Do you own a small business? Are you a member of an LLC or a shareholder in a closely held company? (A closely held company has a limited number of shareholders and is often a private company that does not trade publicly). If so, you should be aware of the Corporate Transparency Act (CTA). This law was passed by Congress on January 1, 2021, because, according to the legislative history, “malign actors seek to conceal their ownership of corporations, limited liability companies, or other similar entities in the United States to facilitate illicit activity, including money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption, harming the national security interests of the United States and allies of the United States.”

The CTA requires the Financial Crimes Enforcement Network (FinCEN), an agency of the U.S. Department of the Treasury, to establish and maintain a database of beneficial owners of entities in the United States. Final regulations were issued on September 30, 2022, and the law will take effect on January 1, 2024. The law provides 23 exemptions from the new reporting requirements, mostly for already heavily regulated companies such as banks, insurance companies, publicly traded companies and credit unions. Typical charitable organizations that qualify under 501(c) of the Internal Revenue Code are also exempt. Most other entities, whether foreign or domestic, will need to report certain information about the beneficial owners and applicants of the entity unless they have at least 20 full-time employees, filed a United States income tax return in the previous year demonstrating $5 million in gross receipts or sales, and has an operating presence with a physical office within the United States.

For those entities that are not exempt, they will need to file applicable reports that include information about the person who formed the entity (known as the “applicant”) and each “beneficial owner” of the entity. A beneficial owner is someone who exercises substantial control over the entity or owns or controls not less than 25 percent of the ownership interest of the entity. By statute, minors, nominees (e.g. custodians), employees acting on behalf of a company, future owners through inheritance, and creditors are exempt from being listed as beneficial owners. The reporting company must report the full legal name, date of birth, current residential or business street address, and a unique identifying number with a copy of the underlying document (e.g. driver’s license number and copy of the driver’s license) for each beneficial owner and applicant. Alternatively, individuals may submit the required information directly to FinCEN and be issued a unique FinCEN identifier that can be used by the reporting company to identify the person.

Reporting requirements start January 1, 2024. Please make an appointment with one of our experienced business attorneys for any questions you have about whether your closely held business entity must report under the CTA.

For more information on this please follow this link. https://www.americanbar.org/groups/taxation/publications/abataxtimes_home/23win/23win-prp-graff-cta/

If you are a business owner, then you, no doubt, have or will go through the process of finalizing your financial statements and gathering your other accounting records and tax documents for your CPA. I encourage you to take time to also locate your company record book and critical legal documents. Having your legal house in order is an important part of business risk management and planning. A basic business check-up should include the following:

1.) Corporate/Company Record Book Review.
Make sure you can locate your company record book and that it is up-to-date, including the ownership records. There are statutory requirements as to certain minimum records that must be kept by certain types of companies. For a detailed list of the records that must be kept, refer to the following article: Statutory Requirements for Record Books.

2.) Organizational Document Review.
A company’s organizational documents contain the rules that should be followed in carrying out business operations. For corporations, the controlling document is the Articles of Incorporation. For limited liability companies, the controlling document is the Articles of Organization. Usually both of these documents contain relatively few provisions. However, whatever provisions they do contain will control if other documents contain conflicting provisions. Watch out for particular limitations or restrictions on ownership. Sometimes restrictions that once made sense are no longer applicable. If those restrictions are in your Articles, they will still be binding!

After reviewing the Articles, you should review the Bylaws (for corporations) and Operating Agreement (for LLCs). These documents should contain more specific details regarding the management and general operations of the business. Review the documents for specific restrictions placed on the authority of managers, officers and directors. Are you acting in compliance with these restrictions? This can be especially critical if you are not the sole owner of the business; however, even if you are the sole owner, it is still important to understand what “position” has what authority.

In addition to reviewing the basic organizational documents, now is the time to review your meeting minutes or resolutions. Some businesses will hold formal meetings to conduct business at the shareholder, member, director and manager levels. Other businesses opt to use “informal action resolutions” or other forms of written consent to document important decisions. In either case, it is important that your records are accurate and kept up-to-date. Remember, if you want others to respect your company as a distinct legal entity, then you must respect it too.

3.) Buy-Sell Agreements.
If you are in business with someone other than your spouse, take a few minutes to review the following article written by my colleague, Steven Thompson: Buy-Sell Agreements: Working for the Best and Planning for the Worst. This article discusses the value of a buy-sell agreement to your business.

