The Corporate Transparency Act: What Business Owners Need to Know

There’s a new standard in place for virtually every company incorporated or registered to do business in the United States. Beginning on January 1, 2024, all legal entities and organizations are bound by the Corporate Transparency Act, which requires them to disclose information about their owners, officers, and controlling persons. Read on for an experienced business attorney’s recommendations on compliance with the new regulations.

What is the Corporate Transparency Act?

The Corporate Transparency Act (CTA), enacted on January 1, 2021, aims to improve clarity in corporate ownership. It requires companies to disclose their beneficial owner information (BOI), making it more difficult for individuals and entities to hide their identities and assets behind complex corporate structures.

The CTA establishes the first nationwide standards for corporate ownership information by ordering businesses to supply BOI requirements to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. The bill was backed by state and local law enforcement agencies that regularly ran into roadblocks when investigating corporate entities used for illegal purposes.

The Corporate Transparency Act is intended to:

• Strengthen efforts to combat financial crimes
• Promote greater accountability in the corporate world
• Reduce terrorist financing 
• Limit tax evasion practices
• Prevent money laundering through the U.S. financial system
• Curb company profit from illegal activities
• Prevent the misuse of anonymous shell companies

What Is a Reporting Company?

Entities subject to the CTA’s requirements are known as “reporting companies,” which are defined as follows:

• A domestic reporting company is any privately held corporation, LLC, or other entity created through filing a document with a Secretary of State or similar office.
• A foreign reporting company is any private entity formed under a foreign country’s laws and registered to do business in the U.S. through filing a document with a Secretary of State or similar office.

What Information Needs to Be in the Corporate Transparency Act Report? 

Companies subject to the CTA must provide identifying information for the corporate entity and each owner for inclusion in FinCEN’s database. This includes the following required information: including:

• The entity’s full legal name and address
• Any other names associated with the entity (such as a trade name or d/b/a)
• The jurisdiction where the entity was formed
• The entity’s federal taxpayer ID number
• The full legal name, home address, and date of birth of each beneficial owner 
• A unique identifying number (such as a driver’s license or U.S. passport number) for each beneficial owner and an image of the document showing the identifying number

What Is a Beneficial Owner Under the Corporate Transparency Act?

Beneficial owners are individuals who own or control a significant percentage of the company, typically those with a 25% or more ownership stake. The CTA also allows an individual who exercises substantial control over a reporting company to act as the beneficial owner.

The CTA defines “substantial control” as at least one of the following:

• Serving as a senior officer of the company
• Exerting authority over the senior officers of the company
• Exercising authority over a majority of the board of a company
• Having substantial influence over the company’s vital decisions
• Having any other type of significant control over the company.

A beneficial owner could exercise control directly or indirectly through financing arrangements, by board representation, or over intermediary entities that exercise substantial control. Indirect control could also include serving as the trustee of a trust, being a named beneficiary of a trust, or through joint ownership with one or more other individuals.

Who Cannot Be Listed As the Beneficial Owner?

The CTA places limits on who may serve as a beneficial owner. The following individuals cannot be listed as beneficial owners of a reporting company:

• Minor children
• Any person acting as a custodian, intermediary, nominee, or agent on behalf of a qualified beneficial owner
• An individual who has only a future interest in the reporting company through the right of inheritance
• An employee of the reporting company whose substantial control is derived from their employment status alone 
• A creditor of the reporting company that does not have substantial control or 25% ownership interest in the reporting company

Who Is the Company Applicant?

Entities created after January 1, 2024, must include information on the “company applicant,” the person in charge of filing the company’s documents. The company applicant could be:

• The person responsible for filing the documents that create the business entity
• The person who directly files the document to register a foreign reporting company to conduct business in a U.S. state 
• The person primarily responsible for directing another individual to file the relevant documents
• Legal counsel meeting the above criteria

Is Anyone Exempt from the Corporate Transparency Act’s Reporting Requirements?

The CTA allows several exemptions from the definition of reporting company, including:

• SEC-reporting companies
• Insurance companies
• Accounting firms with Public Company Accounting Oversight Board (PCAOB) registration
• Tax-exempt entities
• Certain companies with more than 20 full-time employees who operate from a physical office within the U.S. and whose most recent federal income tax return showed more than $5 million in gross receipts
• Subsidiaries of certain exempt entities

What Does the Corporate Transparency Act Mean for Small Businesses?

While the law provides a new avenue in the fight against financial crime, the demands of the CTA could potentially cause problems for small businesses, including:

• Competitive Disadvantage. Exemptions for well-established businesses won’t apply to startup entities that cannot meet the required prior-year tax filings.
• Funding Problems. The new law could make it harder for businesses to solicit funds from private investors, family members, or angel investors who prefer to remain anonymous. 
• Privacy Concerns. Reports filed with FinCEN will not be accessible to the public and are not subject to requests under the Freedom of Information Act. However, state and local law enforcement agencies can access the database for national security, intelligence, and civil and criminal law enforcement matters. 
• Audit Opportunities. The Department of the Treasury can also access the information provided to FinCEN for tax administration purposes.

What Are the Deadlines for Corporate Transparency Act Reporting?

Reporting companies have strict deadlines from the January 1 effective date to comply with reporting requirements. Information cannot be submitted early, as FinCEN will not accept any beneficial ownership reports until January 1, 2024.

The deadline that applies to each reporting company depends on the date of formation:

• Businesses created or registered before January 1, 2024, have one year to file their initial reports. 
• Businesses created or registered on January 1, 2024, or later have 30 days to file initial reports upon receipt of their origination documents.

If there has been a change in the information previously reported to FinCEN, reporting companies have 30 days to file an updated report. Companies must also correct any inaccurate information in previous reports within 30 days of discovering the error.

Is There a Penalty for Non-Compliance with the Corporate Transparency Act?

Yes. The CTA establishes the following criminal and civil penalties for entities and individuals: 

• Failure to comply with reporting requirements may result in a civil fine of $500 a day for each day the reports remain missing or information is inaccurate.
• Any individuals who knowingly provide false or fraudulent information regarding beneficial ownership may result in two years in jail and a criminal penalty of $10,000. The company will also be subject to the daily $500 civil fine until the information on record is accurate.

How Can Reporting Companies Prepare for the New Requirements of the Corporate Transparency Act?

At Yolofsky Law, we can ease the burden that increased legislation places on small businesses. It starts with determining whether you meet the definition of a reporting company and ensuring that you remain in compliance with the CTA. From there, we go the extra mile to prevent problems in the future, such as meeting other disclosure requirements and confirming whether a potential acquisition complies with CTA regulations.

Changes in law are the perfect opportunity to reexamine your company’s compliance plan. Our legal team can help you update internal policies and implement a system to track any disclosure updates to make reporting a breeze. Email us at [email protected] today or schedule a 15-minute call to see how we can help protect your company now and in the future.