In 2021, Congress passed the Corporate Transparency Act (CTA), which goes into effect on January 1, 2024. The CTA requires all companies covered by the law to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN) at the U.S. Department of the Treasury, which is responsible for administering the CTA.
The CTA is intended to make beneficial ownership information (BOI) for U.S. legal entities available to specified federal agencies to assist in their efforts to combat crimes such as terrorism, wire fraud and money laundering.
Who is Covered Under the Corporate Transparency Act?
The CTA defines a reporting company as a corporation, LLC, or similar entity that is (i) created by the filing of a document with a secretary of state, or similar office; or (ii) formed under the law of a foreign country and registered to do business in the U.S. by filing a document with a secretary of state.
There are a number of exemptions discussed below, but otherwise the CTA covers all other corporations, LLCs, limited liability partnerships, and other entities formed by the filing of a document with a secretary of state or similar state office. It has been estimated that as many as thirty million existing companies and two million new companies formed annually will be subject to the reporting and disclosure requirements of the CTA.
Who is a Beneficial Owner?
The Corporate Transparency Act defines a beneficial owner of an entity as an individual who, directly or indirectly (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interest of the entity.
What Information Must be Reported Under the Corporate Transparency Act?
The Corporate Transparency Act requires covered companies subject to the law report the following BOI for each beneficial owner: (i) full legal name; (ii) date of birth; (iii) current residential or business street address; and (iv) a unique identifying number from an acceptable document (such as state driver's license or passport).
Any covered company created on or after January 1, 2024, must report its BOI within 30 calendar days after its creation, while entities created before January 1, 2024, must provide their BOI to FinCEN by January 1, 2025.
Who is Exempt from the Corporate Transparency Act?
There are 24 categories of entities exempt from the CTA’s reporting requirements, most of which apply to apply to large and regulated entities, such as banks, insurance companies, investment advisors, securities brokers, and accounting firms. In addition, the Corporate Transparency Act also exempts “large operating companies,” which it defines as any company that: (i) has more than 20 full-time employees in the United States; (ii)
filed an income tax return the previous year demonstrating more than $5 million in gross receipts or sales; and (iii) has an operating presence at a physical office in the U.S.
How does my Business Comply?
FinCEN recently released a comprehensive, user-friendly Small Entity Compliance Guide intended to assist small businesses in complying with the CTA’s BOI reporting requirements, which is intended to make compliance easier for small business owners.
The CTA includes penalty assessments for covered companies that fail to comply, which include a $500-per-day fine every day the violation continues (up to $10,000) and criminal penalties, which include the potential for jail time.
Therefore, anyone who operates a covered company should take the time to download and read the 56-page guide from the FinCEN website, which answers many common questions in an easily digestible format with many yes/no answers that include charts, models, and examples.