The Corporate Transparency Act affects certain tax-exempt entities and private businesses by introducing a new layer of reporting and compliance requirements. Take time to understand what the law requires and how to get your business ready for this significant change that’s coming soon.
By Ben Young, Greg Boornazian, Christie Vu and Jonathan B. Wilson
The United States is making strides expanding anti-money laundering laws that will bring our practices up to par with European countries.
The Corporate Transparency Act (CTA), a bipartisan law that was passed by Congress in 2020 and will become effective January 1, 2024, requires U.S. companies to disclose specific identifying information about each of their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department.
Businesses will have to file a beneficial owner report with FinCEN, who will then use this information to generate a non-public facing database of beneficial ownership information (BOI) to help eliminate corporate anonymity and expose potential money laundering tactics that have been hidden from view.
While complying with this new law may seem straightforward at first glance, the CTA includes several complicating factors to bear in mind. First and foremost, this is a federal law that is based on state business distinctions, which can create confusion. Other stumbling blocks include determining who exactly is the beneficial owner(s) in the business and establishing a secure and efficient way to collect and transmit the required identifying information and documentation within the timelines mandated by the law.
The CTA goes into effect in mere months, so let’s take a closer look at what’s required and the best way to get started.
Defining the nuances of the Corporate Transparency Act
The CTA is far-reaching and impacts a vast number of U.S. businesses, but it doesn’t apply to everyone and may vary from state to state. Reporting companies required to adhere to the CTA include:
- Any entity formed by filing a formation document with a Secretary of State or similar office
- Any entity formed under the laws of a foreign country and registered to do business in the U.S. by the filing of a document with a Secretary of State or similar office.
Some entities that are subject to the law are exempted from its filing obligations. There are 23 categories of exemption, including:
- Tax-exempt entities under Section 501(c) of the Internal Revenue Code (IRC). [Note: This does not include tax-exempt entities under other sections of the IRC, such as homeowner associations, which are exempt under IRC Section 528.];
- Publicly traded businesses;
- Banks and credit unions;
- Bank holding companies; and
- Large operating companies with more than $5 million in annual gross receipts (as demonstrated on their most recent tax return) and more than 20 full time employees.
FinCEN estimates that approximately 32 million companies will need to file in the first year the CTA takes effect. Thereafter, FinCEN estimates that there will be about 5 million new reporting companies added each year.1
Identifying Beneficial Owners
Once you’ve determined that your business must comply with the CTA, you need to identify who are the beneficial owners and gather required information and documentation. Beneficial owners are defined by FinCEN as any individual who either “exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interests of the reporting company.”2
Any existing companies established before January 1, 2024 will have one year to file their first report. New companies established on or after January 1, 2024 will have to file their first report within 30 days of formation.
The following five pieces of personally identifiable information (PII) must be provided for each beneficial owner of the reporting company:
- Full legal name
- Date of birth
- Residential address
- Identification number (driver’s license, passport, etc.)
- An image of the photo ID provided
All companies will be required to file an amendment within 30 days after any beneficial owner data changes.
In addition, companies formed on or after January 1, 2024 will also need to provide these same five pieces of PII with respect to their “company applicant.” The term “company applicant” is defined as the individual who files the company’s formation (or registration) documents with the Secretary of State, or who directs the filing of those documents.
What do business owners and operators need to do?
CTA compliance introduces significant new obligations for impacted businesses across the country, so it’s important to look ahead and prepare for what’s to come.
Here are three steps to get started:
1. Appoint a compliance officer and adopt a compliance policy.
The officer should report to the board, advise on progress and be responsible for ensuring reporting is done completely and on time.
2. Amend your internal corporate governance documents.
Formalize corporate governance documents, such as LLC operating agreements and shareholder agreements, to include requirements for shareholders to report and collect data in compliance with the law. The documents should also require the shareholder to represent and warrant the reported data and indemnify the organization in the event a third-party claim arises from the data provided. Counsel should review these documents to ensure your organization is protected in the event a shareholder fails to report or provides inaccurate data.
3. Engage with your attorney to determine who are your “beneficial owners.”
Beneficial owners cannot merely be identified as those who hold your stock. If your company is taxed as a partnership, for example, determining the beneficial owners can become complicated. Don’t delay here — start the process now so you aren’t left scrambling in a few months.
A note on mergers and acquisitions: Don’t assume companies you’re acquiring are compliant with the CTA. Make adding CTA beneficial owner updates to your M&A due diligence checklist a high priority, as all updates will need to be made within 30 calendar days of transaction closing.
For a more detailed look at how to prepare, check out Jonathan Wilson’s The Corporate Transparency Act Compliance Guide,3 to be published this summer. This in-depth guide offers a complete overview of the CTA and offers examples, checklists and model forms to help companies develop compliance policies and governance provisions.
CTA enforcement and penalties
FinCEN has not yet published details about how they intend to enforce the CTA, but it’s almost certain that those who do not comply will incur civil money penalties. Even companies that make filing errors — regardless of company size or number of beneficial owners — will be fined. Organizations that file past the deadline are liable to pay a fine of $500 per day with a maximum penalty of up to $10,000. Criminal liability charges will be imposed on senior officers or those who knowingly provide false information which can result in imprisonment for not more than 2 years.
FinCEN Reporting System
It’s imperative that companies establish a secure, efficient way to manage beneficial owner data, as solutions such as email, Google Docs and Excel spreadsheets fall short of doing this effectively. They lack proper security, transparency among owners and those managing the data, and do not provide an accessible way to collect and update data as needed.
FinCEN Report Company’s FinCEN Reporting System has been purpose-built for CTA compliance and will soon offer an easy and secure way for companies to collect, prepare and file beneficial owner data and reports. The FinCEN Reporting System also simplifies reporting data of beneficial owners who own multiple reporting companies. Check out these quick videos to see how to create your free personal account or company account to get started. For more information on how the FinCEN Report Company can help you prepare for the CTA reporting requirements, you can contact them at [email protected] or visit their website at www.fincenreport.com.
Protector Plans would like to give special thanks to Jonathan Wilson, Co-Founder of FinCEN Report Company, for his time in speaking to us about the CTA, its impacts, and how to prepare.
[1] Federal Register “Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifiers for Entities,” December 16, 2022.
2 Practical Guidance Journal 2023 Second Edition “The Corporate Transparency Act and Beneficial Ownership Reporting Requirement.”
3 LexisNexis “The Corporate Transparency Act Compliance Guide, 2023 edition.”
This information is intended for informational purposes only. Protector Plans Executive Liability is not liable for any loss or damage arising out of or in connection with the use of this information.