By Jeffrey S. Watson

The Corporate Transparency Act (CTA) is here and now in full force and effect. In 2021, Congress passed this legislation that was signed into law by President Biden but did become official and enforceable until January 1, 2024. This is the most broad, overreaching, and invasive federal reporting statute in the history of our government that squarely and directly impacts every small business owner, entrepreneur and real estate investor you know.

If you are a real estate investor, agent, broker, operator, or anyone else who owns a business, here is what you need to know.

- Which of your entities are considered “reporting entities” under the CTA?

- Who are the beneficial owners of each entity?

- What disclosure information is required?

Using that information, you are now required to timely file your disclosures with the Financial Crimes Enforcement Network (FCEN).

I realize that is a heavy load of information, so let me break this down for you into bite-sized bits of information. Let’s start by looking at what entities are considered to be “reporting” companies under the CTA. The types of entities that must report include C-corporations, Sub-S corporations, LLCs taxed as corporations or partnerships, and LLCs treated as disregarded or pass-through entities.

There is a minimum threshold for the entity of owning, possessing, or controlling $1,000 or more. This means if you have an entity, for example an LLC, that has only been filed with the Secretary of State but does not yet have a tax ID number and does not yet own or control anything, that entity is not considered to be a reporting company yet. When that entity does get a tax ID number and has control or ownership of $1,000 or more of assets, whether directly or indirectly, that entity will then need to report.

What must be reported? Any person who has either substantial control of or an ownership interest of 25% or more in an entity must be disclosed. “Ownership interest” as defined under the CTA is incredibly broad and covers all sorts of arrangements, including, but not limited to, equity, certificates, interest in joint ventures, convertible interest, and bearer shares. Any individual who owns or controls an ownership interest through various means such as trusts, beneficiaries, grantors, intermediaries, or blocker MUST be reported.

The CTA aims to ensure that reporting companies identify all individuals who have substantial control and those who own or control at least 25% of that entity. I know what some of you are thinking. “Well, Jeff, I’ll never own more than 24%, and I’ll stay under that 25% threshold.” That’s fine, as long as you don’t have any substantial control, which I’ll define in my next email. I think you’ll be disappointed to find that your 24% ownership strategy will not work.

What is meant by “substantial control”? Under the Corporate Transparency Act (CTA), the definition of substantial control is distinct from other federal statutes defining that term, such as securities laws. Under the CTA, an individual is deemed to exercise substantial control if any of the following are true:

- they serve as a senior officer or manager of the entity that must report beneficial ownership information to FinCEN,

- they have authority over senior officer appointments,

- they have authority over a majority of the board of directors, or

- they influence important decisions, including those related to business operations, asset transactions, equity issuance, borrowing money, entering into contracts, and governance documents.

In the CTA, there is a non-exhaustive list of examples wherein an individual may exercise substantial control, but the foregoing list should give you an idea as to how wide open and subject to interpretation the term “substantial control” is as it relates to business operations, asset transactions and equity issuance.

Some of you may have read my previous email thinking, “Well, Jeff, I’m going to make sure I never own more than 24% of an LLC or corporation, so I won’t have to be listed in any report.” OK, then how are you going to be able to have that entity do what you want it to do without having “substantial control”? For example, in a small LLC that buys, fixes, and resells houses, whoever makes the decisions on what houses to buy, how much to spend, how to do the rehab, what contractors to hire, where to borrow the money, and when to sell the property and for how much, would all have substantial control. I trust by now you are beginning to realize just how broad and invasive this legislation is.

I’m going to close by giving you an update to a presentation I did last month on the CTA on behalf of the Seller Finance Coalition. Between when I did that presentation and the end of 2023, the regulators at FinCEN changed and expanded the timeframe for a newly-formed 2024 company to report. They have 90 days. If a company formed in 2024 makes any changes to its ownership structure, such as adding or losing a member or someone different having substantial control, it is still a 30-day reporting window for that.

Before I get into explaining my experience using the FinCEN website to register one of my existing entities so I could get a feel for what is going on, I want to make sure you understand a recommendation I’m making that has no material benefit to me but should have a huge protection for you. If you do not already have in place good identity theft insurance, you need to get that right away because it’s more likely than ever that your identity will now be exposed. You need to make sure that identity theft insurance covers the family-owned businesses you may operate and control.

I understand that on page 21 of the 22-page bill, Congress set forth requirements regarding the cyber security for FinCEN’s website, and they are saying it has been given the highest non-classified cyber protection possible; but I also know that there is a history of even classified websites in our federal government being hacked by foreign operatives. That information will be stolen some way, somehow. I don’t know when or by whom or how, but I’m preparing for it now, and I recommend you do the same.

Now for my thoughts regarding my first attempt to use the FinCEN website. At the outset, let me say that I’m impressed by the fact that the site was up and working, but I was highly annoyed at the fact that it looks to be a complicated, multi-page process that seeks to collect far more information than was collected by the office of the Secretary of State when I established my LLCs.

What I and other practitioners I’ve talked with have yet to determine is whether certain information can be auto-populated or auto-saved if you get a FinCEN identification number or if you get an applicant identification number. I would hope, at a minimum, that the applicant ID number would apply across all the entities I have and will be forming in the future.

Given that in the latter part of December, the bureaucrats once again changed their positions on one of the regulations giving a new filer 90 days instead of 30 days in which to register an entity formed in 2024, it allows adequate time for us to figure out how this website functions and how to use it correctly before the deadline for getting things submitted for our newly-filed entities. It also gives each of us time to make sure we develop a list of all the entities we have that we believe are “reporting entities” and gather the necessary information such as drivers licenses or passports and current physical addresses for ourselves and any individual who owns the entities with us.

As of the time of this writing, I don’t know if there are any particulars that the website is requiring relative to the quality or size of the photo identification, such as your drivers license or passport. Remember, we are in the early days of this brand new, invasive, and broad legislation, so there will be a lot of learning to do going forward.

Your comments and brief questions are appreciated. I read every one and will do my best to briefly respond. If you like this article, please feel free to share it on social media or otherwise and encourage your friends to go to WatsonInvested.com to sign up so they can receive my emails.

UPDATE 3/5/24:  Federal Judge Rules Corporate Transparency Act Unconstitutional

UPDATE 3/18/24:  Is It Unconstitutional or Not?

Jeffery S. Watson is an attorney who has had an active trial and hearing practice for more than 25 years. As a contingent fee trial lawyer, he has a unique perspective on investing and wealth protection. He has tried over 20 civil jury trials and has handled thousands of contested hearings. Jeff has changed the law in Ohio four times via litigation.  His articles are also regularly featured the RE Journal.  Read more of his viewpoints at WatsonInvested.com.
https://bostonrealestateinvestorsassociation.com/the-corporate-transparency-act-cta-is-here/