Be it a James Bond flick or Ozark, we’ve all watched those intriguing dramas featuring complicated plots in which the main characters are involved in money laundering, corruption, and tax evasion through shell corporations.
Well, the team at FinCEN (the Department of the Treasury’s Financial Crimes Enforcement Network) must have seen those shows, too! Thus, FinCEN has now issued proposed regulations through the Corporate Transparency Act (CTA), which will hopefully crackdown on corruption. But their crackdowns may affect your small business as well.
Let’s hit rewind for a moment. A shell corporation is a company without active business operations or significant assets. There may be legitimate reasons for setting up a shell corporation. However, they are often used for unethical or illegal purposes by disguising business owners from law enforcement or the public.
Currently, few states require corporations, LLCs, or other entities to share information about their owners or the people who form them, and there has never been a federal regulation to do so. As a result, anonymous shell companies exist, and when an investigation is required it can be impossible for law enforcement to find the actual owners.
Moving forward, FinCEN will soon require smaller businesses to disclose the names, addresses, and other identifying information of their beneficial owners for inclusion in a database that will be accessible to law enforcement. Beneficial owners include individuals who own 25 percent of a business entity and all those who exercise substantial control over it.
The CTA targets small business entities since they are most likely the ones that may be shell companies. Almost every small business that is not a sole proprietorship or general partnership will have to comply with the new regulations. Most larger publicly-traded companies will be exempt from reporting.
The CTA will take effect when the proposed regulations become final. When it does, all new smaller businesses will have to file a beneficial owner report with FinCEN within 14 days of formation, and all existing smaller companies will have to file a report within one year.
Company owners can apply for a FinCEN identifier, which will then assign them a unique number to give to the reporting company. Reporting companies must identify every beneficial owner and inform them of the need to provide the required information.
Watch for notifications from FinCEN, and be sure to comply if you are required to do so. Tune in to C&B for the latest news and developments in this series.