Small Businesses Have New Federal Reporting Requirements

The paper work for many small businesses will be increasing.

Many small businesses with 20 or fewer employees and $5 million or less in gross receipts or sales will be subject to new federal reporting requirements under the Corporate Transparency Act (“CTA”), a section of the National Defense Authorization Act enacted on January 1. This will include both those formed in the U.S., whether through a state or an Indian nation, as well as those formed outside the U.S. but registered to do business here.

The Act is designed to fight against money laundering, terrorism finance, tax fraud and other serious financial crimes through additional reporting to the Financial Crimes Enforcement Network of the U.S. Department of Treasury. The new law requires these businesses to reveal their “beneficial owners” in a written statement, defined as anyone who “exercises substantial control” and owns at least 25% of the entity, as well as any applicants—those who file applications to form or register the company in question.

With regulations currently in the process of being fleshed out, the Act probably will not actually take affect for about a year, but companies would be wise to become familiar with its provisions. What’s certain is that the ownership statement must include the full legal name of each “beneficial owner” and their residential address or that of the business, as well as each individual’s birth date and either their driver’s license or passport number.

These ownership statements will not be available to the public. Under the Corporate Transparency Act, the government may only access them for reasons related to law enforcement, intelligence and/or national security. Financial institutions are allowed to see them if the reporting company gives them permission to do so for due diligence purposes.

Businesses above the aforementioned employee and sales figures, publicly traded companies in general, nonprofits, closely regulated entities like banks, and some other types of organizations are exempt from the reporting requirements.

Regulations to be fleshed out could well touch on topics like fine-tuning how to measure who is and is not a beneficial owner, how to handle multi-tiered companies and related parties, how to indicate changes in ownership, and possibly to exempt certain entities or classes of entities whose information would not help detect, prevent or prosecute the crimes in question.

Once regulations are adopted, companies that pre-date those regulations will have two years to submit their beneficial ownership statement, while those that subsequently come into existence must do so as soon as they are formed. Information about changes in ownership must be provided within a year, although that time frame can be shortened by the Secretary of the Treasury.

Those who do not report—or who provide false information—can be fined or imprisoned, although they can evade responsibility if they show they either didn’t know the information was false or didn’t understand the requirements, and they provide correct information within 90 days.

So … it’s not too soon to find out whether and how this new law will affect your business, and going forward you should keep abreast of regulatory developments as they roll out.