 and welcome to Connecting Hawaii Business on Think Tech Hawaii. My name is Kathleen Lee, and I am your host for this program. For today's show, I am excited to welcome back my friend, Ryan K. Hugh of Hugh and Bordeneuve. I'm saying that correctly. I hope Ryan, welcome to the program. Welcome back to the program. You said it beautifully, Kathleen. I'm the one who usually says my own business partner's name wrong. So perfect, it's perfect. And your client? I'm doing OK. It's crazy time. It's crunch time. And we're here to talk about a new law to get ready for in the new year. And I appreciate you reaching out as well, especially since a lot of people who come on the show are small business owners. So to give everyone a bit of a background, Ryan was on the show maybe a year or two. It's been a while. Pandemic years have kind of molded together. So I don't know how long I've been. Let's not use numbers. Let's not use numbers anymore. I would like to say those three years don't really count. It's kind of weird to think. I was actually sitting thinking about it in 2022. Technically, we still had lockdown measures and kind of requirements. They had been far loosened. But yeah, it's only been a year, but it feels like it's been decades since I've seen people. But for me, we kind of chug in along. We moved offices. So that's nice. And kind of expanding practice areas and kind of dealing with a lot of business owners, actually, funny enough. We're talking about succession planning or getting out of businesses, give it over to the kids, or I'm going to sell it to my employees. Because for whatever reason, maybe it was the pandemic or whatnot, they wanted to get out of business. So I've been doing a lot of those kind of discussions as well. But yeah, it's been a fun, interesting kind of times. I think that's great. Just to give folks a bit of a quick overview, what does your firm do when you folks service before we get into the Corporate Transparency Act? We do everything. I always like to say, we're problem solvers, or if you have a problem, we'll fix it or attempt to. We'll try and not make it worse. Joking aside, my practice area tends to be what I call a transactional compliance. But what that really boils down to is I tend to work very closely with small business owners, medium-sized business owners, or their kind of point or key person manager. And it is kind of troubleshooting a lot of business law and compliance matters. So I have a lot of licensor, license professions, so contractors, physicians, even nurse practitioners, or cosmologists, and or realtors. So there's that aspect. And then retail and kind of restaurant. I'm in the same building as the liquor commission, so liquor license kind of stuff. So you can see how, especially here in Hawaii, we're comprised of so many small business owners in mom and pop. That's kind of where I function. While I said, we kind of do everything, what it is, is my business partner, whose name you said absolutely correctly, Gordon Aves. He does litigation, and he does personal injury. So I like to say that I do all the building of businesses, and he does all the tearing apart and the fighting. So he works on our cease and desist and telling people, stop using my name, or you need to cut that out. And then also, he does do personal injury claims. I like to tell the joke that, because always people ask, how is a business attorney partners with a personal injury attorney? I was like, well, we fell into it by accident. Ha, ha, ha. Actually, so it actually works out because a lot of times people forget that business owners are people, which is why we're doing what we're doing today. And they actually can be hit by a car or accident, and it really severely impacts and hurts the business when the main owner operator cannot function in their business space. So there is synergy there. Thank you for explaining all that, Ryan. And I want to let everyone know that Ryan was very proactive in letting me know about this new act that we'll be taking into effect, coming into the new year. So let's pull up the first slide. And I also appreciate how, Ryan, you, like I mentioned earlier before the show, you have a way of explaining intricate concepts like this in layman terms. So let's go into a corporate transparency act taking into effect January 1st, 2024. What is that about? So back in 2021, Congress and then President Trump signed into law, the Congress passed this is the Corporate Transparency Act. It's taken the organization, the agency, that we'll get into a little later, three years to develop the rulemaking big for this to go into effect. But the basic gist of the Corporate Transparency Act and why we're talking today, because Kathleen, I believe you have an LLC, so small business owner is, this is adding an extra additional reporting requirement that many, many, many business owners, including their advisors. So I've talked to financial advisors and accountants who have their own LLCs or corporations and they're like, wait, do I also have to report? I was like, yeah, probably. And they're like, I've never heard of the Financial Primes Enforcement network. I was like, yeah, most business owners don't. So we'll get into that. But again, that's the gist of it. You will have to file a report if you basically have a corporation, LLC, or some type of business entity that you've registered here in Hawaii with the Department of Commerce and Consumer Affairs Business Registration Division. Other states use a Secretary of State or some other type of registration function. So that kind of applies there. But here it's, if you've registered your business entity with Breg, then you're going to have to consider that you may have to file a report. There are exceptions. Okay, let's do slides two and three. You already touched upon. Why should small business