The Corporate Transparency Act – Effective January 1, 2024
The Corporate Transparency Act (CTA) is a relatively new law that requires businesses to report their beneficial owners to the U.S. government. The purpose of the CTA is to prevent money laundering, tax evasion, and other criminal activities by increasing the transparency of business ownership. While there are some exemptions, beginning in 2024, many small businesses will need to regularly report information regarding ownership of the business. As is often the case, the implementing regulations may be adjusted along the way, but here is an overview to give you a sense of the requirements.
The Corporate Transparency Act
How the Corporate Transparency Act affects businesses –
Starting from January 1, 2024, many businesses in the U.S. will have to comply with a new reporting requirement under the Corporate Transparency Act (CTA). The CTA, enacted in 2021, is a federal law that aims to combat money laundering, tax fraud, and other illicit activities by requiring certain businesses to disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN).
Which Businesses will have to report?
The scope is broad and applies to any corporation, limited liability company, or other similar entity created by filing a document with the secretary of state or similar office in any state or territory or with a federally recognized Indian Tribe, or formed under the laws of a foreign country and registered to do business in the United States. These covered companies are referred to as “reporting companies.” Certain entities are exempt from reporting, including banks, credit unions, large operating companies (think more than 20 full time employees and $5 million in gross receipts or sales), insurance companies, charities, and government entities.
What is a beneficial owner?
A beneficial owner is an individual who owns or controls a business entity, either directly or indirectly. According to the CTA, a beneficial owner is any individual who:
- owns 25% or more of the equity interests of the entity; or
- exercises substantial control over the entity.
What information needs to be reported?
The CTA requires reporting companies to provide the following information about each beneficial owner:
- The individual’s name;
- Date of birth;
- Residential address; and
- An identifying number from an acceptable identification document, such as a passport or U.S. driver’s license, and the name of the issuing state or jurisdiction of identification document. The reporting company will also have to report an image of the identification document used to obtain the identifying number.
Alternatively, a reporting company can obtain a FinCEN ID for each beneficial owner, which is a unique identifier issued by FinCEN. Reporting companies also need to provide their own name, address, and identification number.
When and how to report?
The CTA applies to both existing and newly formed entities. The required report must be submitted within 30 days of formation or registration of an entity if the entity is formed or registered in a US state after January 1, 2024. Existing companies must report by January 1, 2025. Reporting companies must also update their reports within 30 days of any change in beneficial ownership information.
How can small businesses prepare for CTA reporting?
Small businesses affected by the CTA may want to start preparing for the reporting requirement. Some of the steps that small businesses can take include:
- reviewing their entity structure and ownership to determine if they are a reporting company or exempt from the CTA;
- communicating with their beneficial owners and informing them of the CTA and their obligations;
- collecting and verifying the necessary information and documents from their beneficial owners;
- registering and obtaining a FinCEN ID for themselves and their beneficial owners, if desired;
- filing their initial reports with FinCEN by the deadline; and
- updating their reports whenever there is a change in beneficial ownership information.
Penalties for Non-Compliance
Purposely providing false information or failing to report complete information to FinCEN can result in fines up to $10,000 and imprisonment for up to two years. There is an opportunity window to correct previously submitted false information.
Who has access to the reported information?
Information reported under the CTA is not publicly available and can be accessed by certain governmental agencies (including federal law enforcement agencies) and certain financial institutions.
Although it sounds daunting at first, now you have a heads up and an opportunity to plan accordingly. FinCEN has published a brochure, a video, and a FAQ page to help reporting companies understand and comply with the CTA, and reports may be filed electronically through FinCEN’s website.