On January 1, 2024, the Corporate Transparency Act (CTA) goes into effect.  The CTA has far-reaching implications for millions of small businesses, creating new reporting obligations for owners and decision-makers.  Understanding the impact this new law has on your business is critical, as the law imposes civil and criminal penalties for non-compliance, including fines up to $10,000 and imprisonment up to two years.  So let’s find out if the CTA affects your business and what you may need to do to comply.

What is the Corporate Transparency Act?

The CTA was originally enacted in 2021 in an effort to combat money laundering, tax evasion, and financing for terrorism.  Specifically, the Act seeks to prevent individuals from concealing the ownership of U.S. entities, a tactic that has been widely used by wrongdoers to the detriment of national security and our economic integrity.

To accomplish its goal, the CTA requires that certain businesses file a Beneficial Ownership Information (BOI) Report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).  The report will include the identity of individuals having “beneficial ownership” of the reporting entity.

What entities are required to file a BOI?

The following two types of reporting entities will be required to file BOI reports:

• Domestic reporting companies – these include corporations, LLCs, and any other entities formed by filing with a secretary of state or equivalent office. Notably, sole proprietorships, general partnerships, and trusts are not subject to the CTA, unless they have filed documentation with the secretary of state.
• Foreign reporting companies that are registered to conduct business in the United States after having filed with a secretary of state or equivalent office.

At first glance these qualifications would seem to include the vast majority of companies operating in the United States, but there are several exemptions to the CTA’s requirements.  Most cover entities in the financial realm, like banks and investment institutions that are already reporting this type of information, but tax-exempt and inactive entities are also exempt.

The CTA also provides an exemption to “large operating companies” that employ more than 20 full-time employees working at a U.S. office and which reported more than $5M in domestic revenue on the previous year’s tax return.  If your business isn’t otherwise exempt and doesn’t employ more than 20 full-time employees, regardless of your revenue, you’ll be required to file a BOI.  Similarly, if you have more than 20 employees but less than $5M in domestic revenue, you are subject the CTA’s reporting requirements.  This is why the CTA will affect millions of small businesses across the country.

What constitutes “beneficial ownership?”

Under the CTA, an individual is a beneficial owner if their ownership stake is at least 25% or they have a significant influence on the company’s decision-making, operations, or equity.  Under this definition, not only do large passive investors qualify as beneficial owners, but directors or upper level management that don’t have equity ownership may qualify as well.

What information needs to be reported on the BOI?

The required information varies for entities formed before and after January 1, 2024, but in general the following information must be disclosed:

• For beneficial owners, their names, addresses, birthdays, and identification numbers (from a passport or driver’s license).
• For company applicants (the individuals who filed for formation of the entity, which could be the entity’s attorney or CPA), the same information required of beneficial owners.
• The entity’s legal name, assumed name (DBA), and tradenames.
• The entity’s current U.S. address (not a PO box), tax ID number, and the jurisdiction where the entity was formed.

It is important to note that all information submitted to FinCEN in the BOI reports will be kept confidential, only to be used by the Treasury Department and other law enforcement agencies, and will not be accessible by the public.

When does the BOI have to be filed?

For entities established before January 1, 2024, the BOI must be filed no later than January 1, 2025.  For entities formed between January 1, 2024 and January 1, 2025, the BOI can be filed within 90 days of the date of formation or public announcement, whichever is first.  Entities formed after January 1, 2025 must file their BOI within 30 days of their formation or public announcement.

While there have been no annual reporting requirements set, any change in beneficial ownership – or the beneficial owner’s personal information, including their address or legal name after marriage or divorce – will require an updated BOI be filed with FinCEN.  Changes in the substantial control of the entity, including hiring and firing of C-level management, key decision-makers, etc., will also necessitate filing an updated BOI.  The deadline for filing in these instances can be as little as 30 days, so it is important for management to be diligent and proactive about monitoring changes that may require an updated BOI.

While companies may choose to file their own BOI reports, given that civil and criminal penalties are a possibility for improper reporting, we suggest that small businesses seek the assistance of a trusted attorney to file the required information.

TrustBridge Legal can review the applicability of this new legislation to your business, and if we determine that your company is subject to the CTA’s requirements, we will help you navigate the complex landscape to ensure your corporate records are up to date and the BOI report is properly completed and timely filed.