Navigating the Corporate Transparency Act: Secure Your Business with a Trust

Family business owners and what they need to know about the Corporate Transparency Act and trusts
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Under the impending Corporate Transparency Act (CTA), businesses are facing fresh reporting requirements in 2024. For business entities in New Mexico, these changes can lead to new obligations and challenges. Keep reading to understand the act’s nuances, the potential impacts on businesses, and how shifting ownership to trusts can offer a secure path forward.

Understanding the Corporate Transparency Act (CTA)

A component of the The Anti-Money Laundering Act of 2020, passed on January 1, 2021, the Corporate Transparency Act (CTA) is set to go live on January 1, 2024.  The CTA creates new reporting requirements for limited liability companies (LLCs), corporations, and other business entities in the United States about their beneficial owners, i.e., the individuals who ultimately own or control the company.  Small business owners are likely to see the biggest impact of the act, yet this new regulation will affect millions of companies, both domestic and foreign.

What is the Purpose of the Corporate Transparency Act?

The goal of the new legislation is to wade through the entity formalities and find out who truly owns the company and its assets.  The information will aid the U.S. government in its efforts to identify bad actors, both foreign and domestic, who use the anonymity provided by various company structures to pursue criminal activities.

Definition of a Reporting Company

A reporting company is defined by entities such as corporations or limited liability companies created by a document’s filing with the New Mexico Secretary of State. This includes both domestic and foreign entities. However, certain entities like banks, insurance entities, and charitable organizations are exempt from these requirements.  Large corporations consisting of 20 or more full-time employees, $5 million in gross sales, and an office location in the U.S. are also exempt from the reporting requirements.

Beneficial Ownership Information: What’s Expected?

Companies are expected to report details about the reporting company and the individual(s) holding direct or indirect control of the business entity, as well as company applications to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Information like full names, birth dates, and addresses of beneficial owners or senior officials of reporting companies must be shared via the online (FinCEN) portal to ensure data security.

Deadlines, Penalties, and the CTA

For companies established before January 1, 2024, the filing deadline extends to January 1, 2025. Those formed post-2024 must file within 30 days of inception. Non-compliance or misinformation can lead to steep fines, civil penalties (fines up to $500 per day up to a total of $10,000), and criminal penalties (up to and including imprisonment).

Are Trusts Considered Reporting Companies?

Generally, trusts are outside the CTA’s purview since they aren’t created by filing documents with the New Mexico Secretary of State.  But, if a trust holds a reporting company, it becomes essential to analyze its terms to determine beneficial ownership.

Why Trusts? The Benefits Beyond CTA

Trusts provide added layers of protection for businesses.  A trust is another type of legal entity, like an LLC, created when one party (grantor) gives another party (trustee) the right to hold title to property or assets for the benefit of a third party (beneficiaries).  By definition, trusts protect assets for businesses and individuals, ensuring beneficiaries’ security against potential creditors.

Protection from Litigation with Trusts

Trusts act as shields against legal actions, especially in cases of small business sales. Removing assets from direct ownership can safeguard against litigation since one cannot be sued for assets they no longer possess.

Succession Planning: The Role of Trusts

For business continuity, trusts play a pivotal role in succession planning. This ensures business objectives align with future goals, whether that’s selling to external parties, employees, or family retention. Effective documentation and coordination among legal and financial experts are key to achieving these plans. Learn more about succession planning in our article: Is Succession Planning Necessary for Family Business Entities?

Next Steps: Consult with E-Law

Considering the looming changes, it’s prime time to review your business entity’s status to understand what your reporting requirements are for the CTA.  Estate Planning Attorney Michele Ungvarsky of E-Law in Las Cruces will help you navigate this new reporting requirement for businesses.  If you are a business owner, request a consultation with her office to:

  • Understand if your entity is seen as a reporting company under the CTA.
  • Evaluate the benefits of changing company ownership to a trust.