The Corporate Transparency Act (CTA), which will go into effect on January 1st, 2024, was enacted by Congress as part of the Anti-Money Laundering Act of 2020. Because of this act, most smaller LLCs and corporations, limited partnerships, and trusts will need to file an information report with the Financial Crimes Enforcement Network (FinCEN), starting in 2024.
No business owner enjoys being saddled with a new bureaucratic requirement, but since the CTA is going to be an unavoidable hassle for many business owners and investors, we wanted to explain in straightforward terms what the Corporate Transparency Act is, who needs to report, and what the requirements are.
What Is the Corporate Transparency Act?
The Corporate Transparency Act is a new law requiring US corporate entities and non-US entities that do business in the United States to report ownership information to FinCEN. The purpose of the law is to prevent bad actors from using anonymous US companies to stash money for illegal purposes, such as money laundering, terrorism, and fraud.
Starting in January 2024, newly formed companies will have to submit a Beneficial Ownership Information (BOI) Report to FinCEN within 30 days of formation. Companies formed before January 1, 2024 have until the following year, January 1, 2025, to report. Entities that are required to file this report are referred to as “reporting companies” in the CTA. There are exemptions to the requirement, which we’ll get into below.
Beneficial Ownership Information Report Requirements
Let’s go over who has to file this report, what the exemptions are, and what information is required.
Who is required to report?
The following entities are considered reporting companies, unless they qualify for an exemption:
- US LLCs
- US corporations
- Other US corporate entities, including limited partnerships and trusts
- Foreign entities that do business in the US
Who is exempt from reporting?
According to the Beneficial Ownership Information Reporting Requirements, there are 23 categories of exemptions from this requirement, including:
- Large operating companies that have 20 or more full-time employees, had more than $5 million in gross receipts during the previous tax year, and have an office in the US.
- Publicly traded companies that issue securities and are regulated by the Securities Exchange Act.
- Money services businesses registered with FinCEN, such as banks, credit unions, and foreign currency exchange businesses.
- Subsidiaries of some exempt entities.
- Investment companies, investment advisers, and venture capital fund advisers that are registered with the SEC.
- Commodity pool operators and commodity trading advisors registered with the CFTC.
It’s important to note that while registered investment advisers are exempt from the reporting requirement, private investment advisers are not. Certain commodity pools and other investment vehicles are also not exempt from this requirement. If you’re not sure whether or not your business is exempt, it’s a good idea to consult an attorney.
What information do I need to report?
Reporting companies need to disclose some basic information about the business entity, as well as information about all beneficial owners of the company. A “beneficial owner” is defined as any individual who either has substantial control over the company or who owns or controls at least 25% of the ownership interest in the company.
Here’s the company information required in the BOI report:
- Entity name (plus any DBAs)
- Business street address
- Jurisdiction where the business was formed (for foreign entities, the US jurisdiction where the business is registered)
- Tax identification number, such as an EIN
For each beneficial owner, you’ll need to give the following information:
- Legal name
- Birth date
- Residential or business street address
- A photo of an acceptable identification document (such as a driver’s license or passport) and the ID number from the document
When you file, you may request a FinCEN identifier, which is a number you can use on future filings with FinCEN rather than submitting the above information again.
Who is considered a beneficial owner?
As mentioned above, a beneficial owner is an individual with either 25% ownership interest in the company or substantial control over the company. The CTA criteria for having “substantial control” are deliberately vague, to account for companies with unconventional leadership structures. According to the CTA, a person is considered to have substantial control if she or he:
- Is a senior officer (such as a CEO, CFO, president, etc.).
- Has the authority to remove a senior officer or a majority or dominant minority of the board of directors.
- Directs, determines, or has substantial influence over important decisions within the company.
- Has any other form of substantial control over the company.
People who are exempt from being reported as beneficial owners include:
- Minor children. (Parent or guardian information is required instead.)
- Employees who act in the company only as employees and who are not senior officers.
- An individual acting as a nominee, intermediary, custodian, or agent for a beneficial owner.
- An individual who has only a future interest in the company through a right to inheritance.
- A creditor of the company.
Who can see the information I report?
FinCEN will have the authority to share information in your report with:
- US government agencies.
- State, local, and Tribal law enforcement agencies.
- Financial institutions for the purpose of verifying customer identity.
The information on the BOI report will not be accessible to the public and won’t be subject to Freedom of Information Act requests.
How to File the BOI Report
FinCEN is currently building a web system called the Beneficial Ownership Secure System, which is not yet available. Once the reporting requirement goes into effect in January 2024, you’ll be able to submit your BOI report using this online system.
When do I have to file?
If your company was formed before January 1, 2024, you have until January 1, 2025 to file your first BOI report. For companies formed on or after January 1, 2024, the BOI report must be filed within 30 days of receiving notice that your company was successfully formed or registered.
Will the BOI report need to be updated?
Yes. If there are any changes to the information reported, you’ll be required to file an updated report no more than 30 days after the date of the change. Some changes that would need to be reported include:
- Transfers of ownership interest.
- Changes in the names, addresses, or identifying numbers of beneficial owners.
- The company becoming exempt from reporting requirements.
What happens if I don’t report?
The Corporate Transparency Act states that a company that willingly fails to report or that provides false or incomplete beneficial owner information can be charged with harsh penalties—including fines and up to a three-year prison sentence. While the law says that the failure to report has to be “willing” in order to receive these penalties, it’s still a good idea to take this law seriously and file your report on time if required.