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Corporate Transparency Act

November 29, 2023

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What is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) will require certain companies to report information about the company and its beneficial owners to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). The purpose of the Corporate Transparency Act is to protect the U.S. financial system from corruption by requiring companies to report beneficial ownership information (BOI). The hope is that this transparency will make it more difficult for criminals to use companies as fronts for illegal activity.

 

When does the Corporate Transparency Act take effect?

The Corporate Transparency Act was part of the 2021 National Defense Authorization Act and the new reporting requirements will take effect January 1, 2024. However, there is a chance that the Protecting Small Business Information Act of 2023 will delay the effective date until all rules required under the CTA have been issued and are final. Either way, it is important to start thinking about this now and preparing for its implementation.

The CTA is not a part of the tax code. Instead, it is a part of the Bank Secrecy Act, a set of federal laws that require record-keeping and report filing on certain types of financial transactions. Under the CTA, BOI reports will not be filed with the IRS, but with the Financial Crimes Enforcement Network (FinCEN), another agency of the Department of Treasury.

Below is some preliminary information for you to consider as you approach the implementation period for this new reporting requirement. This information is meant to be general-only and should not be applied to your specific facts and circumstances without consultation with legal counsel.

 

What are the guidelines around filing?

Entities that exist before January 1, 2024 are required to file the initial report by January 1, 2025. Once the initial report is filed, existing entities have 30 days to file any updates to the report.

New entities formed in 2024 must file the initial report within 90 days of formation. New entities also have 30 days to file any updates to the report.

 

Who is required to file?

To put it simply, domestic and foreign companies who are registered to do business in the U.S. by filing a document with the secretary of state or similar office are required to file.

However, there are several exemptions, including the following:

  • Large operating companies (20 or more full-time U.S. employees, more than $5 million in U.S. revenue, and have a physical operating presence in the U.S.)
  • Companies registered with the Securities and Exchange Commission (SEC)
  • Banks
  • Insurance Companies
  • Tax-exempt entities
  • Accounting firms
  • Public utilities companies
  • Registered Commodity Exchange Act entities, registered investment companies or advisors, etc.

 

What is reported in the corporate transparency report?

  • The company’s full name
  • Any trade name or DBA’s
  • Business street address
  • Jurisdiction of formation
  • IRS taxpayer ID

 

Who is considered a beneficial owner?

An individual who directly or indirectly: exercises substantial control over the reporting company or owns or controls at least 25% of the reporting company’s ownership interests.

 

Who is considered a company applicant?

The individual who filed the application/documents to form the company as a corporation, LLC, etc.

 

What needs to be reported for the beneficial owner(s) and company applicant?

  • Name
  • Birthdate
  • Address
  • A unique identifying number from an acceptable official document (Ex: passport or driver’s license)

 

What happens when there are changes to this information?

A reporting company is required to report any changes to the corporate transparency report or beneficial owner/company applicant information within 30 days of the change. This information could include changes in ownership, moving homes, getting married/divorced, etc. It is important to stay on top of this information and be prepared to update the report within the required 30 days.

 

What are the consequences of noncompliance?

There are some significant consequences associated with not complying with the BOI reporting requirements. Willfully not complying can result in civil penalties of $500 per day up to $10,000 for as long as the violation exists and criminal penalties up to 2 years of prison time. This is why it is important to start considering if you are required to comply now and not to wait.

Additional information regarding this reporting can be found at the FinCen website in particular the “Small Entity Compliance Guide”.   If you have additional questions, we suggest you consult with your legal counsel regarding this new law.