4.) Key Contract Review.
Review your key contracts, including leases, customer contracts and vendor agreements. Calendaring important dates from each contract can help you avoid costly mistakes. Many contracts will automatically renew each year or at the end of the term unless some advance notice is given. This may be a good or bad thing, depending on your perspective on any given contract. What it should not be is a surprise!

I find that most owners have a pretty good handle on the “business terms” of their contracts but the standard legal terminology and provisions are often a mystery. Such standardized legal language is known as “legal boilerplate.” Those “boilerplate” terms, however, are often the most important. For example, look at the “assignment” provisions to understand if your contract could be assigned to another person. If you are planning to sell, then assignability of a key customer contract could be crucial. Other often overlooked terms include limitations on liability, indemnification and insurance requirements. While these provisions may mean little if all goes well, they could be the most important provisions if there is a problem. Ask yourself if those provisions are both fair and adequately protect your business.

5.) Insurance Review.
Forming an LLC, corporation, or other business entity can be a critical part of your business risk management and control. However, forming a business entity alone is not sufficient. Proper liability and property insurance coverage is critical. Hopefully you meet at least annually with your insurance agent or broker to review coverage. If it has been a while, then you should take time now to review what you have in place. Consider the following:

• General commercial liability and products liability.
• Fire and extended insurance coverage for your business assets.
• Worker’s compensation insurance as required by law.
• Insurance for business vehicles (liability, collision and comprehensive).
• Non-owned and hired vehicle insurance coverage.
• Theft, vandalism and malicious mischief.
• Bonding for employees handling funds of business and required bonding for fiduciaries of qualified retirement plans.
• Any insurance required of you under a lease arrangement.
• Make sure that owners and your subsidiary companies are included as additional insured parties or are covered on their own policies and include necessary parties (like landlords or mortgagees) as additional insured parties or as loss payees, if required in your leases, contracts or mortgages.

Make reviewing these basic business records part of your normal routine! Reviewing these types of business records routinely puts your business in a safer and more productive state. If, during your review, you have questions or need assistance, contact the skilled attorneys at the Anderson O’Brien Law Firm.

There are statutory requirements as to certain records that must minimally be kept in a Corporate/Company Record Book. These records vary based on the type of company. The following is a list of different types of records to be kept for LLCs and Corporations:

For LLCs the following records must be kept:

1. A list, kept in alphabetical order, of each past and present member and, if applicable, manager. The list shall include the full name and last-known mailing address of each member or manager, the date on which the person became a member or manager and the date, if applicable, on which the person ceased to be a member or manager.
2. A copy of the Articles of Organization and all amendments to the Articles.
3. Copies of the limited liability company’s federal, state and local income or franchise tax returns and financial statements, if any, for the four most recent years or, if such returns and statements are not prepared for any reason, copies of the information and statements provided to, or which should have been provided to, the members to enable them to prepare their federal, state and local income tax returns for the four most recent years.
4. Copies of all Operating Agreements, all amendments to Operating Agreements and any Operating Agreements no longer in effect.
5. Unless already set forth in an Operating Agreement, written records containing all of the following information: 1) The value of each member’s contribution made to the limited liability company as determined under Wis. Stat. Section 183.0501(2); 2) Records of the times at which, or the events upon which any additional contributions are agreed to be made by each member; 3) Any events upon which the limited liability company is to be dissolved and its business wound up; 4) Other writings as required by an Operating Agreement.

For CORPORATIONS the following records must be kept:

1. Minutes of meetings of its shareholders and board of directors.
2. Records of actions taken by the shareholders or board of directors without a meeting.
3. Records of actions taken by a committee of the board of directors in place of the board of directors and on behalf of the corporation.
4. Appropriate accounting records.
5. A record of its shareholders, in a form that permits preparation of a list of the names and addresses of all shareholders, by class or series of shares and showing the number and class or series of shares held by each shareholder.

Making sure you locate your company’s record book and ensuring that it is up-to-date is an important part of keeping your legal “house in order.” The maintenance of your company’s record book is a part of proper risk management and a step in checking up on your business. For information about other documents recommended you review for a business check-up check out the article: A Business Check-up Checklist.