Creating a business entity in Colorado is a relatively simple process. You visit the Secretary of State’s website, fill out the required forms, pay a filing fee, and your new business entity is ready to go. Once the entity has been formed, you just need to file an annual report and pay the filing fee to stay in compliance with Colorado law. For many business entities, this was the only reporting requirement (other than tax returns) that they would face. However, beginning on January 1, 2024, the Corporate Transparency Act (“CTA”) will go into effect. Designed primarily to combat money laundering, this new federal law creates substantial reporting requirements for most business entities, including small businesses. More importantly, these reporting requirements apply regardless of whether a business currently exists or will be formed on or after January 1, 2024. After providing some background on the CTA, this post will explain what you will need to do to make sure your business complies with the CTA.
The CTA was enacted in 2020 as part of a broader package of anti-money laundering laws. If you’ve seen Ozark or read about The Panama Papers, you may be familiar with how business entities such as LLCs can be used for illegal activity. Typically, a business entity in a foreign jurisdiction is used to create a business entity in the United States. The US business entity can be used to create more business entities until the actual owners are masked behind a layer of businesses. The purpose of the CTA is to create a database so that the Financial Crimes Enforcement Network (“FinCEN”) can drill down through these multiple layers and get to the actual owner. However, a database is only as good as the information it contains and, given the sheer number of business entities operating in the United States, imposing transparency on the US financial system is going to require business entities of all types to file a report with FinCEN.
The CTA is highly complex and owners are going to need to look at how the law applies to their specific entity. For this reason, this post will deal only with entities formed in the United States and not entities formed in other jurisdictions. For owners of US entities, there are three key terms to know: (I) reporting company, (II) beneficial owner, and (III) company applicant.
A “reporting company” is any “business entity” that must file a report with FinCEN. A “business entity” is any entity formed by filing a document with a Secretary of State or tribal entity and includes LLCs, limited partnerships, and corporations. There are 23 types of business entities that are exempt from filing a report with FinCEN, with the general rule being that if the entity already has to file a report with the government, such as banks and non-profits, then the entity does not need to file a report with FinCEN. The other key exception is for businesses with (i) $5 million or more of sales or gross receipts from the United States as shown on a federal tax return; (ii) more than 20 full-time employees in the United States; and (iii) an office or operating presence in the United States.
A person is the beneficial owner of a reporting company if that person directly or indirectly owns at least 25% of the reporting company. Certain persons, such as minors and future heirs under an estate plan, are exempt. If an exemption does not apply, the general rule is that if the person either owns at least 25% of the ownership interests or has a mechanism to gain control of at least 25% of the ownership interests (e.g. stock options), then that person is a beneficial owner. Owning ownership interests through a trust or holding company DOES NOT divest a person of beneficial ownership of the underlying business entity. For example, if D is the sole member of ABC, LLC and ABC, LLC is the sole member of XYZ, LLC, then D MUST be listed as a beneficial owner of BOTH ABC, LLC and XYZ, LLC.
A beneficial owner also includes someone who has “substantial control” over the entity. This includes high-ranking company employees and officers, persons with the power to remove or replace a majority of the entity’s board of directors, and any another person with the right to influence important decisions, such as someone who owns voting shares.
Reporting companies that are created on or after January 1, 2024, will need to disclose their “company applicants.” This is the person who actually files the documents with the relevant state or tribal authority creating the entity AND the person or persons who direct or cause the filing to be made. For example, if a business owner is not very tech savvy and asks his friend to file articles of organization for his LLC, then the friend AND the business owner are both company applicants.
If a business entity is a reporting company, then it must file a report with FinCEN disclosing its beneficial owners and, potentially, its company applicants. Reporting companies formed before January 1, 2024 will have until January 1, 2025 to file their initial report. Reporting companies formed on or after January 1, 2024 will have 90 days to file a report. Reporting companies formed on or after January 1, 2025 will have 30 days to file a report. If a reporting company has any changes to its beneficial ownership, it must file an updated report within 30 days. You should consult with an attorney to determine if your business is a reporting company and, if so, who are its beneficial owners.
The advice given in this post is educational and provides only a general overview. If you have questions about how the CTA applies to your business entity or would like to speak with one of our estate planning attorneys, please contact Alex Kirven at 720-443-4892 or by sending an email.