The Corporate Transparency Act: Rising Reporting Requirements

The Corporate Transparency Act (“CTA”), which takes effect on January 1, 2024, will create reporting obligations for most small businesses in the United States.[1] The CTA is designed to capture more information about the ownership of specific entities operating in or accessing the U.S. market, with the goal of enhancing transparency in entity structures and ownership to combat money laundering, tax fraud, and other illicit activities.[2]

Under the CTA, applicable entities, known as “reporting companies,” will be required to file information with the Financial Crimes Enforcement Network (“FinCEN”), a division of the U.S. Department of the Treasury. The CTA broadly defines a reporting company as 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 with a federally recognized Indian Tribe, or formed under the laws of a foreign country and registered to do business in the United States.[3] Under this broad definition, almost all businesses, besides sole proprietorships and general partnerships, are considered reporting companies. However, the CTA expressly excludes 23 categories of large or highly regulated entities from reporting.[4] These categories include banks and credit unions, publicly traded companies, nonprofits, government entities, and certain investment entities.[5]

If a business is obligated to report under the CTA, they must file a Beneficial Ownership Information (“BOI”) report, which provides general information about the company, identifying information about the beneficial owners of the entity, and individuals who have filed an application to create the entity or register it to do business, known as a company applicant.[6] When producing the BOI report, a reporting company must disclose each of its beneficial owners or company applicant’s full legal name, date of birth, current address, unique identifying number from a document like a passport or driver’s license, and an image of the identification document.[7] The BOI report must also include information about the reporting company, which includes full legal name of the reporting company, any trade names through which is conducts business (d/b/a), address of its principal place of business, formation jurisdiction, and its taxpayer identification number.[8]

The definition of beneficial owner is aimed at capturing information about those who take tangible actions that signify control at a company, rather than just an employee with a title. A beneficial owner is defined as any individual who, directly or indirectly, (1) exercises substantial control over the entity or (2) owns or controls not less than 25 percent equity in the entity.[9] An individual exercises substantial control if they serve as a senior officer of the company, have authority over the senior officers or a majority of the board of a company, or have substantial influence over the company’s important decisions, such as nature and scope of the company’s business, major expenditures, or incurrence of significant debt.[10] Like reporting companies, there are exemptions to being labelled a beneficial owner. For example, a beneficial owner does not include a minor child; an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; employees of an entity whose economic benefit comes solely from their employment at that entity; individuals whose only interest in an entity lies in inheritance; and creditors.[11]

Companies that form in 2024 will also have to provide company applicant information; however, this is a narrow requirement because it does not apply to already established businesses. In the case of a reporting company that is created or becomes a reporting company on or after January 1, 2024, the BOI report must identify its beneficial owners and company applicants.[12] If a reporting company was created or registered before January 1, 2024, it does not need to report information regarding its company applicants. [13] A company applicant is an individual who either (1) directly files the document that creates a domestic reporting company or first registers a foreign entity to do business in the US, or (2) is primarily responsible for directing or controlling the filing of the relevant document by another, if more than one individual is involved in the filing.[14]

The reporting requirements under the CTA are scheduled to become effective on January 1, 2024. Reporting companies created or registered prior to January 1, 2024, will have one year to comply with the CTA by filing initial reports.[15] Reporting companies created or registered January 1, 2024, will have 30 days upon receipt of their creation or registration documents to file initial reports.[16] If an exempt entity ceases to qualify for an exemption, the entity must file a report within 30 days after the date it no longer meets the exemption criteria.[17] Additionally, a reporting company must update a report for any changes that occur or any inaccuracies within 30 days of the change or when they become aware of the inaccuracy.[18] FinCEN has stated that BOI information will be reported electronically, but details regarding certification of the report, extensions, and system details have not been released.

Ensuring compliance with the CTA requirements can help avoid steep penalties that accompany violations. A reporting violation occurs when a company willfully provides false or fraudulent BOI or willfully fails to provide or update BOI.[19] The penalty for a reporting violation can result in fines of $500 per day that a violation continues, up to $10,000, and imprisonment for two years.[20]

Given these penalties, it will be essential for businesses to understand their reporting obligations.

If you have questions about meeting the upcoming reporting requirements created by the CTA, please contact the experienced business attorneys at Eckland & Blando LLP.