Episode Transcript
[00:00:00] Speaker A: Hey guys, before we get started on this week's episode, we have had a lot of great feedback on our most recent two episodes with Danny Andrews. First sharing his money story, then tips for high income earners advancing their career. We've had several people who have reached out asking for his contact information, so we told Danny about this. He actually does do career counseling and consulting and he is going to open up a few spots on his calendar for people who are on our email list. So if you're not already on our email list, go to newmoneynewproblems.com subscribe we're going to be sending out a newsletter this week with details of how you can take advantage and what the rates will be and so on and so forth. So we're about to hop into the episode. But if you are interested in being one of the people who reaches out to Danny and gets some time on his calendar, join that email list and you will have details by the end of this week. All right, let's get started with this episode.
[00:00:49] Speaker B: Let's get some money from New Money, New Problems. It's the New Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
Negotiating compensation, purchasing your first investment property, helping your family with money, the highs and lows of, ah, entrepreneurship. New Money brings new problems that require new solutions. Join us as we work through them together.
I'm Brenton Harrison and this is the new M. Money New Problems podcast.
[00:01:27] Speaker A: Hello, my name is Brenton Harrison of New Money New Problems and your host for the New Money New Problems podcast. We're getting towards the end of the year and we are going to have an, as I promised, a recap episode if you were on our newsletter about some of the things that will change or stay the same with the impending incoming administration that we will see at the top of next year. But in this week's episode, I wanted to talk about something that is equally relevant, especially for small business owners. And if you hear the term small business owner and you think that's not you, there are several people out there who may not own their own small business per se. They work in corporate America or a W2 job, but they have some type of LLC or they're a member of an llc or you may work for a small business and be one of its key employees. And if you are in any of those camps, this week's episode is still relevant to you because it's about something called the Corporate Transparency act. And The Corporate Transparency act was passed way back in 2021. But there's a deadline that's right around the corner as it pertains to the act that I would say the overwhelming majority of people I come across that are impacted by it are completely unaware of. So let's talk through what the act is and why it's so important that you understand this deadline. The Corporate Transparency act was something that was passed with the goal of actually making it harder to do things like evade taxes and launder money through entities, where up to this point in time, it has been easier to hide who is benefiting or who is actually owning the entity. So, for example, when you think about things like, uh, what you see online when you have this, you know, drug dealer or money launder, who has all these offshore international shell companies where there's three or four different companies that are obscuring the actual source of revenue, those are things that actually happen in real life. And part of the reason that people have been able to evade taxes and launder money is because there is not always a large amount of information that's required in terms of who actually owns the entity. So, for example, we've talked about LLCs in previous episodes, and we have said that an LLC could members or owners of the LLC that are actually individuals, but you can also have an LLC whose members are other llc. So if you think about how complex that can get if you have one LLC and then the members of that LLC are other LLCs, and if you look at that LLC, the members of that are other LLCs, you can see how, ah, you can get into a scenario where it can be very hard to discern who actually owns and operates and benefits from that entity. Well, the Corporate Transparency act, uh, aims to resolve this or solve this by not only requiring that you give reports on the beneficial owners, but it creates a database where it can actually identify the individuals themselves to have a better idea of the individuals instead of the entities that are benefiting from things like an LLC or an S Corp or a pllc. And if you're wondering just how big an impact this could have, there's an estimate that over 30 million entities would be required to actually file reports as a result of, of the Corporate Transparency Act. And many of these entities could have several members. So in terms of the number of people that it impacts, it is well over 30 million, and the number is probably inestimable. But there are people out there who think they are not impacted, and they definitely are because of what the act considers a Beneficial owner. But before we get into that, let's talk about who actually has to file these reports as a result of the Corporate Transparency Act. And when it comes to who has to file reports under the Corporate Transparency act, one of the easiest ways to keep it in your mind is any entity that has to file an article with the state to create itself is likely impacted by the law. So that could be something like an LLC or a pllc. It also could be something where maybe that entity itself didn't have to file with the state, but it owns things that do so. For example, we have not talked yet about irrevocable trusts, but irrevocable trusts are an estate planning tool that many wealthy people use to get items out of their state, so they wouldn't be subject to taxes. But inside of that irrevocable trust, there are assets. And one of those assets, as an example, could be an llc. So while that trust may not be something that typically has to file because it owns an asset that is subject to the law, it could be an example of a beneficial owner of that trust or the director of that trust needing to file a report with the Treasury Department as a result of adhering to the Corporate Transparency