The Corporate Transparency Act impacts 32 million small businesses, effective January 1, 2024, nearly every legal entity incorporated or registered to do business in the United States will be required to report certain ownership information to the federal Financial Crimes Enforcement Network, or FinCEN.
The Corporate Transparency Act is likely to catch small business owners — most of whom have never had a federal reporting requirement beyond their taxes — by surprise.
Established under the National Defense Authorization Act of 2021, the Corporate Transparency Act aims to curb illicit financial activities such as money laundering, terrorist financing and other fraud. Businesses that fit the criteria of a “reporting company” under the CTA will have one year to comply.
A reporting company is defined as a domestic or foreign corporation, limited liability company, or similar entity that was either formed or registered to do business in any state or jurisdiction. FinCEN estimates that at least 32.6 million organizations will be affected in year one, most of which will be small businesses.
What do you need to report?
Reporting companies must submit a confidential report called a Beneficial Ownership Information Report (BOIR). Required information includes the following:
• The company’s legal and trade names
• Current address
• Jurisdiction of formation
• FEIN or taxpayer identification number
The report must also include information on any “beneficial owners” as well as the “company applicant.” A beneficial owner is defined as any individual who directly or indirectly exercises substantial control over the business or owns or controls at least 25 percent ownership interest. A company applicant is the individual who filed the documents to create the entity. BOIR will require the following for each:
• Full legal name
• Date of birth
• Current address
• Unique identifying number from an acceptable document (e.g., a passport or driver’s license) as well as copies of such document
Note that the “substantial control” stipulation could cast a wide net over who is considered a beneficial owner. This will include senior officers, as well as those with indirect control through joint ownership and individuals who control an intermediary entity. Beneficial ownership will also extend to those individuals represented by a nominee such as a custodian, agent, trustee, etc.
When are reports due?
Reporting companies formed before Jan. 1, 2024, will have a year to submit their BOIR. However, any companies formed on or after that date may have as little as 30 days to file. (A Notice of Proposed Rulemaking has been filed that will likely offer a temporary 90-day extension, but only for those companies formed in 2024.)
Additionally, businesses must keep their beneficial ownership information up to date and file an amended report within 30 days of any changes. A change with respect to required information will be deemed to occur when the name, date of birth, address, or unique identifying number on such document changes. This is a burdensome and easy to miss requirement. If someone with ownership or control move to a new residence, or changes their name (e.g., gets married and takes on a new name), that change will have to be reported quickly.
Which businesses are exempt?
The CTA identified a number of entities that are exempt from the definition of reporting company:
• SEC-reporting companies
• Regulated financial services companies
• Insurance companies
• Tax-exempt entities
• Inactive entities
• “Large operating companies” with more than 20 full-time employees and a prior year tax return showing more than $5 million in gross receipts, operating from physical premises in the U.S.
Compliance challenges
As the CTA went into effect January 1st, it is important for businesses to identify beneficial owners, collect the required information, and plan to file the beneficial ownership report.
Businesses may have questions over who qualifies as a beneficial owner. That can be difficult for businesses with complex ownership structures or multiple layers of ownership. Others may need time to gather acceptable documentation from beneficial owners who live outside the United States.
It is our understanding that penalties for failure to comply can be as much as $10,000.00.
If you have questions about the CTA and how to comply, please contact attorney Fatjon Cake at 843-238-5141.
The Floyd Law Firm assists businesses and startups by providing experienced legal counsel and practical solutions to a wide variety of business and corporate problems. We work to form relationships that last. Over the years, we have developed ongoing relationships with many of the business owners who have come to us for assistance with individual issues. These business owners understood the value that we offer as outside counsel who knows their businesses as well as in-house counsel would. We give them the benefits of in-house counsel without the cost of maintaining their own legal department.
