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What farmers need to know about new Corporate Transparency Act

Estate Plan Edge: As of Jan. 1, the federal government has a new set of reporting rules aimed at small businesses — and farms aren’t exempt.

Curt Ferguson

January 16, 2024

4 Min Read
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The average farmer has to deal with enough government red tape to tie up Interstate 80 on a holiday. But never fear: Now there’s more! The Corporate Transparency Act is imposing new burdens on small businesses, and that probably includes your business, effective Jan. 1.

The CTA was passed by Congress purportedly “as part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.”

While fishing for these “bad actors,” the CTA casts a net that is wide enough to entangle your farm. Reporting is required of businesses that are formed by filing documents with the Secretary of State such as limited liability companies, corporations and limited partnerships. There are several exemptions, but guess what? A typical farm business won’t fit any exemption.

These reporting requirements are clearly aimed at small businesses. Bigger companies don’t have to report. Any company with the following must report:

  • fewer than 20 full-time employees

  • an operating presence in the U.S.

  • $5 million or less in gross receipts

What to report

So, if your business is required to report, what must be reported to the Financial Crimes Enforcement Network (FinCEN)? The phrase in this law is “beneficial ownership information.” FinCEN wants the name, date of birth, physical residence address and a photo ID for all beneficial owners. Beneficial ownership is not merely who owns the business. Rather, a beneficial owner is anyone who exercises substantial control over the company, or owns or controls at least 25% of the ownership interests.

Focusing on control first, according to CTA, someone has substantial control when he or she:

  • is a senior officer

  • has authority to appoint or remove certain officers or a majority of directors

  • is an important decision-maker

  • has any other form of substantial control over the reporting company

The obvious examples of substantial control would be managers of an LLC, officers of a corporation (president, vice president, etc.) and general partners in a limited partnership. These people are identified in the state filings for the business, so they are already on public record.

One might credibly argue that FinCEN ought to just check existing public records instead of requiring us to submit information to a new federal database. But the identity of people with authority to remove officers or who may be “an important decision-maker” can include people who are not in the state records.

More identification

The other major category of individuals is those who “own or control at least 25%” of the business. Again, start with the obvious. If you own 25% or more of the business, you must be reported. In estate planning, we see a lot of trusts that own some or all of the business. This can get confusing.

The CTA is looking to identify individual people. You have experienced the same thing with USDA certifications. When you show an entity as the farm operator or landowner, USDA doesn’t stop there, but asks you to identify the individuals who are the owners of the business, or who are the underlying beneficiaries of the trust that owns the business.

How does this fit the CTA? The revocable trust is simple. The person with power to revoke it is considered the owner of all that is in the trust. However, if there is another trustee of that revocable trust — say your spouse is your co-trustee, or perhaps a child is your trustee — that individual will also be reported as a control person. Your successor trustees named to act on your death and beneficiaries who will receive the business on your death are not reported presently, but must be reported when you die.

Many farmers have established trusts for heirs now and transferred business interests to those trusts, often to reduce estate taxes. Each beneficiary of that trust who could currently receive as much as 25% of the income from the business must be disclosed. So, for example, you established a trust that can presently distribute income to your spouse, and after your spouse dies, the trust will be divided among your children. Only your spouse is reported as a current beneficiary. Within 30 days after your spouse dies, an updated report is required to disclose your children.

Don’t even think about failing to comply with the CTA. Enforcement includes $500-per-day penalties, a $10,000 fine and two years in prison.

About the Author(s)

Curt Ferguson

Curt Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com.

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