Friday, June 21, 2024

The Corporate Transparency Act: How Asheville Real Estate Investors Handle Beneficial Ownership Filings

Meetup Recap
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From the AVLmeetup event on June 21, 2024

Lunch & Learn: The Corporate Transparency Act: Navigating Beneficial Ownership with LLCs

Event details, podcast, and full transcript ›

Every LLC owner in the room had a filing deadline they probably did not know about. That was the takeaway from the Corporate Transparency Act Lunch & Learn, AVLmeetup's June 2024 event at Hilltop Event Center, where retired attorney and real estate investor Mary Hart broke down the new federal beneficial ownership reporting rule and the penalties attached to it.

Hart is a 30-year attorney turned real estate investor and educator who runs The Aim Higher Academy and co-founded the SweetHart Women in Real Estate Mastermind. She opened by asking who had heard of the law. A few hands went up. She asked who had already filed. Fewer still.

Key Takeaways

  • The Corporate Transparency Act came out of the 2021 National Defense Authorization Act but did not take effect until January 2024. FinCEN, the Financial Crimes Enforcement Network at the U.S. Department of Treasury, expects about 32.5 million businesses to file a beneficial ownership information (BOI) report in the first year.
  • A beneficial owner is anyone with 25% or more ownership, or anyone with "substantial control," meaning senior officers or whoever actually makes a company's day-to-day decisions, whether or not they own any of it.
  • Penalties run $500 a day per entity, even for an honest mistake. Hart has interests in 16 to 18 entities, and the presentation put that at roughly $8,000 a day if her own filings lapsed. Willful violations can also carry a $10,000 criminal fine and up to two years in prison.
  • Deadlines depend on formation date: entities that existed before January 1, 2024 have until the end of 2024 to file; ones formed during 2024 get 90 days; anything formed in 2025 or later gets just 30 days. Corrections and updates also carry a 30-day window.
  • A federal court in the Northern District of Alabama ruled the law unconstitutional for the plaintiffs in that case and National Small Business Association members as of March 2024, but the ruling does not extend to anyone else, and FinCEN has appealed.

What the Corporate Transparency Act Actually Requires

The Corporate Transparency Act requires most companies formed by filing with a secretary of state, corporations, LLCs, and certain statutory trusts, to report information about the people who own or control them. The presentation described the stated purpose as stopping anonymous shell companies from being used for human trafficking, money laundering, and drug cartels, a laudable goal even as Hart criticized how far the law reaches into ordinary small businesses. There are 23 exemptions, mostly for large companies with 20 or more employees and $5 million or more in revenue, banks, and charities, none of which the presentation expected to apply to anyone in the room.

For the company, the report requires the full legal name, any DBA, the U.S. address of its principal place of business, and the EIN. For each beneficial owner it requires a full legal name, date of birth, personal residential address, and a copy of an unexpired driver's license, passport, or state ID. Company applicants on entities formed in 2024 or later must supply the same, except they may list a business address instead of a home address. The applicant must be a specific individual, not a law firm name; if a paralegal filed under a supervising attorney, both of their information gets reported.

Who Counts as a Beneficial Owner, and Who Does Not

The presentation said to think broadly when deciding who counts, because the government cast an intentionally wide net to catch bad actors, which also sweeps in ordinary business structures. Minor children are exempt until the age of majority in the state where the company is located, but someone has to remember to file once they turn 18. Custodians, employees whose authority comes only from their job title, creditors, and heirs who have not yet inherited also do not have to be listed. Hart's advice on the gray areas: "if you're not sure whether someone's a beneficial owner, err on the side of caution and report their information."

Trusts are where the law is least settled. FinCEN's FAQs do not directly address them, so a trustee is generally treated as a beneficial owner when a trust owns 25% or more of an entity, and beneficiaries with distribution rights or the power to revoke the trust as grantor may also need reporting. Trust protectors, who hold powers like removing a trustee but carry no fiduciary duty, probably do not need to be reported, but Hart said there is no case law yet.

The FinCEN Identifier Shortcut

Anyone reporting the same information across multiple entities can apply for a free FinCEN identifier: a unique number, for individuals or companies, that replaces a full information packet on every filing. For someone in Hart's position, retyping the same details across 16 to 18 entities would be, in her words, "a pain in the rear end." The advice from the session: get an identifier before filing, since updating it later updates every linked entity instead of requiring separate corrected reports.

Questions

  • Is there an annual filing requirement once you submit the initial report? No. According to the presentation, the only times you file again are a corrected report, if the original was inaccurate, or an updated report, if information like an address or ownership stake changes. Both carry a 30-day window.

  • Isn't most of this information already on file with the IRS through tax returns? No. A tax return does not necessarily identify everyone with substantial control, does not include a copy of a beneficial owner's driver's license, and likely does not include their home address either, all of which the BOI report requires.

  • How does the 90-day deadline work if you repurpose an existing LLC instead of forming a brand-new one? It runs from the entity's creation date, not from when you started using it. Reusing an LLC formed before 2024 gives you until the end of 2024 to file; a brand-new LLC starts the 90-day clock immediately.

  • Does the FinCEN identifier apply to a person, a company, or both? Both.

Hart also pointed attendees to FinCEN's own website for its FAQ section and filing form. The presentation warned that FinCEN will never text or email a form or QR code, so anything claiming to be from FinCEN that asks for a click is fraud. AVLmeetup's next event, the 2nd Annual Summer Mixer, followed on July 11, 2024.

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