owners care and is it a crime if you don't file? It might be. So the thing is, with this new report, it's going to be filed with the Financial Primes Enforcement Network, short abbreviation, FinCEN. The thing is, is that, like I said, for a lot of people who form LLCs or corporations and they don't go beyond the state, maybe they have a convenience store or maybe they're just a general contractor or maybe they're just selling stuff on the internet from their home, right? They're not aware of this law and they're not aware of this federal agency. So part of the reason the Corporate Transparency Act came about was a lot of these LLCs and corporations that do exist across the country, launder money. This is primarily an anti-money laundering, illicit activities type of law. It's used to combat basically anybody can go into Beredge or Department of Corporations or Secretary of State of various states, register an LLC and then just kind of pull themselves off. So again, this came about to combat money laundering, terrorism and illicit activities and how is it doing that? Well, it's forcing these business owners to disclose their ownership over these LLCs and corporations. So, yeah, if you don't do it, it would be a violation and if they discover that it was intentional or if you're reporting inaccurate information intentionally, yeah, it can actually lead to jail time. It's up to two years. The daily penalty I believe for not filing the report and if you have to is $500 a day up to, I believe the limit is 10,000. So, yeah, every day you don't file this report and if you're required to, you could be assessed penalties and fines. So it's actually something very serious. And despite the name and we lawyers and policy makers and legislators, you know, when they're doing these things, they like to scare people with big fancy words by National Crimes Enforcement Network Orbitransparency Act, Beneficial Ownership Information Report. Yeah, it's relatively simple. It's just that I think like you, the reason why did the outreach is a lot of people are just frankly unaware and it's coming in January 1, 2024. Okay, let's do- Long answer for those two slides. Yeah, yeah, let's do the fourth slides. Does everyone, if it, do all business owners have to file it? And I love how you talk about the exemption. So let's go into that, Ryan. No, no, there are 23 exemptions. But the thing is, is that a vast majority of those 23 exemptions are for already, what we call reporting, I mean, companies that kind of already routinely report to either the financial crimes enforcement network, the Securities Exchange Commission and a lot of other federal agents that that is they're already regulated by disclosure requirements. And what are those types of businesses? Well, those are the companies on Public Stock Exchange, banking, securities, investments, a lot of these large financial regulated industries that again, they're already forced to disclose either ownership or make very clear about their money or cash activities, they're generally going to be exempt. Moving down those 23 exemptions, going to the ones that people may consider that apply to them is first, a lot of nonprofit, they're not really business owners, but they run a nonprofit, but they run it like a business. In general, tax exempt entities are going to be, so that's anything under the 501c for the IRS. So biggest ones are 501c3s, they're going to also be exempt. And it kind of makes sense. There's not supposed to be a beneficial owner over some type of charitable organization. The second one that people may consider as an exemption is inactivity. And there's very specific requirements and basically if you have a corporation or LLC that just exists on paper that you haven't done anything with and you can prove that it's been inactive and you're also going to not, you're probably going to not need to report. But there's a little checklist that they've provided that if you can answer yes to all these questions, you're kind of exempt. And by they I mean often said, they have check a box and kind of making a determination. For everybody else though, unless you fall into those larger categories of operating companies that are already forced to make certain financial disclosures, again like banks, financial investment companies, you're going to have to see if you can shoehorn yourself into one of those exemptions, which is probably unlikely. So somebody like yourself, Kathleen, if you run an LLC, make some money off of that LLC, you're probably going to have to disclose your ownership over your own LLC to FinCEN, continue your year. Ellen, Ryan, you mentioned inactivity as well. What, do you know the definition of that? Is there a certain time length of when and else? Yes, so the entity has to be in existence on or before January 1st, 2020. It has to not be engaged in active business. It's not owned by a foreign person, whether directly or indirectly or wholly or partially. So there's something there to talk about, but they're not a part of these slides about foreign ownership of businesses because that also includes them, but I don't think. That's where the second part of, that's for a part two show. But anyway, continuing on the list of requirements of inactivity has not experienced any change in ownership in the preceding 12th month period. So when you file, there hasn't been anything. And then the last kind of criteria is R, has not sent or received funds in the amount of greater than $1,000, basically haven't transacted business, right? And then the last one is, does not otherwise hold any kind of type of assets in the United States or abroad, any ownership interest in the, of other entities basically. So you can't say that, oh, this is a holding company that's inactive when it has a child company or some type of interest and it's