Corporate Transparency Act (“CTA”)

DISCLAIMER - THE INFORMATION PROVIDED IN THIS ARTICLE IS BELIEVED TO BE ACCURATE AS OF THE DATE THE ARTICLE WAS POSTED. HOWEVER, EACH PERSON SHOULD DO THEIR OWN INDEPENDENT INVESTIGATION AND ANALYSIS FOR THEIR SPECIFIC SITUATION AND SHOULD NOT RELY ON THIS INFORMATION .

What is the Corporate Transparency Act (“CTA”)?

In 2021, Congress passed the Corporate Transparency Act on a bipartisan basis. This law creates a new reporting requirement for most small businesses as part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other complex ownership structures.

The new law took effect on January 1, 2024 and all “reporting companies” must comply with the new requirements and provide “beneficial ownership information (“BOI”) to the Financial Crimes Enforcement Network (FinCEN) of the United States Government.

What is a “Reporting Company?”

According to the CTA, a reporting company is a corporation, limited liability company, or other similar entity that is created (a “Domestic Reporting Company”) or in the case of any foreign entity, registered to do business, (a “Foreign Reporting Company”) by filing a document with a Secretary of State or similar office under the law of any U.S. State or Indian Tribe.

Domestic reporting companies include corporations, LLPs, or any other similar entities that are created by the filing of a document with a secretary of state or any similar office under the law of a state. Foreign reporting companies include privately formed entities and any other similar entities formed under the law of a foreign country that are registered to do business in the United States.

The CTA identifies certain exempted entities that are not considered reporting companies. Examples of exempted entities include banks, credit unions, SEC-reporting companies, insurance companies and public accounting firms.

A specific exemption exists for an entity that: (i) employs more than 20 employees on a full-time basis in the United States; (ii) filed in the previous year Federal income tax returns in the United States demonstrating more than US$5 million in gross receipts or sales; and (iii) operates and has a presence at a physical office within the United States.

What is a “Beneficial Owner?”

A beneficial owner of a reporting company is any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity; or (ii) owns or controls at least 25% of the equity interests of the entity.

“Substantial control” includes individuals who: (i) serve as a senior officer of the reporting company; (ii) have the authority to appoint or remove the senior officers and board of directors;(iii) can direct, determine, or have substantial influence over important decisions within the company; and (iv) have any other type of substantial control over the company.

There is no maximum number of beneficial owners who must be reported, but beneficial owners do not include the following five types of people:

• A minor child if the information of a parent or legal guardian is reported pursuant to the CTA.

• An individual acting as a nominee, intermediary, custodian or agent on behalf of another individual.

• An employee of the reporting company who is not a senior officer and whose control over or economic benefits from the company is derived solely from the employment status of the person.

• An inheritor whose only interest in a reporting company is a future interest through a right of inheritance.

• A creditor of the reporting company unless the creditor exercises substantial control over the entity or owns or controls at least 25% of the equity interests of the company.

What Information Must be Provided?

Reporting companies subject to the CTA are required to provide the following information regarding the entity: (i) full legal name; (ii) trade names or d/b/a names; (iii) address of the entity; (iv) the jurisdiction of formation or registration; and (5) the federal taxpayer identification number.

For each beneficial owner, the reporting company must provide the following: (i) full legal name; (ii) birthdate; (iii) home address; (iv) an identifying number from a driver’s license, passport, or other approved documents; and (v) an image of the approved document that contains the identifying number. In lieu of (iv) and (v), an individual can apply for a FinCEN identifier number, after which the individual is permitted to use the identifier number on subsequent filings.

You can read more about the BOI requirements here.

When do I Need to Act?

A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025 to file its initial beneficial ownership information report.

A reporting company created or registered on or after January 1, 2024, and before January 1, 2025, will have 90 calendar days after receiving notice of the company’s creation or registration to file its initial BOI report. This 90-calendar day deadline runs from the time the company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier.

Reporting companies created or registered on or after January 1, 2025, will have 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their initial BOI reports with FinCEN.

How Do I File the Report?

You can file your CTA/BOI reports directly at the FinCEN website, here.

What Are the Penalties for Failure to Comply?

FinCEN imposes civil penalties for simple reporting violations. These can include fines up to $500 per day for each violation. 

These violations typically involve filing the Beneficial Ownership Information (BOI) Report late or submitting incorrect information.

Additionally, business owners face civil fines if they do not update FinCEN whenever their company’s beneficial ownership information changes. 

Remember – Be Smart. Be Legal.

 Disclaimer – Yes, I’m a lawyer, but I’m not your lawyer. All information in this post is provided for educational purposes only and should not be considered legal advice for any person or specific situation.