By: Ted Sutton, Esq.

Sam was a young man who began buying stocks at a young age. As he got older, his stock portfolio kept growing. But because he held the stocks in his personal name, Sam was concerned about the portfolio being exposed in a lawsuit. In order to protect his investments, Sam formed a Wyoming LLC in 2021.

Sam’s best friend was Ricardo, a Spanish citizen whom he met in college. Ricardo also loved to invest in stocks, and wanted to invest alongside Sam. So in 2023, Sam gave Ricardo a 30% interest in the Wyoming LLC. Ricardo contributed $5,000 worth of stocks into the LLC.

From that point on, it was all downhill for Sam and Ricardo. The Corporate Transparency Act (CTA) took effect in 2024. And because Sam and Ricardo didn’t timely report their Wyoming LLC, they were hit with a $10,000 fine.

What Are Inactive Entities?

Under the new CTA, companies are required to report information about their business and its “beneficial owners” to the Financial Crimes and Enforcement Network (FinCEN) at the U.S. Department of the Treasury. However, the CTA carves out 23 exemptions for certain entities.

One of these exemptions is the “inactive entities” exemption. Many business owners may try to argue that their company meets this exemption. But the exemption’s requirements are a lot stricter than you think.

“Inactive entities” are entities that:

• Were in existence before January 1^st, 2020.
• Are not engaged in active business
• Have no ownership held by a foreign person
• Have had no change in ownership in the last 12-month period
• Have not sent or received funds over $1,000 within 12-month period; and
• Do not hold any type of assets

Your business must meet all of these requirements to be classified under the “inactive entities” exemption. And if it doesn’t, it must report information to FinCEN.

Application

As you can see, Sam’s Wyoming LLC failed all of the requirements. Sam created the entity in 2021. Ricardo, a Spanish citizen, acquired an interest in the Wyoming LLC within the past year and placed $5,000 worth of stocks into it. And, of course, the LLC owned assets in the form of stocks.

The only argument that Sam could make here is that the LLC was not engaged in any “active business.” But because the Wyoming LLC failed every other prong, it does not meet all of the “inactive entity” requirements. As such, it needed to report its information to FinCEN.

Beneficial Ownership Requirements

Another thing worth mentioning is the beneficial ownership requirements. A “beneficial owner” is someone who owns at least 25% of the company, or someone who exercises “substantial control” of the company. If someone meets the requirements of a “beneficial owner,” they must report their beneficial ownership information to FinCEN.

In the example above, Sam owned 70% and Ricardo owned 30% of the Wyoming LLC. Because both owned greater than 25%, they both qualify as “beneficial owners.” As such, both must report their beneficial ownership information, including copies of a passport or driver’s license, to FinCEN.

Conclusion

The CTA is a new law that nobody is talking about. It is complex and convoluted. Even worse, many business owners will be left in the dark about the law and its requirements.

Luckily, we here at Corporate Direct will help you navigate the CTA. For more information, click the link here.