generating economic activity under there. But it truly is, is your company only exists on paper and you've done nothing with it, then you're gonna be. Okay, thanks for clarifying that. Let go into slides five and it's six, the, your checklist of what people may need to report. And again, thank you for making this convenient for people who may be watching the show. So let's go over slides five first. Okay, so really simply, slide five is about the company, so about the LLC or corporation. And this is what we call a recording company because why it's required to file the report because then you're gonna list all the owners. But first part, reporting company is it's full legal name. So whenever you've registered, a lot of people like to use short hands and drop off things. So it's gonna be the full legal name. Attached to that is also the trade names. So you have to disclose all the trade names that you use associated that are registered. You're gonna use a complete current US address and then gotta, so we're in Hawaii. So we're gonna list out Hawaii is where you registered this LLC or corporation. Then you're gonna put your federal employment identification number because it identifies it. Again, there are additional criteria if it's truly a foreign company that is, you know, it's not registered or created in any of the 50 states. So again, if you want me back for that, we could talk about that, but I'm here primarily to help Hawaii small business owners with this. So the next slide is the key critical component that I think a lot of small business owners are like, oh no, what do I have to share? What do I have to give? So it uses the phrase beneficial owner and we'll get into that in a minute, but beneficial owner information that is filed with the reporting company is the full legal name of the beneficial owner. Their date of birth, their current residential address. So again, we're trying to combat money laundering, right? And that's the whole point of this new law. So they're trying to figure out who are you, you know, where do you live and then also are you a legitimate person, right? So the accompanying thing, and you may be used to this if you've already traveled abroad during COVID times, but a lot of governments required you, right? Oh, have you got your vaccine? Take a picture of your card, upload it. Very similar process. In this case, you have to have an identifying kind of document and number information. So for a lot of people that will likely be their driver's license or a U.S. passport, you then need to put, take a picture, and this is the part where similar to the COVID vaccine cards is you're gonna take a picture of that and upload it with all that other information, right? Again, if we're trying to combat money laundering or drug money or terrorism money, right? Now we can identify who the person is and that's all getting uploaded. So again, I recognize there are privacy concerns. A lot of LLC owners and corporation owners on the small business, they formed it for privacy. A little bit of that is going to go away by having this reporting requirement. Wow. I think the last slide kind of goes over the beneficial owner or the next, not the last slide, the next slide. Yeah, slide seven. So I keep going on about this beneficial owner. And that doesn't actually mean if, for instance, Kathleen, if you have an LLC, you're a hundred percent owner of your LLC. You probably have a hundred percent, what we call membership interest or ownership interest in your LLC and some LLCs use member units. The point being is it's very clear you own your LLC, but why do they keep putting beneficial in front of the word owner or ownership in this law? It's because they realize that a lot of business partner relationships and a lot of LLCs in particular or registered type of partnerships, they have very unique reward and benefit or financial. Interest relationships is that the owners, the partners or the members of an LLC partnership may have structured ownership in a traditional sense, but the financial incentives, the authority and control is differentiated amongst the people who run and run and operate the business. So beneficial ownership information also includes people who control. You can see this in a corporation. Maybe you're a secretary of your corporation or maybe you're a treasurer of your corporation, but you have business partners, but as treasurer you only have maybe 10% shares, which is under the 25% threshold, but as treasurer of the corporation, you can pledge securities, you can buy or mortgage the corporation. So therefore you would deem to have control and also be construed as a beneficial owner. So for a lot of these complex business owner relationships, they're going to probably have to work with somebody like myself and, oh God, an attorney, right? Or with accountants or somebody, a professional advisor to identify who are the beneficial owners of the entity. So again, we're talking about complex business partnership arrangements of figuring out who is exactly. Does that make sense? I know that's kind of a mouthful, but it's a very kind of complicated or abstract kind of concept for this aspect of who is in control or who is a beneficial owner. Right, since this is new, I mean, I know you said this, obviously this law is passed and that's why it's just coming into effect. Our small business owners, well, do you know if people are going to get alerted about this? Well, on the FinSend page, they have an alert and a notice. In fact, they just notified a scam alert. So just exactly like how in the business registration here, they always remind people don't give out your business insurance because there's that flyer that goes out from kind of a scam fraudulent company for your annual report here. FinSend did the same thing, but for me in terms of just pragmatic