The Corporate Transparency Act, or CTA, creates new reporting requirements for many companies operating in the U.S., especially small businesses.
The new requirement to report beneficial ownership information (BOI) comes into effect January 1, 2024. It was passed as a part of the 2021 National Defense Authorization Act, designed to protect the U.S. financial system from corruption.
Here’s what business owners need to know to prepare for the Corporate Transparency Act.
Who Needs to File Beneficial Ownership Information Reports?
Under the Corporate Transparency Act, any entity that needs to file a formation or incorporation document with a Secretary of State or similar government agency during the entity formation process is considered a “reporting entity.”
The Corporate Transparency Act regulates both U.S. domestic entities and foreign entities doing business in the U.S; it requires these entities to file Beneficial Ownership Information reports (BOI reports) to the Financial Crimes Enforcement Network (FinCEN).
The list of reporting entities includes:
- Limited Liability Corporations (LLCs)
- Limited Liability Partnerships
- Any foreign entity that does business in the United States with a registration requirement
For any reporting entity, a BOI report will need to be filed on behalf of:
- The company or entity itself
- Beneficial owners (any individual who has substantial direct or indirect control of the reporting company or who owns or controls at least 25% of the ownership interests of the reporting entity. This is known as the “substantial control” test)
- Company applicants (any individual who files the FinCEN report on behalf of the reporting entity)
In some cases, beneficial owners and company applicants may be able to include their information on the entity’s report and avoid filing reports individually.
The following entities are exempt from reporting under the Corporate Transparency Act:
- Publicly traded companies
- Entities that are already required to file reports with FinCEN
- Entities that are already required to register with the SEC
- Dormant companies that don’t own any assets Domestic companies with 20+ employees and $5 million or more in annual gross revenue
What Do Businesses Need to Report Under the Corporate Transparency Act?
The Corporate Transparency Act requires reporting entities to file accurate information about the company, its applicants, and beneficial owners. This is called a Beneficial Ownership Information report.
Reporting entities must submit the following information:
- Full name of the entity
- The entity’s trade names or DBA (doing business as) names
- Street address of the business
- Jurisdiction of company formation
- Taxpayer Identification Number or Employer Identification Number (EIN)
The company’s beneficial owners and company applicants must submit the following information:
- Full legal name
- Date of birth
- Current address
- Active government-issued ID, driver’s license, or passport
You may be wondering where this information will be stored. Will the Corporate Transparency Act affect the privacy of businesses and their owners?
“The information contained within the FinCEN database can only be accessed by federal agencies, state agencies with a court order, and financial institutions with the company’s consent,” says Michael Brandwein, senior attorney at Gordon Law Group.
“The public will not be given access to this information; the CTA merely allows the federal government easier access to an entity’s financial data.”
This information will allow the government and financial institutions to identify shell companies responsible for fraud and illegal transactions.
The Corporate Transparency Act takes effect on January 1, 2024.
- Entities that were formed before the effective date will have 1 year to submit their initial reports (due on January 1, 2025).
- Entities formed after the effective date will have to report within 14 calendar days of formation or incorporation.
- Entities that were previously exempt from CTA reporting must file an initial report within 30 days of the company no longer being exempt.
An individual or company who violates these reporting requirements can be subject to civil penalties up to $10,000, 2 years in prison, or both.
Any updates to the reports also must be submitted to FinCEN within a specific time frame:
- Changes to previously reported information should be filed within 30 days of the change
- Updates to incorrect information should be filed within 14 days of learning of the error
How to File Beneficial Ownership Information Reports Under the Corporate Transparency Act
FinCEN is still at work establishing a system to collect this information from companies. In the meantime, it’s best for “reporting entities” to begin preparing now. See FinCEN’s Beneficial Ownership Information Reporting Rule Fact Sheet for more information.
We understand filing can be overwhelming. That’s where our experienced team of business attorneys can step in. Allow Gordon Law Group to ensure you’ve checked every box to comply with all the requirements of the Corporate Transparency Act!