New York, United States – Starting from January 1, 2024, a law known as the Corporate Transparency Act will have implications for solo artists, performers, writers, and creatives who have Limited Liability Companies (LLCs) or are considering forming one. The law aims to combat financial crimes, including money laundering and terrorism, by requiring businesses formed through their state’s Secretary of State to file a report called a Beneficial Ownership Information Report (BOI). The report will identify the “beneficial owners” of LLCs and other entities.
The primary target of this law is small LLCs, often single-member businesses. In recent years, the US has become a prevalent source of shell companies, with many states not requiring identification during the formation of an LLC. As a result, law enforcement has faced challenges in prosecuting financial crimes committed through these entities. The Corporate Transparency Act seeks to address this issue by establishing a non-public database of beneficial owners with at least a 25% stake, accessible to law enforcement through the Financial Crimes Enforcement Network (FinCEN), a division of the US Treasury.
While the filing itself is free and simple, failure to comply can lead to severe penalties, including fines of up to $10,000 and imprisonment for up to two years. To navigate this new requirement, LLC owners and entities formed through the Secretary of State must first determine if the law applies to them. Most LLCs, corporations, and entities formed through state filings are required to file a BOI report unless they qualify for an exemption. Foreign entities conducting business in the US through a Secretary of State registration are also subject to the law.
Determining the beneficial owners is the next step. For single-member LLCs, this is straightforward as the owner is the beneficial owner. In the case of partnerships and larger entities, anyone with at least 25% ownership or “substantial control” must be identified. Existing entities have one year from January 1 to file their initial reports, while new entities formed after January 1 have a 30-day window to file.
Once the BOI report is prepared, it must be filed through the FinCEN website or with the assistance of an accounting or legal professional. Additionally, LLC owners must remember to update the report within 30 days of any changes in beneficial ownership, such as gaining a partner or closing down the business. Importantly, the BOI report is not an annual filing, but rather an initial report and subsequent updates when necessary.
New York State has also passed its own law, the LLC Transparency Act, which will take effect on January 1, 2025. Unlike the federal law, the New York law focuses exclusively on LLCs and creates a publicly available database.
The Corporate Transparency Act is expected to impact around 32 million entities, aiming to combat financial crimes and hinder the use of shell corporations. By identifying beneficial owners and maintaining a non-public database accessible to law enforcement, the law has potential to assist in prosecuting crimes such as terrorism and human trafficking. However, LLC owners and entities must familiarize themselves with the requirements, file the necessary reports, and keep them updated to avoid penalties.
It is important to note that this article does not provide specific tax advice and individuals should consult with their accountants to apply the rules correctly to their circumstances. This article serves as general information only and should not be acted upon exclusively.