Beginning on January 1, 2024, the Corporate Transparency Act (CTA) will go into effect. This federal law was enacted in 2021 to bolster transparency in business structures and ownership to thwart money laundering, tax fraud, and other illicit activities. The law is designed to capture more information about the ownership of specific entities operating in or accessing the U.S. market.
All entities formed or registered to do business in the United States will need to either confirm they qualify for an exemption from the Act’s reporting requirements or submit a beneficial ownership information (BOI) report to the U.S. Treasury’s Financial Crimes and Enforcement Network (FinCEN).
The Corporate Transparency Act aims to curb illicit financial activities by making it more difficult for individuals to hide behind anonymous corporate structures. By mandating the disclosure of beneficial ownership information, law enforcement agencies and regulatory bodies gain access to crucial data that can be instrumental in investigating and preventing financial crimes.
Who Must File a Beneficial Ownership Information Report?
Reporting companies are identified as either domestic or foreign. Domestic reporting companies are corporations, limited liability companies, limited liability partnerships, and any other entity created by the filing of a document with a secretary of state or similar state office or Indian tribe. Foreign reporting companies are a corporation, LLCs, or other entity formed under the law of a foreign country that’s registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or similar state office.
Sole proprietorships that don’t use a single-member LLC are not considered a reporting company.
The information collected under the CTA will be stored in a confidential database accessible only to authorized government entities, such as law enforcement agencies and financial regulators. This database is intended to provide a valuable resource for investigating and preventing financial crimes.
What Kind of Companies are Exempt from the CTA’s Reporting Requirements?
There are 23 exemptions listed in the CTA. These exemptions center around those entities that already have robust reporting requirements. These include, among others, publicly traded companies, certain non-profit organizations, and companies such as insurance companies, banks, and investment advisers.
If an entity’s exempt, they don’t have to do anything else.
Each reporting company must provide BOI reports to FinCEN. And while the exact submission process has yet to be finalized, the reports are expected to be filed online.
A BOI report must contain specific information about the reporting company (name, address, taxpayer identification number) and its “beneficial owners” and “applicants” (full legal name, date of birth, address and passport or driver’s license number, with a photocopy of such document).
Who is Defined as the “Beneficial Owners” and the “Applicants” of an Entity?
Beneficial owners include any individual who, directly or indirectly:
- exercises substantial control over the entity (e.g., any senior officer); or
- owns or controls 25% or more of the ownership interests.
Applicants include a maximum of two individuals:
- the person who directly files the formation or registration document of the reporting company; and
- the person who was primarily responsible for directing such filing.
However, entities formed prior to January 1, 2024, do not have to provide BOI reports for their applicants.
Information to be provided about beneficial owners includes full name, residential address, date of birth, and identification numbers from government-issued documents (e.g., driver’s license, passport).
What are the Penalties for Noncompliance?
The CTA has both civil and criminal penalties (up to $10,000 and two years in prison) for willfully providing false information, not giving complete information, or failing to update information.
Anyone may be held liable under the CTA if they caused the failure or were a senior officer at the time of the failure.
When are the Reporting Deadlines?
Reporting companies created after the effective date have 30 days after notice of their creation or registration; however, FinCEN has proposed extending the initial filing deadline for BOI reports from 30 to 90 days for entities created or registered in 2024.
Also, BOI reports must be updated within 30 days of a change to the beneficial ownership (such as via sale of business, merger, acquisition, or death) or 30 days upon becoming aware of or having reason to know of inaccurate information previously filed.
The website for reporting is not yet available, so we don’t have information yet on the process. We will let you know when it is live and we will offer a program to handle the filings on your behalf.
What does this mean for small business owners?
1. Enhanced Due Diligence:
The CTA necessitates that businesses engage in enhanced due diligence when establishing partnerships or engaging in transactions. Companies will need to verify the beneficial ownership information of their counterparts to mitigate the risk of unwittingly engaging with entities involved in illicit activities.
2. Increased Regulatory Scrutiny:
The establishment of a centralized database for beneficial ownership information means that regulatory authorities will have improved tools for monitoring and investigating suspicious financial activities. This increased scrutiny is expected to act as a deterrent against the misuse of corporate entities for illicit purposes.
3. Compliance Costs and Challenges:
While the exemptions and thresholds aim to minimize the impact on small businesses, compliance with the Corporate Transparency Act will incur costs related to record-keeping, reporting, and internal controls. Companies should be prepared to allocate resources to ensure compliance with the new requirements.
The Corporate Transparency Act represents a crucial step towards fostering transparency and accountability in the U.S. corporate landscape. By addressing the loopholes that allowed for anonymous ownership, the CTA aims to protect the financial system from abuse while promoting legitimate business activities. As businesses navigate the new reporting requirements, the ultimate goal is to create a more secure and transparent environment that safeguards against financial crimes and illicit activities.
New regulations create new obligations on the part of business owners. LOVE LAW FIRM is here to help you comply. Schedule a complimentary call to discuss how we can help you.
If you liked this article, please check these out as well:
Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM, PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.