Yes, Your Small-Business Clients Still Must File FinCEN Reports

Despite a court ruling, the Corporate Transparency Act remains in effect for most businesses, with penalties for noncompliance.

The Corporate Transparency Act remains in effect for most taxpayers despite one court’s ruling that it is unconstitutional with respect to those plaintiffs.

Under the legislation, nearly all entities formed or registered to conduct business in the United States must report beneficial ownership information to the Financial Crimes Enforcement Network. The law was designed to limit taxpayers’ ability to use shell companies and ownership structures that can allow money laundering and other criminal activity to take place through those entities. 

The reach of the legislation is incredibly broad. Most small businesses are subject to the new rules, and failure to fully comply with the beneficial ownership reporting requirements can result in significant civil and criminal penalties. Now, FinCEN has recently updated its guidance to provide additional details on who is required to comply.

This new guidance can significantly affect business owners who are contemplating winding down operations — and even newly created entities that are quickly dissolved. 

Who Has to File With FinCEN/?

FinCEN’s new beneficial ownership reporting obligations apply to all domestic “reporting companies.” That includes C corporations, S corporations, LLCs (including single-member LLCs), limited partnerships and any other entity formed by filing a document with a secretary of state in the United States. 

Reports must contain basic information about the individuals who hold ownership interests in the entity, such as the owner’s (1) full legal name, (2) date of birth, (3) address, (4) identifying number from the individual’s ID (driver’s license or passport) and (5) a copy of the ID used. 

Entities created before Jan. 1, 2024, are required to file their report containing required beneficial ownership before Jan. 1, 2025. Entities registered after Jan. 1, 2024, will have 90 days from the date their registration becomes effective to report the required information. This 90-day deadline is reduced to 30 days starting in 2025.

Most small-business clients will not qualify under the exemptions that FinCEN has created. The law does create exemptions for tax-exempt entities, certain political organizations and inactive organizations that are no longer conducting business. Large organizations can be exempt if they have more than 20 U.S. employees, have filed a tax return showing more than $5 million in gross receipts or sales during the prior year and have an operating presence at a physical site within the United States. If the entity fluctuates above and below the 20-employee limit, it must file.

Penalties for failure to comply can be significant. Civil penalties for willful failure to comply with the reporting requirements equal up to $591 per day until the violation is corrected. Criminal penalties can include up to two years in prison and $10,000 in fines. Penalties can be imposed for failure to file, willfully providing false information or willfully failure to correct or update previous filings.

Updated FinCEN Guidance

When a company ceased to exist before the Corporate Transparency Act became effective, it is not subject to the reporting requirements. However, if the company existed as a legal entity for any period after Jan. 1, 2024, it is subject to the new reporting regime. That’s true even if the company had technically ceased operations before Jan. 1, 2024.

The new FinCEN guidance also addresses situations in which an entity was created in 2024 or later, yet was dissolved or ceased to exist before the entity’s initial reporting deadline. These entities are still required to submit their initial beneficial ownership information via the new procedures. FinCEN did not provide any guidance on how to identify the relevant individuals when an entity formally ceases to exist before their reporting deadline. A different FinCEN FAQ indicates that the report should include information about the beneficial owners at the time of filing.

FinCEN guidance makes it clear that an individual can control an entity through a trust structure. It’s possible that a trustee may be a beneficial owner of a reporting company by (1) exercising substantial control over the reporting company, or (2) owning or controlling at least 25% of the ownership interests in that company via the trust or structure. Beneficiaries, grantors and trust settlors can also be beneficial owners for legal purposes. The terms of the trust itself will dictate whether the individual is subject to beneficial ownership reporting requirements.

For example, the requisite ownership or control can be obtained if the trustee has the authority to sell or dispose of trust assets or if a beneficiary is the sole recipient of income and principal from the trust itself.

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