The Corporate Transparency Act (CTA), embedded within the National Defense Authorization Act and enacted on January 1, 2021, represents a pivotal shift in anti-money laundering regulations. Designed to fortify the fight against money laundering, terrorist financing, corruption, and tax fraud, the CTA introduces crucial reforms. A key aspect of this legislation is the imposition of beneficial ownership reporting requirements for corporations, limited liability companies (LLCs), and similar entities operating in the United States.
Here are five vital aspects every business needs to comprehend:
1. Who's Obligated to Report?
The Corporate Transparency Act (CTA) aims to enhance transparency in small business activities. The catalyst for this improvement lies in the reports of Beneficial Ownership Information (BOI), primarily directed at small businesses. The CTA applies to a broad spectrum of entities, including actively operating corporations, LLCs, and businesses established through state filings in the U.S. To ascertain whether your business is obligated to submit reports, it is advisable to contact the Financial Crimes Enforcement Network (FinCEN).
Required reporting companies:
Limited Liability partnerships
Limited Liability limited partnerships
Business Trusts
What is a Beneficial Owner?
When we talk about the beneficial owner, 2 categories define someone. Directly or indirectly:
substantial control or exercises substantial control over a company
an individual who controls or owns 25 percent of ownership of a reporting company
What is a Company Applicant?
When we talk about the beneficial owner, 2 categories define someone. Directly or indirectly:
The individual who directly files the document that creates the entity, or the document that first registers the entity to do business in the United States.
The individual is primarily responsible for directing or controlling the filing of the relevant document by another.
2. What Information is Reported?
Reporting companies will utilize FinCEN’s website with no associated fee. Beneficial Owners, individuals with substantial control or owning 25% or more of the entity, must be reported. Company applicants, responsible for the formation or registration document submission, also need reporting. The report encompasses crucial details such as the company's legal name, principal place of business, assumed business names (DBA), taxpayer identification number (TIN or EIN), and specific information about Beneficial Owners and Company Applicants. Importantly, this is not an annual report, only necessitating updates and corrections.
3. When are reports for the CTA due?
January 1, 2024. Companies in existence on the effective date have one year, so January 1, 2025, to file their initial report.
Companies created after the effective date have 30 days from receiving their notice of creation or registration. However, there has been discussion of extending the BOI report deadline to 90 days for companies registered or created in 2024.
To note, reports must be updated within 30 days anytime there is a change to beneficial owner (see above for beneficial owner). So the sale of a business, merger or acquisition, or death all fall in line within the here. Additionally, if one becomes aware of previously filed inaccurate information, one must report it within 30 days of becoming aware.
Remember this applies to reporting companies. The exempt companies you can find below and determine whether your business falls under the exempt category.
4. What impact the Corporate Transparency Act will have moving forward?
Failure to comply can result in high penalties and some cases imprisonment. The fines can range from $500 to $10,000 per violation and up to two years in jail. Frequent monitoring will be necessary moving forward. Because the CTA will directly affect small business owners, tracking all of the above information becomes another hurdle to jump. Financial institutions will be well-equipped as they will be required to stay up to date on future changes in the Corporate Transparency Act.
If you have not done so already, you may want to reach out to your accounting team and ask what this means for your business. What should happen is they will take on the responsibility of monitoring reports or connect you with someone who will.
5. Are you unsure whether your company is exempt or not?
Here is a list of those exempt from reporting
Publicly traded companies,
financial institutions,
tax-exempt nonprofits,
public utilities and certain large businesses are exempt from reporting.
Refer to the Small Business Compliance Guide (Chapter 1.2) for a comprehensive list of exempt entities already subject to other regulatory requirements.
The Corporate Transparency Act marks a significant step toward fostering transparency in business ownership. Understanding and adhering to these reporting obligations is crucial for businesses to navigate the evolving regulatory landscape and contribute to the broader efforts against financial crimes. Stay informed, stay compliant. Reach out today and ask about these changes coming in the new year.