What does the Corporate Transparency Act mean for family offices? David S. Rosen is chair of the tax department at RS&F, a business advisory and CPA firm, and a nationally recognized authority on family office structuring and planning. He explains what the CTA requires, how its implementation is going and why punctuality is more important than perfection when it comes to compliance:

What is the Corporate Transparency Act, and why was it passed?

The Corporate Transparency Act was passed into law as part of the Anti-Money Laundering Act of 2020 and went into effect on January 1, 2024, for new companies. The law was passed as a measure to counter money laundering and terrorism.

The effect of it is that every single entity (other than certain exempt entities) has to report certain information to the federal government’s Financial Crimes Enforcement Network, or FinCEN. They have to do that by filing what’s called a Beneficial Ownership Information Report, or a BOI Report.

The law was passed to try to identify who is engaging in activities on behalf of the millions and millions of entities that are out there. To do that, they’re requiring that every entity ultimately disclose all of its material beneficial owners at the natural person level. So, for the first time in the United States, we are requiring entities to report to the federal government who the owners actually are and the controlling parties of those entities.

What are the specific requirements and deadlines in the CTA?

For an entity that was formed this year, in 2024, you might already be late: You have 90 days from the day it was formed to file a BOI report. If an entity was formed prior to January 1, 2024, you have until December 31, 2024, to file your BOI Report. And if it’s formed on January 1, 2025, or later, you only get 30 days to file.

And this is important: If any information changes — including, for example, the home address of a beneficial owner — then you need to, within 30 days, file an updated BOI Report for every single entity that person is associated with.

 

 

 

 

 

 

This can be complicated, because what if someone moves and you don’t know? You’re late, and then you have these incredibly onerous potential penalties. Civil penalties can be $500 a day for every day the violation continues. There are also criminal penalties if you do it willfully: imprisonment of up to two years and a fine of up to $10,000.

Are any entities exempt from the requirements?

The only exemptions are for entities that already report information to the federal government — like banks, credit unions, public companies and anyone that registers with the SEC — and for those that have no activity and no assets. There would not be very many family office-type entities that would be exempt except for entities that already register with the SEC.

There is also a general exemption for a large operating company: one that has more than 20 full-time employees, has filed a tax return reporting more than $5 million in gross receipts, and has a physical office in the United States. These are companies that file payroll and tax returns, so they’re already on record.

Any entity that doesn’t meet those qualifications – one that just owns assets, that is used for financing or estate planning purposes — has to file a report.

How difficult is it to file a BOI Report?

You’re reporting, for every single entity, who its beneficial owners are, so you have to report every individual who either exercises substantial control over a reporting company or a person who owns or controls 25% or more of the ownership interest of the reporting company. This means that on entities whose owners are other entities or trusts, it must look through to see if anyone has substantial control, or owns 25% or more.

Now, in most circumstances, you know who owns more than 25% and who has substantial control. So it’s probably not a very large issue. But it creates a massive amount of complexity, including finding the information, inside of large organizations.

How is the filing process going?

They estimate that there are more than 32 million entities in the United States, and all of them that were in existence prior to January 1, 2024, will have to file by December 31, 2024 — less than six months from now.

I want to spend the second half of this year helping clients get ahead of their estate planning for next year, since that will change on December 31, 2025. So I’ve tried to tell everyone to focus on getting their Corporate Transparency Act filings in already. But the problem is that there’s a lot of friction out there, and people are not filing them quickly. Some are starting to, but they’ve never done it before, and some families don’t know what they have to do.

A lot of delay, I think, frankly, is being caused by too much discussion and analysis and a lot less doing. There are a couple of reasonably complicated legal issues that relate to how you properly fill out these forms, because you have to identify who has substantial control and who owns or controls 25% or more. And you have to take that down to the individual level, which means you have to review trust document after trust document. And then there are separate rules about who has substantial control.

So this could be a lawyer’s field day. A law firm could look at this set of rules and say, In order to identify who actually is required to file every one of these little one or two-page forms, we have to go through a million documents. That’s true, if you want a 100% guarantee you get it 100% right.

 

However, I would suggest that most family offices and most clients that we’ve represented over the years are not afraid of disclosure. They plan on complying with this law, and they plan on filing what is required to be filed. I think that clients should probably stop spending money on over-identifying the exact correct way to do this. Your objective is to get the form done accurately, without necessarily going through 50 documents to get there.

I’m not suggesting you take complete shortcuts, but I think that a lot of that there’s a lot of discussion and delay because people are trying to get to the correct answer in the technically correct way — when, frankly, you can probably get to the correct answer a lot more easily and get this behind you.

How has the legal challenge to the CTA affected the filing requirements?

There was a case in Alabama where a small business association sued, saying the CTA was unconstitutional, and won. They got an exemption for their members — but only for their members. And it’s more expensive to join this association than it is to file.

This case is being appealed to the 11th Circuit. The appeal has not yet been set.

For this to apply more broadly, you would need an expansive ruling by the 11th Circuit that takes the entire law and throws it out. That’s broader than what they did in the lower court, and I think that’s a stretch. No one is asking for that anywhere that we know of.

So delaying filing in hopes of a legal reprieve is not a good strategy?

If there is no court case that takes care of it, then the only way this goes away is if Congress does something.

And if you take a step back and look at the past 25 years, you see more and more compliance requirements ever since then. It’s a combination of technology making it easier and international events like 9/11 in 2001. There is just more and more disclosure.

If I were them, I would file.

 

Margaret Steen

Margaret Steen is the editor of FO Pro, The Family Office Professional. Based in Silicon Valley, she has written for Family Business Magazine for more than 15 years.