*Please see the last section for an important update on the CTA*
Beginning January 1, 2024, the Corporate Transparency Act (CTA) mandates certain business owners to file reports detailing ownership information with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). This measure aims to combat various illegal activities such as money laundering, terrorism financing, and tax fraud. It’s crucial for those with business entities in their estate plans to understand and comply with this law.
What is the CTA?
The CTA requires reporting companies, which include corporations, LLCs, and similar entities, to disclose specific details about the company and its beneficial owners. Beneficial owners, defined as individuals with significant equity or control, must provide personal information as well. Exemptions apply to larger businesses and regulated industries.
Entities created before January 1, 2024, must submit initial reports by January 1, 2025, while those established after this date have varying deadlines. Understanding and meeting these requirements is essential for compliance.
Note: While a trust is not classified as a reporting company under the Corporate Transparency Act (CTA), if the trust holds a stake in a reporting company, like an LLC, it may still necessitate disclosure of certain trust information under the CTA due to its potential classification as a beneficial owner.
Does the CTA Impact You?
Utilizing business entities like LLCs and family limited partnerships can offer asset protection and probate avoidance benefits. LLCs shield personal assets from business debts, while FLPs provide protection from creditors and tax advantages through partnership interest discounts.
The Corporate Transparency Act (CTA) targets smaller entities, unlike many business regulations that focus on larger businesses. Small business owners may need to comply with the CTA unless they qualify for stated exemptions. These exemptions are typically applicable to heavily regulated industries or businesses with specific criteria, such as over 20 full-time employees, $5 million in gross receipts or sales, and a physical office in the US. Compliance with the CTA is critical for business owners, especially if their entity is part of their estate plan, as certain entities like LLCs and family limited partnerships may fall under its reporting requirements.
An LLC serves as a versatile business structure capable of holding various assets, offering asset protection and avoiding probate. Asset protection is facilitated by the LLC’s separate legal status, shielding members’ personal assets from business debts. Probate avoidance is achieved by transferring ownership to the LLC, which bypasses the cumbersome probate process. However, if membership interests are held individually, probate may still be required.
Family Limited Partnerships (FLPs) are entities owned by multiple family members, designed to manage contributed assets. FLPs consist of general partners responsible for management and unlimited liability, and limited partners who receive profits without personal liability. FLPs provide asset protection by holding assets separately from individuals, complicating creditor access. Additionally, leveraging FLPs for tax planning involves discounting partnership interests, maximizing gift tax exclusions and estate tax exemptions.
To ensure compliance with the CTA, gather necessary information for all reporting companies and beneficial owners and submit initial reports within the specified deadlines. If you have or plan to establish such entities, seek guidance to navigate the CTA’s requirements effectively.
Recent Controversy*
On March 1, 2024, a US District Court ruled that the Corporate Transparency Act (CTA) of 2021 is unconstitutional (National Small Bus. United v. Yellen). The CTA mandated companies to disclose personal stakeholder information to a division of the US Department of the Treasury. The court found the CTA unconstitutional because it exceeded Congress’s power.
Currently, the CTA cannot be applied to the specific plaintiffs involved in this case. However, the outcome, likely subject to appeal, may hold significant implications. It is advisable for business owners and advisors to stay vigilant regarding evolving regulations as this case, along with others, progresses through the appeals process. For LLCs formed in 2024, there is a 90-day period to comply with CTA reporting requirements, but for LLCs formed before 2024, LLC owners may be advised to wait to take any action until this progresses in court. Neal Law Firm remains committed to tracking CTA-related developments and will furnish updates accordingly.
