Why You Should Form Your LLC or Incorporate a New Business BEFORE 2024!

Are you considering starting a new business or forming a new LLC or incorporating in the near future? If so, you should really consider getting it done before the end of 2023. The Federal Corporate Transparency Act (“CTA”) is here, and it carries both civil and even criminal penalties for non-compliance.

Introduction, Caveat Stuff

In this article, I’m going to give you a super high-altitude overview of the CTA and why I think it’s important to at least consider forming your new business, corporation, LLC or other legal entity as soon as possible before January 1, 2024.

As always, this article is strictly for entertainment and educational purposes only and is NOT legal advice. Always consult with your own lawyer to discuss your given facts and legal situation.

This article will not be a deep dive into the CTA, which will be a topic for a different post.
The point of this one is to simply get the information out there to current or aspiring business owners and their advisors on this very narrow point.

I am not trying to be alarmist in any way. I hate alarmist blog articles and videos.
One of the goals of the new firm YouTube channel is to debunk alarmist videos.

Also, I don’t get anything out of doing the above video. While I have been a business attorney here in Phoenix Arizona for over 20 years, I stopped handling formations awhile ago and won’t do them even if asked!

What is all this CTA talk about?

The CTA imposes mandatory reporting obligations on a broad swath of entities. While there are 23 categories of exempt companies, chances are very good that you’re not one of them. By some estimates, some 32 million U.S. legal entities will be swept up in the CTA’s requirements in just the first reporting year alone. If you don’t think you’re covered under the CTA and its reporting requirements, be prepared for a rude (and possibly very costly!) awakening.

Specifically, the CTA will require the following information to be disclosed and reported directly to the Financial Crimes Enforcement Network (aka “FINCEN”) regarding the following:

  • The legal entity itself (i.e., a “Reporting Company”)
  • The Reporting Company’s “Beneficial Owners”
  • “Applicants” of or for the Reporting Company

All of this reporting must be done online through FINCEN’s dedicated portal named Beneficial Owner Secure System (“BOSS”). As of the date of this article, BOSS is not currently live but presumably will be by the start of 2024.

Reporting Company information

Reporting Companies subject to the CTA will need to provide at least the following basic information to FINCEN:

  • Entity’s legal name
  • Any trade names or d/b/a’s
  • Business address
  • Tax identification number
  • Jurisdiction in which initially formed or incorporated

Who is a Beneficial Owner or Applicant?

Per the CTA, a “Beneficial Owner” is any individual who, directly or indirectly, either:
i) Exercises “substantial control” over a reporting company; or
ii) Owns or controls at least 25% of the ownership interests of a Reporting Company

Per the CTA, an Applicant includes an individual who either:
a) directly files the document that creates the entity or registers the foreign reporting company, or
b) is primarily responsible for directing or controlling the filing of the relevant document by another.

NOTE: Reporting Companies formed before January 1, 2024, do not need to report Applicant information. Moreover, changes to Applicant information do not need to be updated with FINCEN, assuming the information was correct when first reported. This detail is of special relevance to those of us who either are owners of or, as in my case, have previously formed many corporations and LLCs for clients in the past.

What information must be disclosed about Beneficial Owners and Applicants?

Under the CTA, Reporting Companies must provide all of the following information regarding Applicants and Beneficial Owners:

  • Full legal name
  • Date of birth
  • Street addresses (identified as a current residential or business street address).
  • Non-expired State ID or Passport (a copy of which will be uploaded into BOSS)

What are the penalties for non-compliance?

For failure to report or remedy a non-compliant report, Beneficial Owner’s and Applicants could face civil penalties of $500 per day. Serious violators, on the other hand could be looking at criminal fines of up to $10,000 and/or imprisonment for up to 2 years.

While this might not apply so much to Beneficial Owners and Applicants, unauthorized disclosure of information reported to FINCEN carries the same civil penalties mentioned above, only harsher criminal punishment of up to $250,000 in fines and up to 5 years in prison.

So why hurry to form my new business or entity before 12/31/2023?

First of all, you don’t have to do anything, particularly if you have no interest in having your own business ever or being an owner or an officer of a corporation or LLC in the future.

However, if you are planning on either of these things, having your entity formed before this year’s end will give you an extra 1-year window (i.e., December 31, 2024) to comply with the CTA’s formal reporting requirements outlined above. On the other hand, if you form your new business after December 31st of this year, you only get 30 days to report the necessary information to FINCEN.

On top of this, as mentioned earlier, if you happen to be an Applicant of a Reporting Company formed after December 31, 2023, you will then be subject to CTA’s mandates for Applicant’s to report and update information.

What you can do now to get ready for the CTA?

If you have an existing legal entity that qualifies as a Reporting Company under the CTA, the good news is that you do have some time to work with.

Discuss CTA’s reporting requirements with your company’s legal counsel and begin to collect and verify information on not only the entity itself, but also your Beneficial Owners and those exercising “substantial control” over the Reporting Company (which may or may not be the same as the individuals who own 25% or more of ownership interest in the company.

You should also discuss and consider coming up up with a CTA compliance policy for your company, as well as designate a compliance officer to collect, report, track, and update Beneficial Owner information with FINCEN.

It may also be prudent to think about amending your corporation’s Bylaws or shareholder agreements or, in the case of LLC’s, the operating agreement, to now require anyone who could be considered a Beneficial Owner under CTA to provide their information to the company and update any changes to that information promptly, so as to be able to comply with the data update obligations of CTA.

To this end, your business may wish to further amend its management and ownership documentation to limit or carve-out any duties of confidentiality which the Reporting Company may owe to owners and “substantial control” officers and key employees considered Beneficial Owners under the CTA.

Ben Bhandhusavee is the Founder of BHANDLAW, PLLC, a technology and e-commerce law practice advising founders and management teams on select e-commerce and intellectual property matters, as well as corporate and technology transactions. The firm serves corporate and individual clients throughout Arizona, the United States, and internationally. For more information, feel free to reach out using the contact form on the right or call us at (602) 222-5542 to schedule a meeting. Connect with Ben on LinkedIn or Avvo.