What is the Corporate Transparency Act?
Enacted in 2021, the Corporate Transparency Act (“CTA”) became effective on January 1, 2024 and requires certain entities to file additional reports with the Financial Crimes Enforcement Network (FinCEN). Hefty penalties and fines will be assessed to businesses that fail to comply with the new reporting regulations.
Created to add an extra layer of security and dependability regarding the disclosure of beneficial ownership information (“BOI”) by entities in the United States, the Act aims to target shell companies associated with anonymity and potential misuse and plans to introduce a new era of transparency by mandating government disclosure of BOIs. These records will be filed with FinCEN and will aim to widen the impact of integrity, disclosure, and trust within the business sector, adding an extra layer of transparency withing the Bank Secrecy Act.
Consider it a government flashlight revealing the layers of corporate beneficial ownership, which historically has been completely in the dark.
Why now?
This is a pivotal step toward exposing financial misconduct such as money laundering, fraud, and other forms of financial wrongdoing by creating reporting standards to identify the individuals who benefit from their operations.
Who is impacted?
Domestic companies required to report under the Corporate Transparency Act include entities that were created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe. Foreign companies that are formed under law of a foreign country and registered to do business in any state or tribal jurisdiction are also required to report.
Entities required to file include:
- Limited liability companies (LLCs) and private corporations (unless they qualify for an exemption)
Exempt entities include:
- Nonprofits
- Banks and credit unions
- Securities brokers/dealers
- Publicly traded companies
- Other similar businesses that already are subject to robust reporting requirements
All in all, there are 23 categories of exemptions largely due to already heavy government reporting and regulations regarding their BOIs.
The Corporate Transparency Act aims to target shell companies associated with anonymity and potential misuse and plans to introduce a new era of transparency by mandating government disclosure of BOIs. These records will be filed with FinCEN and will aim to widen the impact of integrity, disclosure, and trust within the business sector, adding an extra layer of transparency withing the Bank Secrecy Act.
What are the Filing Requirements of the CTA? When must they be filed?
Filing is simple, secure, and free of charge. Companies that are required to comply (“reporting companies”) must file their initial reports by the following deadlines:
- Existing companies: Reporting companies created or registered to do business in the United States before January 1, 2024 must file by January 1, 2025.
- Newly created or registered companies: Reporting companies created or registered to do business in the United States in 2024 have 90 calendar days to file after receiving actual or public notice that their company’s creation or registration is effective.
Reporting is not an annual requirement. A report only needs to be submitted once, unless the filer needs to update or correct information. Generally, reporting companies must provide four pieces of information about each beneficial owner:
- name;
- date of birth;
- address; and
- the identifying number and issuer from either a non-expired U.S. driver’s license, a non-expired U.S. passport, or a non-expired identification document issued by a State (including a U.S. territory or possession), local government, or Indian tribe. If none of those documents exist, a non-expired foreign passport can be used. An image of the document must also be submitted.
What is a Beneficial Owner?
A beneficial owner is any individual who has ownership or control of a significant portion of a legal entity. This includes individuals who directly or indirectly either hold at least 25 percent of ownership interests over a reporting company or exercises “substantial control” over a reporting company.
To learn more about Beneficial Ownership and “Substantial Control” please visit: https://www.wolterskluwer.com/en/expert-insights/who-is-a-beneficial-owner-under-the-corporate-transparency-act
Frequently Asked Questions
Where do I file?
Reporting for the CTA can be done online at Financial Crimes Enforcement Network (FinCEN) Beneficial Ownership Secure System https://boiefiling.fincen.gov/. The BOI E-Filing System supports the electronic filing of the Beneficial Ownership Information Report (BOIR) by either uploading the PDF form or by filing it online.
Do I have to report for my LLC?
Most likely, as most Limited Liability Companies do not meet the criteria for exemption listed above. If an LLC has over 20 full-time employees or has more than $5 million in gross receipts it may be exempt from reporting due to the large operating company exemption.
What are the criteria for the subsidiary exemption from reporting?
The entity’s ownership interests are controlled or wholly owned, directly or indirectly, by any of these types of exempt entities:
- Securities reporting issuer
- Governmental authority
- Bank
- Credit union
- Depository institution holding company
- Broker or dealer in securities
- Securities exchange or clearing agency
- Other Exchange Act registered entity
- Investment company or investment adviser
- Venture capital fund adviser
- Insurance company
- State-licensed insurance producer
- Commodity Exchange Act registered entity
- Accounting firm
- Public utility
- Financial market utility
- Tax-exempt entity
- Large operating company
I formed my company before January 1, 2024. When do I need to report by?
For active companies that meet the reporting requirements and were established before January 1, 2024, they must report by January 1, 2025. Companies formed in 2024 must file an initial report within 90 days after the earlier of either (1) the date on which it receives notice that its creation has become effective or (2) the date on which a secretary of state or similar office provides public notice that the company has been created.
Do I have to report for my Trust?
No, a trust is not required to file any beneficial ownership reports. However, an entity owned by a trust may be required to report certain BOIs.
Do I have to report for my Donor Advised Fund?
No, a Donor Advised Fund (DAF) is not required to report.
Do I have to report for my Family Foundation?
A foundation may not be required to report beneficial ownership information to FinCEN if the foundation qualifies for the tax-exempt entity exemption.
A beneficial owner in my LLC died. Do I need to file anything?
Yes. A reporting company must file an updated report but it is not required until 30 days after the deceased’s estate is settled.
What happens if I do not report?
There are hefty penalties assessed for non-compliance of the Corporate Transparency Act, which can result in civil penalties of $500 per day (up to $10,000) with up to two years of jail time.
Next Steps
If you believe that you are subject to the new reporting requirements enacted under the Corporate Transparency Act you should speak with you tax and legal advisors. In many cases these advisors are helping clients fulfill the reporting requirements.
Additional Resources
FinCEN Beneficial Ownership Information
US Chamber of Commerce – What Every Small Business Needs to Know about the Corporate Transparency Act
Thomson Reuters – Are you ready? The Corporate Transparency Act becomes effective Jan 1, 2024
Update – On Friday, March 1, 2024, the U.S. District Court for the Northern District of Alabama held that the Corporate Transparency Act (“CTA”) is unconstitutional. The District Court’s injunction prohibits the defendants from enforcing the CTA against the plaintiffs, members of the (National Small Business Association “NSBA”), but does not speak to other regulated parties.
Currently, FinCEN is not enforcing compliance with the CTA on members of the NSBA (as of March 1, 2024). However, it appears that FinCEN’s current position is that it will be enforcing the CTA as to all other reporting companies. In the meantime, if you are not a member of the NSBA it seems clear that FinCEN’s current position is that you will be required to comply with the CTA on the relevant date. For existing reporting companies formed before January 1, 2024, FinCEN is requiring the initial beneficial owner information return on January 1, 2025. For those new reporting companies formed on or after January 1, 2024, the initial beneficial owner information return is due within ninety days of formation.
The American Institute of Certified Public Accountants (AICPA) in a statement is advising that small businesses should continue to file beneficial ownership information (BOI) reports. Questions regarding the Corporate Transparency Act should be directed to your tax and legal professionals.
This document is being provided for informational and educational purposes and is not meant to be taken as specific advice. Oakworth Capital Bank does not provide tax or legal advice. All decisions regarding the tax and / or legal implications of these strategies should be discussed with your tax and / or legal advisors before being implemented