A new federal law requires entities owned by real estate brokers to disclose personal information and photographs of those who have ownership and control of the business.
Why this is important to you. From Wall Street to Main Street to your city, most private organizations and many nonprofits will be forced to comply with the Corporate Transparency Act (CTA). If you own or manage a real estate brokerage business, you should be careful. Beyond the initial reporting, ongoing compliance and coordination with other disclosures you are currently making, such as license and ownership disclosures and similar filings that real estate brokers make on a regular basis, is also important.
What is this law about? If you’ve never heard of CTAs, you’re not alone. Many business owners, executives, and their professional advisors were surprised to learn of the existence and scope of CTAs. At its core, the CTA requires the reporting of direct and indirect beneficial ownership and control information for individuals associated with businesses operating in the United States. Personally Identifiable Information (PII) includes your name, date of birth, physical home address, and photo. The U.S. Treasury Department’s Financial Crimes Enforcement Division (FinCEN) is currently building the Beneficial Ownership Protection System (BOSS) to receive, store, and manage this massive influx of information. FinCEN estimates that more than 32 million existing companies will be required to report in his first year. This law will reduce the risk of money laundering, illicit financial activities, corrupt practices, and terrorist financing, at the expense of many legitimate businesses (and their owners and managers) facing these extensive new reporting obligations. The purpose is to prevent donations.
Who must report? On or after January 1, 2024, any natural person who directly or indirectly owns 25% or more of a class or category of beneficial ownership in an enterprise, or who has or claims, directly or indirectly, “substantial control”; PII must be reported for natural persons who may on business.
What ongoing reporting obligations exist? Once your initial report is filed, you must update this information within 30 days of any subsequent event that makes the previously reported information inaccurate. What constitutes ownership and effective control varies from company to company and requires analysis and expert advice.
Exclude entities. Certain categories of entities are exempt from CTA compliance. These typically include regulated entities such as publicly traded companies, insurance businesses, banking businesses, nonprofit 501(c) tax-exempt entities, and quasi-governmental organizations. There are two other exemptions that are particularly important to the real estate broker sector.
Large entity exemption
In addition to other exemption categories, a blanket exemption is available to entities that meet all three of the following criteria: (1) operate from a physical commercial address within the United States; (2) 21 (3) have annual U.S. gross receipts of more than $5 million as reported on the entity’s prior year federal tax return; Missing any of these criteria will disqualify a company from this exemption. One important aspect of this exemption is that it only covers full-time W-2 employees of the company itself.
Because many real estate brokerages rely on part-time employees, contractors, independent contractors and other arrangements, the company’s ability to reach and maintain at least 21 full-time employees throughout the year; may be hindered. Furthermore, FinCEN did not allow companies to consolidate the number of employees across their affiliates. This exclusion may also impact on the structure of relevant professional bodies and management service organizations common to the real estate brokerage industry. An open question remains as to whether FinCEN considers employees assigned to professional employer organizations to be “employees” of reporting entities.
Regarding professional entities (PCs, PLLCs), there are also special rules regarding who qualifies as an employee if the individual also holds an ownership interest in the professional entity. Specifically, some “employees” do not count towards the 21-employee minimum if they also have an ownership interest in the reporting entity.
Exemption for Wholly Owned Subsidiaries of Exempt Entities
The CTA also includes an exemption for wholly owned subsidiaries of exempt entities. For example, if a parent company is a large entity and wholly owns a subsidiary, that subsidiary is also exempt from her CTA reporting. However, this exemption only applies to wholly owned subsidiaries. For companies with large, complex organizational charts, it is important to analyze the individual entities, as joint ventures are not subject to this exemption, even if all owners themselves are exempt. This exemption also does not apply to upstream entities. This means that a non-exempt parent company is not eligible for an exemption by virtue of its investment in an exempt entity.
Professional corporate practices
Many real estate brokerages are specifically organized to comply with state laws related to the corporate practices of chiropractic professionals. The CTA requires an analysis of the administrative service arrangements between the parties and whether reporting is required in relation to the indirect guidance by the administrative service provider and the management of the implementing entity and its operations. Non-exempt entities operating in this field should carefully consider both who needs to be reported and how their reporting relationships align with state laws governing the companies’ professional practices. Must be considered.
License and Ownership Disclosure
Real estate brokers are already regularly required to disclose ownership and management information on a variety of occasions, in addition to applying for a real estate broker license. The BOSS system gives state and federal agencies access to ownership information reported by non-exempt real estate brokerages, providing new and clear capabilities for regulators to verify a company’s ownership structure. is provided. Unless the disclosures match, this is another potential sanction by federal and state regulators who could seek to suspend a real estate broker’s license based on inaccurate records. present an opportunity. Of course, the CTA’s definition of ownership may not exactly match the state’s license definition, so real estate brokerages must account for variations and report accordingly.
What about compliance? Companies must continually compile, maintain, and update their reported PII to meet CTA compliance requirements. Changes or corrections to previously reported information must be made within 30 days of the event, not at the time the company becomes aware of the event. All newly formed business entities after January 1, 2024 must file their first CTA report within 90 calendar days of incorporation. Reporting company operations existing before January 1, 2024 will be required to file the original CTA report and any subsequent amendments that would have been required if the report had been filed on January 1, 2024. You will have one year to do so. In other words, it’s an existing business. The initial report must be submitted by January 1, 2025, but any changes to reporting information during the 2024 calendar year must be incorporated.
What happens if I don’t comply? Failure to timely and properly comply with the CTA can result in significant fines ($500 per day, up to $10,000) and prison terms (up to two years) per incident. Those who fail to file an initial report are also subject to fines for failing to file subsequent filings that were required, and the fines can be large. Additionally, the IRS recently announced enforcement enhancements aimed at leveraging new data analytics technology to identify audit targets. FinCEN’s database has been recognized by the IRS as a critical component of such data analysis initiatives. As noted above, this information is also available to other federal and state agencies, who may use this new database to verify other information and take action against real estate brokerages. It may be possible.
Who can access FinCEN’s Beneficial Ownership Protection System (BOSS)? The information in BOSS will be accessible to law enforcement agencies at the federal, state, and local levels. Financial institutions may also have access based on customer consent, and we expect CTA disclosure to become a key element of corporate and regulatory attention to future transactions. Importantly, this information is not publicly available or accessible through a Freedom of Information Act (FOIA) request.
Conclusion. Compliance requirements under the CTA go into effect on January 1, 2024, leaving you with only a few days left this year to take action to prepare for the compliance profession of the future. Now is the time to discuss CTAs with your legal team for guidance.