What is the Corporate Transparency Act
Beginning January 1, 2024, many small businesses will be required to report information about their owners to the federal government. The reporting is new and affects virtually all small businesses.
In 2021, Congress passed the Corporate Transparency Act (CTA) as part of a government initiative to fight against corruption, money laundering, financing of terrorism, tax fraud, and other illicit activities. The CTA is intended to target shell companies that facilitate the flow and shelter of illicit money in the United States.
Currently, few states require businesses to disclose information about their beneficial owners, i.e., the individuals who ultimately own or control the businesses and there has never been a federal requirement to do so. As a result, anonymous shell companies are prevalent and can be difficult, if not impossible, for law enforcement to determine who really owns them.
The new law did not take effect immediately. However, beginning January 1, 2024, companies that are not exempt from the CTA will be required to report beneficial ownership information (BOI reports) to the Financial Crimes Enforcement Network (FinCEN).
Who Has to Report
Generally, any domestic or foreign corporation, limited liability company, or similar entity that was formed or registered to do business in United State by filing a document with a secretary of state or similar will need to comply with the mandatory reporting requirements of the CTA.
There are 23 types of entities that are exempt from the BOI reporting requirements. These include publicly traded companies and other businesses that are already subject to substantial federal reporting requirements. Also exempt are “large operating companies”, defined as companies that employ more than 20 full-time employees in the United States, reported more than $5 million in gross receipts or sales in the aggregate year’s federal tax or information return, and have an operating presence at a physical office in the United States.
Information to Be Reported
The CTA requires reporting businesses to disclose the identity of each beneficial owner of the company. There are two broad categories of beneficial owners:
- Any individual who owns 25 percent or more of the company.
- Any individual who, directly or indirectly, exercises substantial control over the company.
The reporting information must include the following for each individual who is identified as a beneficial owner of the reporting company:
- Full legal name
- Date of birth
- The individual’s current residential street address
- A unique identifying number from an acceptable legal document such as a driver’s license or passport
- An image of the document described in 4.
Due Dates for Reporting
New Companies. Companies created on or after January 1, 2024, must file their initial report within 30 calendar days of being formed. However, proposed regulations would extend the initial report deadline to 90 calendar days for companies created and registered on or after January 1, 2024, and before 1, 2025, to give those entities more time to understand the reporting requirements.
Existing Companies. Companies created before January 1, 2024, must file their initial report no later than January 1, 2025.
Conclusion
The effective date of the CTA reporting requirement is rapidly approaching. Companies should take steps to understand their reporting requirements before the effective due date. Willful violation of the BOI reporting requirements can result in civil or criminal penalties, including civil penalties of $500 per day for each day the violation has not been corrected; and criminal penalties of $10,000, and imprisonment of up to 2 years.
Reporting companies will report BOI information electronically through FinCEN’s website: www.fincen.gov/boi