logic, if you weren't required to report anything to this federal agency, why would you think to look there on that federal agency's website? So what I suspect is a lot of business owners are gonna get informed about this through their trusted advisor. Either I would say business attorney, business accountant or financial advisor as we're slowly as professionals getting advised and alerted to the new law and the requirements. And in fact, just last week, they have a new update. So are you serial entrepreneurs or people who own a large kind of holding company but have a lot of a children company? Again, complex relationships. Everybody's been wondering, do I have to file over and over again for my parent company and all my other children company? They have alerted a new kind of change that once you register one, and if you do request what they call a FinSend identifier or FinSend identifier number, you can then use that for all the filings of all the other reporting companies rather than re-uploading beneficial ownership information for each single company that you own or are deemed to control. I know it's fairly new, Ryan. Do you know what some of the penalties may be, especially since people are just learning about this Corporate Transparency Act? So again, the penalties will be $500 a day when you don't file. But guess what? They recognize that this is going to take people off guard and it's gonna take some time and compliance takes a while even if it's something simple. And you have from January 1st, 2024 to December 31st, 2024, if your LFC or corporation exists as of right now before the effective date of this new law, you have the whole year to get your reports in. I do think this is gonna prompt some conversations for those business arrangements that are complex of, do we have to adjust our operating agreement, our partnership agreement or our bylaws to reflect because there's privacy issues? Or I think for others, and because of the violations, and finally, the other violation that I'd mentioned earlier is, you could jail even if you intentionally kind of deceive or not file, depending on how they make a determination. But going back to my other thread and thought, I think on the estate planning side for a lot of family businesses that are a series of corporations or LLCs, they're going to have to have a sit-down with their business attorney and their trust and estate planning attorney. The reason is, is a lot of people like, well, I'm okay, I hold my corporation in that type of trust. Again, using that control variable that I talked a lot about, well, if you don't directly own it, but the trustee controls it, the LLC, the trustee would probably have to be declare, declare there have been ownership on it. So I think, again, for tax, estates and trusts, financial and business law, these advisors and accountants, all these advisors are probably going to chime in for a lot of business owners, whether they are small or like I said, probably a lot of these privately held companies that are a series of family or interrelated companies are going to have discussions. Okay, let's pull up the last slide. Ryan, with a few minutes that we have left, is there anything else that you would like to add? I'm one of those attorneys that likes to try and get ahead out of it. I'll put it this way. If you have to speak to my business partner that we talked about at the top of the half hour, it's like, well, you probably waited too long or you miscommunicated something or there was a problem that you couldn't kind of correct, which great, great for him. That's why I exist and he is a problem solver or solver like me. But for things like this where you can get a heads up and have those discussions and prepare and not to mention you have a year grace period, I think you need to kind of prepare yourself and kind of figure out again, are you going to have to be a reporting company? And then if so, who are all your beneficial owners? If you have business partners and it's a pain in the butt to kind of corral them or get information, or can you send me your documents? Talk now, because again, it's very easy. Look at this year. The year went by very quickly as we reopened up. I suspect next year will be much the same. So that's kind of my last kind of bit. The only thing, oh, maybe we can talk about it again or as a followup, there is new information because the system, by the way, the system is not even up yet. It's not like you can preload this stuff. They will make it go live probably on January 1st. So even I don't know what the online system or platform looks like to upload this information. On that note, I do also think if people are planning to launch a new business in the year, the reporting timeline requirement is different and we can talk about that. Like I said, Kathleen, if you wanna have me back when we're in it. But Vincent is discussing a rule of 30 to 90 days. So if you register a new LLC in the new year, you have to file this report from the date of registration of your new LLC. So again, a lot of people, as I said, they're used to filing an LLC with articles or organization here and being done. So my point of on this is, know this law and get prepared for your information that you're gonna report. Wonderful, Ryan. Nick, I'm time, look at that. Thank you again for being on the show. We had Ryan Cahue, partner for Hugh and Bordenay talking about the Corporate Transparency Act that will take effect on January 1st, 2024. So Ryan, thank you again for being on the show today. No, thank you for having me again and it's so great to talk to you after. Well, we're still on Zoom, but we'll get together in person. We'll do. And thank you again to Think Tech Hawaii for making shows like this possible. We had Haley and Mike who helped us out for this episode. Until next time, aloha.