The federal Corporate Transparency Act (CTA) requires disclosure of the “beneficial owners” of most companies doing business in the United States. Congress passed the CTA in 2021 as part of the Anti-Money Laundering Act, designed to combat the use of shell corporations, LLCs, and other entities to facilitate money laundering and other criminal financial activities. The goal of the CTA is to make it harder for bad actors to evade law enforcement and hide proceeds of their crimes.
Blog Post
Update: Corporate Transparency Act places new reporting requirements on most businesses
George King • Jan 04, 2024
A federal law that went into effect January 1 requires most legal entities to report specific information about the business and its owners.
This article provides a general overview and multiple updates from our October 2023 article. This version includes the following changes:
- The Beneficial Ownership Information reporting portal is ready to use.
- FinCEN has published the Small Entity Compliance Guide as a companion to its updated Beneficial Ownership Information Reporting Frequently Asked Questions.
- The FinCEN FAQ document includes an updated list of “exempt entities.”
- The FAQ document also provides more information on the criteria for “inactive entities.”
- The reporting deadlines for entities formed on or after January 1, 2024, have been changed and are detailed below. Entities formed in 2024 must submit their report within 90 days of their establishment, while entities formed in 2025 and beyond must report within 30 days.
Below is a short, general summary of the CTA, followed by a list of action items for your business to promote compliance. Those action items include:
- updating stale contact and other important information; and
- addressing any “phantom” owners or managers, people who wanted to be part of your company, but who do not want to be found by creditors, former spouses, etc. Failure to disclose owners can subject you to civil and criminal penalties, so be careful and thorough.
DOES MY BUSINESS HAVE TO FILE A REPORT?
Sole proprietorships do not have file, nor do some general partnerships (check with your attorney).
With a few exceptions noted below, every entity that is registered to do business within a state – whether formed by state law or under foreign law – must file a report.
WHAT ARE THE EXCEPTIONS?
Types of entity. The CTA provides a list of 23 “exempt entities” – mostly larger companies in regulated industries, such as banks, insurance companies, SEC-registered companies, utilities, many 501(c) tax-exempt organizations, etc.
Size of entity. In addition to exempting certain types of entities, the CTA exempts entities based on their size. Specifically, the CTA exempts a “large operating company,” defined as an entity that (a) employs more than 20 employees on a full-time basis in the U.S.; (b) “filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate”; and (c) has an “operating presence at a physical office within the United States.”
Inactive entities. The list of exemptions includes, at #23, “Inactive entity.” Qualifying for inactivity requires specific criteria that you can view in the FinCEN FAQ document at https://www.fincen.gov/boi-faqs#L_2.
If your entity does not qualify for one of the 23 exemptions, you should plan to comply with the new law.
WHAT HAS TO BE REPORTED?
Entity information. The CTA requires an entity to report information about itself and about its “beneficial ownership.” The required entity information is basic, consisting of the entity’s:
- legal name;
- trade names or DBAs, if any;
- physical address;
- jurisdiction of formation (e.g., Arizona); and
- Employer Identification Number (EIN), aka: the federal tax ID number.
Owner identifying information. The CTA also requires reporting of information about the entity’s “beneficial owners,” who fall within three general categories: applicants, owners, and individuals with “substantial control” over the entity. The information to be reported is relatively straightforward. Deciding who falls within these categories is more complicated.
For each of these individuals, the CTA requires reporting of the individual’s:
- name;
- date of birth;
- home or business address; and
- a unique identifying number from an acceptable identification document, such as a passport, along with an image of that identification document.
WHO ARE BENEFICIAL OWNERS?
Applicants. This applies only to entities that are created after January 1, 2024. For such entities, an “applicant” is the individual who directly files the documents that create the entity with the relevant government office. If a different individual directs or controls the filing but does not do the filing themselves, the entity has two “applicants”: the person who files, and the person who directs the filing.
Owners. An entity must report any person who directly or indirectly owns 25% or more of the equity interests of the entity. Indirect ownership can be ownership through another entity, such as a corporation or a family trust.
Individuals who have “substantial control” over the entity. Individuals with “substantial control” in a corporate setting generally include managers of LLCs, as well as “senior officers” of corporations, such as the president, CEO, CFO, COO, and general counsel.
Indirect ownership and control. The CTA makes clear that it requires reporting of any individual who exercises ownership or control indirectly, even without a formal title or without a formal ownership interest. This can include “phantom” ownership such as an informal profit-sharing arrangement. It can also include individuals who do not have a formal corporate title but exercise control over the entity, such as deciding who is appointed in formal positions of ownership.
WHEN DO WE HAVE TO FILE?
- If your reporting company was in existence before January 1, 2024, you have until December 31, 2024, to file your initial report.
- If your reporting company is created during 2024, it must file its initial report within 90 calendar days after (a) the date on which the entity received actual notice that its creation or registration is effective, or (b) the date after the state first provides public notice of the entity’s creation or registration.
- For a reporting company created on or after January 1, 2025, the 90-calendar-day period mentioned above is reduced to 30 calendar days.
HOW DO WE FILE OUR REPORT?
Reports must be filed online, using the non-public, cloud-based portal maintained by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
See “File the Beneficial Ownership Information Report (BOIR)” at https://boiefiling.fincen.gov/fileboir.
WHAT IF WE DO NOT FILE A REPORT?
Failure to file, on time, can be costly. “Willful” violations of the Corporate Transparency Act can carry civil penalties (e.g., $500/day for each day past a deadline) and, in some cases, criminal liability (up to $10,000 in fines and up to two years in prison).
HOW OFTEN DO WE HAVE TO FILE?
Subsequent filings may be the riskiest and most burdensome issue for many businesses.
While filing your initial report does not seem too difficult, the trick is that every time something in your report changes, you have to file another report.
For all reporting companies, any change to a previously filed report must be reported to FinCEN within 30 days of the change.
GET READY
Generally. It’s not too soon to start gathering the required information, especially if your business has multiple owners and/or multiple entities, or if you contemplate creating a new entity this year.
At the very least, make it the job of someone in your company to look further into the Corporate Transparency Act’s requirements and prepare a timeline and procedures that will help you comply with the new law.
Update contact information. Be sure you have good contact information for all of the individuals who might fall into the categories of applicant, owner, or controlling person. It is easy to forget to update addresses, emails, etc. You may have a 25% silent partner who is, well, silent and may have moved. Better to reach out now than panic a week before a report is due.
Update corporate filings. In Arizona, you must file annual reports for corporations that list certain information about the company and its owners and officers. It is easy to copy the form from the last year and forget that things have changed. Be sure that the Corporation Commission records reflect your company’s correct information. We do not know how aggressively any of these regulations will be enforced, but the easiest thing for a government employee to do is to surf the web and see if your report matches your public filings. If not, expect a compliance letter and a hefty fine.
This problem is even worse with LLCs, which are “file and forget.” Unless you have a change of ownership, location, etc., you never have to file anything with the Corporation Commission other than the initial formation paperwork. Be sure all information is accurately reflected in the Commission’s records. Your lawyer can help you with this.
Danger: hidden ownership and control. Many small companies have owners or participants who want to stay out of public view for a variety of reasons. Some reasons are innocent, but others are more nefarious, such as:
- concealing assets during a divorce or from other creditors;
- hiding employment that violates a non-compete agreement;
- misrepresenting corporate ownership to fraudulently obtain benefits intended for woman and minority-owned businesses; and
- concealing employment of an individual who is barred from owning or controlling a regulated entity (such as a licensed contractor).
Your company needs to address these issues directly. The CTA will dramatically increase risks of this already risky behavior.