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New and Burdensome Reporting Requirements for Pennsylvania Businesses
Two new burdensome reporting obligations, one state and one federal, will hit Pennsylvania businesses in 2024.
Previously, virtually all Pennsylvania business entities (domestic corporations, domestic non-profits, domestic limited liability general partnerships, domestic electing partnerships that are not limited partnerships, domestic limited partnerships (including limited liability partnerships), domestic limited liability companies, domestic professional associations, domestic business trusts and all registered foreign business associations) were required to file decennial reports, a reporting requirement that was frequently overlooked by the businesses, simply because the need to file arose only once every ten (10) years. However, starting in 2024, all of these business entity forms will be required to file annual reports with the Pennsylvania Secretary of State.
The new annual report is to contain essential (but not necessarily extensive) information about your business including the business name, jurisdiction of formation, registered office address, names of governors or directors, names of principal officers (if any), and the entity registration number issued by the Pennsylvania Department of State.
The reporting dates vary by business type: all corporations (foreign/domestic and for profit/not for profit) by June 30th of each year; all limited liability companies (foreign and domestic) by September 30th of each year; all other business entity forms by December 31st each year. There is a nominal filing fee of $7.00 for “for- profit” entities. There is no filing fee for non-profit entities.
Missing these deadlines is not wise as doing so can result in administrative dissolution or termination.
While the new Pennsylvania annual reporting requirement may be a nuisance, it is not necessarily overly burdensome. However, the new federal “Corporate Transparency Act” (“CTA”) is another story. Passed by Congress to purportedly combat money laundering of illicit money through shell companies, this legislation imposes significant self-reporting obligations on primarily small and medium sized businesses (there are 23 exemptions, which primarily exempt large businesses that already self- report in some other fashion).
One exemption that may be applicable to help some businesses (but not necessarily small or medium sized businesses) is the “large business” exemption, but even that exemption has stringent requirements, which must be met to qualify. To qualify for the exemption, the business must meet all three requirements: (1) employs more than 20 people in the US; AND (2) MUST have an operating presence at a physical location in the US; AND (3) the previous year’s federal tax return must demonstrate more than $5mm in “gross receipts or sales in the aggregate”.
Starting January 1, 2024 newly formed Reporting Companies (“Reporting Company” means any business entity that is not exempt) have to file within 30 days of the entity’s initial formation filing. Entities existing on December 31, 2023 must comply with the CTA by January 1, 2025.
The CTA requires newly formed companies to report information about the identity of its “Beneficial Owners” AND its Company Applicant (meaning who filed to form the entity, including attorneys and paralegals) within thirty (30) days of the initial formation filing. Existing Reporting Companies need to provide Beneficial Owner information by January 1. 2025.
The information must be reported to FinCEN (Financial Crimes Enforcement Network). Here is the burdensome part: to the extent any of the information reported to FinCEN would change, the Reporting Company must file an update within thirty (30) days of the change. The obligation to file an update is triggered by any change in the information (for example, a change of name or address of an officer).
A “Beneficial Owner” is defined as, “any individual who, directly or indirectly, either (i) exercises substantial control over the Reporting Company or (ii) owns or controls not less than 25% of the ownership interests of the Reporting Company”.
While there are exemptions to the term “Beneficial Ownership” (which are beyond the scope of this article, the purpose of which is to generally alert our clients to this reporting obligation), the term includes service as a Senior Officer (not secretary or treasurer), authority over the appointment of any senior officer or a majority of the Board of Directors, direction, determination or substantial influence over the important matters affecting the Reporting Company, including control over the disposition or encumbrance of assets, reorganization, dissolution or merger, major expenditures, compensation, entry into or control over significant contracts, and amendment of governing documents. The regulations (which are not yet final) do a deeper dive into all of these “substantial control” factors. Contact us for help with how these factors may impact your entity and its obligation to self-report.
The penalties for failure to comply are SEVERE and include civil fines of up to $10,000 and 2 years in prison. Any “Senior Officer” or other individual/entity that caused the failure to report can be held responsible. Don’t be one of them.
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