Act. Now, there are a couple exceptions to this. If you're a charity, even if you filed articles with the state to establish your existence, you do not have to file reports as a result of the cta. There also is an exception for larger organizations, which it defines as an organization that has 20 or more employees and revenues of $5 million. So if you have 40 employees but your revenue is only $300,000, you still could be subject to filing as a result of the cta. And you also see an exception for entities that are already subject to really strict, um, measures when it comes to its governance. So, for example, a bank wouldn't that would have to file as a result of the CTA because it is already subject to strict regulations and requirements as a result of being a bank. Additional exceptions include those who are minors. So we talk about this concept of beneficial owners, but if that beneficial owner is a minor, they don't have to report. And there is an additional exception for future beneficiaries and inheritors. So, for example, if you are a person who could be considered a beneficial owner of a trust, meaning that at some point in time, the owner of that trust or the grantor of that trust is going to die, leaving those assets to you. If you do not have substantial control over those assets in the here and now, and you are a future inheritor, you would not be required to file as a beneficial owner. And while we've talked about the concept that a trust could have an asset that would require it to report, if they do not, then there is an additional exception for trust as well. So if the trust does not in and of itself own an entity that would be required to report, then that trust is exempt from reporting. So now that we know about who has to file and who doesn't have to file, let's talk about the concept of beneficial ownership. When you say the term small business or LLC and then the term owner, it's natural that you would think of who's actually a member or an owner in terms of the organizing documents. So a membership share, a partnership share things of that nature. But when it comes to the Corporate Transparency act, beneficial owner doesn't just mean that you are actually a member or an owner. They describe it as anyone who has substantial control over that entity, whether or not they actually own ownership shares. Now, there are guidelines in terms of how much actual ownership you can have before being required to report. So if you are an actual member or owner and you have at least a 25% stake in that organization, you're required to report under this act whether or not on a day to day basis you actually exhibit any form of authority. Um, but even if you don't have that actual percentage, you could be considered having substantial control based on your day to day actions. So you could own 5% of that company as a result of maybe putting up a small portion of the amount that funded the organization. But if you're the CEO or the CFO and as a result of your task, you actually exhibit substantial control over that company on a day to day basis, you're required to file because you're considered a beneficial owner even if you're not in the C suite or someone who is actually running the company on a day to day basis. There are smaller businesses out there that have key employees where there is some type of arrangement on paper where they are going to be elevated at a particular point in time. That could be upon the death or incapacity of the owner. It could be after a particular period of time has passed, whereas this person will be elevated. But those key employees could also in a pinch be considered a beneficial owner even though they have no equity, even though they may not be compensated as such. The law might consider them someone who has a substantial stake in that organization. And while those are the serious things that might come to mind, you also want to think about the fact that when you talk about LLCs, there are smaller or even inactive LLCs that operate for a specific purpose. We see this very frequently with people who might have one real estate property investment property. And for that investment property they created an LLC to manage its affairs and to help with the liability that comes from having an investment property. I've even seen LLCs created in order for people to buy things like packages for sports tickets. So let's give an extreme example of somebody who created an LLC with three or four of their business owner friends and that LLC exists to buy a stake in some small organization, or maybe it actually exists to buy tickets to Titans games every year and they have a person who's a friend of theirs who isn't a member in the LLC but has equal access to the tickets and they pay this person a fee to distribute them to the people who are owners of that box and their friends and family to make sure that they are taken care of on game day. Even though that person isn't an owner in the llc. Based on the access and control they have of that organization, are they considered a beneficial owner? Unfortunately, it may not be clear, but if you don't err on the side of caution and you're wrong, after the break, we'll talk about the potential penalties for failing to report a beneficial owner when it comes to this act. So it's something where you may want to err on the side of caution because many of the rules related to the Corporate Transparency act are very opaque. So after the break, we'll dig into a little more of the details of when you have to file for the Corporate Transparency act and what the penalties are for failing to do so.
[00:10:59] Speaker C: This is the New Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen. We'll be right back.
[00:11:17] Speaker B: Are you wondering what new money problems you might be overlooking in your financial life? If so, we've got great news. We've crafted the New Money New Problems Gap Finder to identify potential weaknesses in your finances in areas ranging from budgeting, investments, insurance, and even the threat your extended family's finances could pose to your household.
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[00:11:51] Speaker C: You're listening to the New Money New Problems podcast. Subscribe now at newmoney new problems.com welcome back.
