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The Corporate Transparency Act is Here – Now What? by Joel G. Young, JD, LLM

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Posted on February 19, 2024 by Joel Young

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has begun enforcing the Corporate Transparency Act (CTA), which requires corporations, LLCs, and some partnerships and business trusts to file beneficial ownership information (BOI) reports revealing the identities of the individuals behind those entities. While the CTA aims to bolster the country’s anti-money laundering policies and unmask the actual owners behind shell companies and other opaque structures that bad actors commonly use to hide illicit financial activity, many legitimate companies will be pulled into the reporting requirements. Here is the information companies need to meet their reporting requirements.

What is the CTA?

Congress introduced the Corporate Transparency Act in 2021 to create a repository of information containing the beneficial owners of companies to be accessible by law enforcement agencies. Under the law, reporting companies must provide FinCEN with detailed statements containing all their domestic and foreign beneficial owners’ names, addresses and other personal identification information.

A reporting company is any domestic entity formed via a filing with a U.S. state (i.e., a corporation, LLC and some partnerships and trusts) or a foreign entity registered to do business in a state. Beneficial owners refer to the individuals who, directly or indirectly, have substantial control over the reporting company or who own 25 percent or more of the reporting company. These individuals may include senior officers, persons with the power to appoint or remove senior officers, or persons who can direct or substantially influence essential company decisions, such as the disposal of company assets, reorganizations or dissolutions, significant expenditures and compensation of senior officers.

What are the Reporting Requirements?

A reporting company must use FinCEN’s BOI E-Filing System to provide its legal name and any of its d/b/a names, employer identification number (EIN), and physical business address and jurisdiction. They must also report the legal names, dates of birth, residential addresses and driver’s license or passport numbers of the beneficial owners and company applicant, who files the documents creating the reporting company or is responsible for directing such filings to be made.

Companies with existing operations have until Jan. 1, 2025, to file an initial report, while those formed after Jan. 1, 2024, have 90 calendar days after formation or registering to do business to file. Companies formed after Jan. 1, 2025, will only have 30 days to file an initial report.  Anytime there are changes to a company’s beneficial owners or other reported information, it will have 30 days to file an updated report with FinCEN.

Can I Qualify for a Reporting Exemption?

There are 23 types of entities exempt from the reporting company definition. They include financial services companies already required to register with a regulatory body, such as banks registered with the FDIC, venture capital fund advisers registered with the SEC, and accounting firms regulated by the PCAOB.

Also exempt from CTA reporting are large operating companies with a physical presence in the U.S., at least 20 full-time U.S. employees, and more than $5 million in gross receipts or sales from U.S. sources as reported on their prior-year tax returns. Subsidiary companies controlled or wholly owned, directly or indirectly, by another exempt company may also be excluded from CTA reporting responsibilities, as are certain inactive entities that existed before January 1, 2020, provided they are not foreign owned, they hold no assets, they do not engage in business activities, and they have not had any ownership changes or significant asset transfers in the prior 12 months.

What are the Penalties for Noncompliance?

The willful filing of an inaccurate report or failure to file can result in civil penalties of as much as $500 per day for each day the violation continues unremedied, as well as criminal penalties that can include a $10,000 fine, up to two years in prison, or both. In addition, penalties can be assessed for the unauthorized disclosure or use of beneficial owner information obtained through a report submitted to FinCEN or a disclosure made by FinCEN to a law enforcement agency.

How Can I Begin Preparing for CTA Compliance?

FinCEN began accepting BOI reports on Jan. 1, 2024, giving existing businesses ample time to determine whether they are affected by the law and start gathering the required reporting information by the Jan. 1, 2025, deadline. Newly formed companies with tighter filing deadlines should begin collecting BOI information as a part of their  pre-formation checklist.  Keep in mind, companies that previously did not need an EIN because they did not have a tax filing requirement (like single-member LLCs) will now need to acquire one to file the BOI report. Moreover, because beneficial ownership includes indirect owners, affected companies may need to dig deeper and look through upper tier holding companies to identify the ultimate individuals behind those entities. Given the expansive reach of the CTA in terms of the number of companies required to report and the sensitivity of the information they must disclose, the earlier one starts the preparation process, the better.

About the Author: Joel G. Young, JD, LLM, provides tax consulting, income and estate tax planning and compliance services for high-net-worth families and closely held businesses with international operations. He can be reached at the firm’s Boca Raton, Fla., office at (561) 361-2000 or info@bpbcpa.com.