The Corporate Transparency Act (CTA) has introduced new regulatory requirements to combat illicit activities like money laundering and tax fraud. The law will take effect on January 1, 2024, compelling specific entities to disclose beneficial ownership information (BOI) to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Notably, failure to comply with these reporting requirements may result in significant penalties, making it crucial for businesses to understand the CTA’s scope and applicability.
Who Needs to Report?
Primarily, the CTA targets small businesses, specifically those with fewer than twenty employees. The Act mandates the following types of entities to file a BOI report, designated as “Reporting Companies”:
- Domestic Reporting Companies: This includes corporations, limited liability companies, or other entities formed by filing a document with a secretary of state or any similar office under any U.S. state, territory, or federally recognized Indian Tribe.
- Foreign Reporting Companies are corporations, limited liability companies, or other entities formed under foreign law registered to do business in the United States.
NOTE: Based on this definition – this is effectively all small businesses.
Exemptions from Reporting
The Act exempts 23 types of entities, including governmental authorities, banks, credit unions, insurance companies, and certain non-profit entities. Significant exemptions are:
- Large U.S. operating companies that employ more than 20 full-time employees in the U.S. filed U.S. federal income tax returns demonstrating over $5,000,000 in gross receipts or sales and have a physical office within the U.S.
- Publicly traded companies registered under Section 12 of the Securities Exchange Act of 1934.
- Investment companies or investment advisers registered with the SEC.
- Trusts, such as Charitable and Split-Interest Trusts.
Notably, sole proprietorships and general partnerships are not subject to BOI reporting requirements as they aren’t formed by filing a document with a secretary of state.
NOTE: Again, based on this definition – C Corporations, S Corporations, and LLCs would be the small business entities impacted.
Reporting Requirements
The CTA defines beneficial owners as individuals who directly or indirectly exercise substantial control over the Reporting Company or own/control 25% or more of the company’s ownership interest. A Reporting Company must report the following information on its beneficial owners and itself:
- Beneficial Owners: Full legal name, date of birth, current address, and a unique identifying number from an acceptable identification document.
- Reporting Company: Full legal name, trade names, complete current address, state of formation, and IRS taxpayer identification number.
Submission and Updates
BOI reports must be submitted electronically through FinCEN’s secure filing system. Companies created or becoming foreign Reporting Companies before the CTA effective date have until January 1, 2025, to file their BOI report. Any changes in the information provided, such as company address or beneficial owners’ names, must be reported within 30 days.
Penalties
Violations of the CTA, such as providing false or fraudulent information or failing to report or update BOI, can lead to civil penalties of up to $10,000 and potential criminal penalties, including imprisonment for up to two years. However, a penalty safe harbor provision applies if the Reporting Company corrects an inaccurate BOI report within 30 days of discovering the inaccuracies.
Conclusion
The CTA represents a significant shift in U.S. corporate compliance. While it targets smaller, unregulated entities, all business operators, particularly those managing private funds, pooled investment vehicles, and other privately-owned companies, should carefully evaluate their circumstances to determine their obligations under the CTA. Companies need to ensure accurate and timely reporting of beneficial ownership information, assess whether they fall under exemptions, and be prepared to provide updates to their reports when necessary.