[00:12:07] Speaker A: All right, let's go over the details of when you have to file this beneficial owner report and some things that you can do to potentially make it easier on yourself if you uh, are the owner of this entity. And to understand these requirements, you actually have to have an understanding of when your entity was actually created. And if it's created after 2025, there's going to be much more stringent requirements and regulations. But here's how it is based on entities that were created before 2024 and those that were created this year. If your entity existed and is required to file a report under the Corporate Transparency act before 2024, then you have until January 1st of 2025 to file your beneficial owner report. Now I don't think there are a lot of people who are even aware that the Corporate Transparency act exists, but those who are, some of them have decided that rather than actually complying with these deadlines, they would just dissolve their llc. So for example, you might have an entity that was inactive and you're like, there's no point of uh, supplying all this information for something that's not producing any revenue, so on and so forth. I'll just dissolve it. Well, if you dissolve your entity in 2024, even though you did so before the filing deadline, you are actually still required to file before 1-1-2025. So doing away with the LLC or the S Corp with the goal of circumventing the CTA is something that actually wouldn't work if you decided to do so in the calendar year 2024. Now that's for entities that were created before 1-1-2024. If your entity was created during the year 2024 before 1-1-2025, then you have to file this beneficial owner report with the Treasury Department within 90 days of Int entity formation. And in terms of the information it includes, it's information like the legal name and any trade names or DBAs of your beneficial owners, their tax identification numbers of any pass through entities, and even an identifying document. So for example, if I'm a beneficial owner, I may not have to give my tax id, but I do have to give my name, my address and maybe a photocopy of my driver's license as a part of my beneficial owner report. And this is a big deal because as we talked about, a beneficial owner does not necessarily need to be someone with membership interest. So if you have an entity that has multiple beneficial owners, some of whom are not aware that the Treasury Department deems them to be. So you have to get all of this information on file for them and upload it to the Treasury Department, which for some people may be a privacy violation. They may not want to be a part of this report because it's something that many people don't know exists, much less understand. And you have to get this stuff uploaded by January 1, 2025, or if the entity was created this year, within 90 days of formation. Now, after January 1, 2025, it's actually 30 days. And you even have to update this report if the information for any of your beneficial owners changes. So imagine having an entity with seven or eight or ten beneficial owners, and not only are you required to file this report for all of them, but if any of them changes their name due to marriage or even just moves and changes addresses, imagine having to update and be aware of all of that information and doing so within 30 days of the change to avoid being assessed a penalty. It's an onerous responsibility. And one of the ways, if you look at the frequently asked questions about this law that you can find on the Treasury Department website, which we'll link to, that they recommend in terms of making it easier on yourself as an entity owner, is to ask beneficial owners to create what's called a fin sin identifying number. So this is something they can create on the Treasury Department website, where instead of the entity being required to upload all that information, the beneficial owner themselves creates that identifying number, uploads that information, and they then have the burden of proof of updating it whenever there are any changes. And we don't practice law here, this is something where we're going to, at the end of this episode, recommend that you reach out to your counsel to see if this act applies to you and what you need to do to comply within the deadlines. But if you're following this guidance, it seems like one of the things that may make it easier to do is if you're an entity with multiple owners, to apply for that FinCEN identifying number to make the report easier on yourself as the entity owner to file before the deadline and to make sure that you're on the right side of any updates for those owners moving forward. Now, earlier in this episode, we talked about the penalties for failing to not only file the initial report on beneficial owners under the Corporate Transparency act, but also subsequent penalties for failing to report updates are something that are no joke at all. If you're looking on screen, we're reading at a section from the American Bar association website, and it says, and I quote, there are steep escalating fines of $500 per day up to $10,000 per violation and possible jail time up, uh, to two years for those failing to timely and properly comply with the CTA's requirements. It continues, it bears noting that failure to timely file a required initial report could result in up to a $10,000 fine, but that subsequent events that would necessitate an amendment to such required but missing filing, had the initial report been made, would also cause penalties to accrue, meaning that a failure to file an initial report may result in aggregate fines accruing well in excess of $10,000 prior to an initial notification of violation from FinCEN to the reporting company, end quote. So what this is saying is if you fail to file the report before the deadline, then you could see penalties up to $10,000. But if after you missed that initial report, there have been changes in the ownership structure that would have had to be amended, like a change in address, like a change in name, they could also apply penalties to that missing amendment M meaning that the total cost could exceed well above $10,000. So, like I said, the Corporate Transparency act, uh, is not something that you want to fool around with. This is something where, as an advisor myself, I'm trying to make people aware of it, but we don't file legal documents. But in terms of getting deep guidance on these reports and even seeing if this is something where someone will file on your behalf, you would want to reach out to a legal professional that has experience with LLC formation, small business entities, and seeing if this is something that the person who created it for you might offer as a service, or if you can sign up with another law firm or entity that can do it for you and handle any amendments on an ongoing basis. So I know this isn't the sexiest of topics, but we've talked about the fact in the past that we're not going to always go for the new flashy thing. We're going to talk about things on this podcast that impact a great number of our listeners. And when it comes to the Corporate Transparency act, it is not just people out there who have an LLC with 20 employees who need to pay attention. If you are somebody who saw those social media reels or tweets years ago where they were telling everybody to create an LLC because it was just the thing that was going to allow you to avoid paying all taxes, even if you've now found out that that is inaccurate, if you still have that llc, you're required to file a beneficial owner report under the Corporate Transparency Act. If you're a person out there whose family has purchased an investment property, or you've purchased an investment property and you hold that property inside of an llc, you have to file a report under the Corporate Transparency act, and you have in many cases, until January 1st of 2025 to do so, or these penalties start to accrue. But we'll be back next week with an episode that will likely be a little more exciting. So if this was relevant to you or relevant to someone whom you know, send this episode to them. And I hope you'll be back here in seven days for next week's episode.
[00:19:27] Speaker B: From New Money, New Problems this was the New Money, New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
