The Corporate Transparency Act (CTA) is a new law that requires businesses in the United States to report ownership information.
The CTA establishes a beneficial ownership reporting requirement for corporations, limited liability companies, and other similar entities formed or registered to do business in the United States. Beneficial ownership reports must be filed with the Financial Crimes Enforcement Network (FinCEN), a bureau within the U.S. Department of Treasury.
Enacted by Congress on January 1, 2021, as part of the National Defense Authorization Act, the CTA aims to enhance transparency and combat financial crimes like money laundering, terrorist financing, and tax fraud.
The reporting requirements under the CTA went into effect on January 1, 2024. Business entities formed prior to such date will have January 1, 2025, to comply with the CTA’s reporting requirements.
In this blog post, we’ll break down the essentials of the CTA in simple terms to help you understand what your obligations are for your business and how to comply with this law.
What is the Corporate Transparency Act?
The CTA requires certain business entities, known as “reporting companies,” to disclose information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau within the U.S. Department of Treasury. The information that you provide about your business ownership will not be publicly available, but FinCEN is authorized to disclose information to:
- to U.S. federal agencies, including those engaged in national security, intelligence or law enforcement activity
- with court approval, to certain other enforcement agencies (state, local, or tribal)
- to non-U.S. law enforcement agencies, prosecutors or judges based upon a request of a U.S. federal law enforcement agency, and
- with consent of the reporting company, to financial institutions and their regulators.
Purpose of the CTA
The main goal of the CTA is to prevent illegal activities such as money laundering and terrorism financing by making it harder for criminals to hide behind anonymous shell companies. By requiring businesses to report their beneficial owners, the CTA aims to provide law enforcement with vital information to detect and punish financial crimes effectively.
Who Needs to Report?
Reporting Companies
The CTA applies to both domestic and foreign entities doing business in the U.S., including corporations and limited liability companies (LLCs). These entities must file beneficial ownership information unless they qualify for an exemption.
Exemptions for Reporting Companies
Certain entities are exempt from reporting, including:
- Publicly traded companies
- Banks and credit unions
- Tax-exempt entities (like charities)
- Pooled investment vehicles
- Venture capital fund advisors
- Investment companies or investment advisors
- Large operating companies meeting specific criteria, such as having more than 20 full-time U.S. employees, has an operating presence at a physical address in the U.S., and over $5 million in gross receipts or sales from inside the U.S.
The CTA lists 23 categories of entities that are exempt from reporting. View the list of exemptions here: https://www.fincen.gov/boi-faqs(opens in a new window)
Business entities that do not fall within the scope of the reporting requirements include sole proprietorships, some general partnerships, foreign entities not registered to do business in the U.S., unincorporated associations, and wealth planning trusts.
So, my business is required to report, what information do I need to provide?
Businesses must provide:
- Legal name and any trade names (like a DBA)
- Principal business address
- Taxpayer identification number (EIN/SSN/ITIN, as appropriate)
- Beneficial owners’ legal names, birthdates, addresses, and a picture of and identification numbers from an acceptable identification document (like a non-expired driver’s license or passport).
What is a Beneficial Owner?
A beneficial owner is an individual who:
- Exercises substantial control over a company; or
- Owns or controls at least 25% of the company’s ownership interests.
What is Substantial Control mean?
An individual can exercise “substantial control” over a reporting company if they direct, determine, or exercise substantial influence over important decisions the reporting company makes. This includes senior officers in the reporting company or individuals who have authority over the appointment or removal of senior officers or a majority of the board.
“Ownership interests” generally refer to arrangements that establish ownership rights in the reporting company, including simple shares of stock as well as more complex instruments.
Are there exceptions to who is a Beneficial Owner?
Yes!
A beneficial owner does not include:
- a minor child if the information of the child’s parent or guardian is reported;
- an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual;
- an individual acting solely as an employee of the entity and whose control over or economic benefits from such entity is derived solely from the employment status of the person;
- an individual whose only interest in the entity is through a right of inheritance: or
- a creditor of the entity, unless the creditor exercises substantial control over the entity or owns or controls not less than 25% of the ownership interests of the entity.
Filing Deadlines
- Existing businesses formed before January 1, 2024, must file by January 1, 2025.
- New businesses formed after January 1, 2024, have 30 days from formation or registration to file.
How to File Reports
Reports are submitted electronically through FinCEN’s Beneficial Ownership Secure System (BOSS).
https://boiefiling.fincen.gov/(opens in a new window)
Cost to File a Report?
There is no fee or cost for submitting the BOI report to FinCEN.
Access and Confidentiality
FinCEN strictly controls access to beneficial ownership information. This information can only be disclosed to authorized parties, such as federal law enforcement agencies or financial institutions conducting due diligence.
Penalties for Non-compliance
Failure to comply with the CTA can result in severe penalties:
- Civil penalties of up to $500 per day for non-compliance
- Criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000 .
There also is a safe harbor rule from the civil and criminal penalties if you submit a report containing corrected information not later than 90 days after you first submitted an incorrect report (provided you didn’t try to evade the reporting requirement and didn’t know the information was incorrect).
Updating Information
Businesses must update their reports to FinCEN within 30 days if there are changes in ownership or if previously submitted information was incorrect. Corrections made within 90 days are exempt from penalties.
How do I contact FinCEN if I have additional questions?
Contact FinCEN if you have additional questions:
Website: https://www.fincen.gov/contact(opens in a new window)
Email: [email protected]
Conclusion
The Corporate Transparency Act represents a significant shift towards greater transparency in business operations. While compliance may seem daunting, understanding your obligations under the CTA is crucial for avoiding penalties. Business owners should consult with legal professionals if they have questions or need assistance with their reporting requirements.
For more detailed guidance on complying with the Corporate Transparency Act, visit FinCEN’s website or consult a qualified attorney.
This proactive approach will help ensure that your business remains compliant and avoids the potential pitfalls associated with non-compliance. Understanding the CTA is not just about meeting legal requirements; it’s also about fostering a trustworthy business environment.
