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The Corporate Transparency Act and Your Small Business

November 10, 2023

What small-business owners need to know about the new Corporate Transparency Act.

If you own a small business or family office, you could soon be required to report ownership details to the federal government—or face stiff penalties and possible jail time. Here's what you need to know.

What is it?
The Corporate Transparency Act (CTA), which goes into effect on January 1, 2024, requires otherwise unregulated companies to report information about "beneficial owners"—those who own at least 25% of or exercise substantial control over the reporting company—to the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN). Failure to comply could result in fines of up to $10,000 and imprisonment for up to two years.

Why target small businesses?
The law attempts to close a loophole in corporate regulations that enables criminals to hide their identities using shell companies. However, the legislation may affect almost every small business in the U.S., including family offices, independent contractors, and the limited liability companies (LLCs) commonly used by mom-and-pop shop owners.

"Family LLCs are often used to transfer ownership of a business from one generation to the next in a tax-efficient way," says Austin Jarvis, director of estate, trust, and high-net-worth tax at the Schwab Center for Financial Research. "By retaining a small interest, the original owner can claim certain discounts that reduce the value of the transfer for tax purposes. The CTA doesn't prohibit this type of transaction, but new IRS rules will require these entities to report ownership information."

What are the requirements?
Entities created on or after January 1, 2024, must report beneficial owner information to the FinCEN website within 30 calendar days of creation. Existing entities have until January 1, 2025, to comply with the statute, unless they undergo ownership changes—such as those triggered by a sale or minor children reaching the age of majority—in which case they have 30 days from the date of change.

The law exempts 23 types of businesses, including accounting firms, banks, charitable entities, and large operating companies that meet certain requirements.

"If you're a business owner, familiarize yourself with the CTA's reporting requirements and meet with your accountant or attorney to discuss whether the new law affects you," Austin advises. "Don't wait for the government to come knocking—the stakes are just too high."

Corporate Transparency Act

Unlocking Transparency: How the Corporate Transparency Act Impacts Small Business Owners.

The Corporate Transparency Act (CTA) holds significant implications for small business owners, aiming to enhance transparency and combat financial crimes effectively. The act requires certain small businesses to disclose beneficial ownership information, meaning the individuals who ultimately own or control the business. This disclosure helps prevent illicit activities like money laundering, terrorism financing, and tax evasion, protecting the integrity of the financial system.

For small business owners, complying with the CTA means providing accurate and up-to-date beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). This requirement promotes a fair and level playing field, as it ensures that businesses across the board are accountable and transparent in their operations. By sharing beneficial ownership details, small businesses demonstrate their commitment to ethical practices and responsible financial dealings.

While the CTA may involve some additional administrative efforts for small business owners, it brings several benefits. Firstly, it can enhance trust and credibility with customers, investors, and financial institutions, making it easier to access funding and forge meaningful partnerships. Secondly, complying with the act helps safeguard businesses from potential reputational damage associated with financial crime allegations.

Moreover, the CTA aids law enforcement and regulatory agencies in investigating suspicious activities effectively, preventing criminals from exploiting small businesses as a cover for illicit operations. By participating in this national effort to combat financial crimes, small business owners contribute to a safer and more secure business environment for all.

It is essential for small business owners to stay informed about the CTA's requirements, seek professional advice if needed, and proactively comply with the regulations. Embracing the act's objectives aligns with the values of transparency, accountability, and integrity, fostering a healthier business landscape and reinforcing the reputation of small businesses as vital contributors to the economy.