appointments,
•  they have authority over a majority of the board of directors, or
•  they influence important decisions, including those related to business
  operations, asset transactions, equity issuance, borrowing money, entering
  into contracts, and governance documents.

In the CTA, there is a non-exhaustive list of examples wherein an individual may
exercise substantial control, but the foregoing list should give you an idea as to how
wide open and subject to interpretation the term “substantial control” is as it relates to
business operations, asset transactions and equity issuance.

I know what some of you are thinking. “Well, Jeff, I’ll never own more than 24%, and I’ll
stay under that 25% threshold.” That’s fine, as long as you don’t have any substantial
control. Without having substantial control, however, how are you going to be able to
have that entity do what you want it to do? For example, in a small LLC that buys, fixes,
and resells houses, those who make the decisions on what houses to buy, how much to
spend, how to do the rehab, what contractors to hire, where to borrow the money, and
when to sell the property and for how much, would all have substantial control.

Reporting is done through FinCEN’s website. I want to remind you of the importance of
having good identity theft insurance in place because it’s more likely than ever that your
identity will now be exposed. You need to make sure that identity theft insurance
covers the family-owned businesses you may operate and control.

I understand that Congress set forth requirements regarding the cyber security for
FinCEN’s website, and they are saying it has been given the highest non-classified
cyber protection possible, but I also know that there is a history of even classified
websites in our federal government being hacked by foreign operatives. That
information will be stolen some way, somehow. I don’t know when or by whom or how,
but I’m preparing for it now, and I recommend you do the same.

The CTA may also impact the way entities are formed. The CTA places a significant
responsibility on the applicant to verify the accuracy and authenticity of the information
being used to file a new entity. With the significant responsibilities and potential
penalties being assessed on the person who actually goes online to submit the
information with a Secretary of State office or tribal authority, individuals like attorneys
or accountants will be less likely to want to take on that task on behalf of someone else.

The burden of determining what “substantial control” is, given the vague and broad
language used in the statute and the uncertainties of the ever-changing rules and
regulations, has caused certain advisory groups for accountants to say that accountants
should not be doing this as a service to their clients going forward. I tend to agree. I
anticipate that in the near future, and probably for some time to come, those who are
very careful about their craft are going to insist that any new LLC be established by
either the actual owners themselves or by an actual lawyer (not a paralegal) advising or
representing the owners and/or the new entity. The extra burdens and responsibilities
will most certainly affect the cost of having an attorney assist with establishing an entity.

I suggest the following plan of action:

• Identify every LLC and corporation in which you have an ownership interest or
  with which you have an affiliation.
• Verify that each entity has its own taxpayer identification number.
• Every entity that has $1,000 or more of assets that it owns or controls must
  report in 2024.
• Make sure you have purchased identity theft insurance.

Jeffery S. Watson is an attorney who has had an active trial and hearing practice for
more than 25 years. As a contingent fee trial lawyer, he has a unique perspective on
investing and wealth protection. He has tried over 20 civil jury trials and has handled
thousands of contested hearings. Jeff has changed the law in Ohio four times via
litigation. Read more of his viewpoints at WatsonInvested.com.