The Corporate Transparency Act (CTA) is a federal law enacted in 2021, as an effort to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and the other illicit activity, while minimizing the burden on entities doing business in the United States went into effect January 1, 2024.
This law creates a new beneficial ownership (additional details on page 3) information reporting requirement as part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.
The following information will provide you with the overview of the CTA, which entities must comply with the law, and reporting timeline.
Overview of the Corporate Transparency Act
The Corporate Transparency Act (CTA) was introduced as part of the Anti-Money Laundering Act of 2020, which was itself part of the National Defense Authorization Act (NDAA). Although then-President Donald Trump vetoed the NDAA, Congress overrode the veto on Jan. 1, 2021.
“Through the CTA,” the American Bar Association explains, “Congress directs the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to establish and maintain a national registry of beneficial owners of entities that are deemed ‘reporting companies.’”
Reporting Under the Corporate Transparency Act
For all companies established on or before December 31, 2023, will be required to register no later than January 1, 2025.
Companies created or registered in 2024, the new company will have ninety (90) calendar days to register "from the date of receiving actual or public notice of their creation or registration becoming effective to file their initial reports”. Companies formed after January 1, 2025, will be required to file their first report within thirty (30) days.
Who needs to file?
Domestic reporting companies are corporations, LLCs, limited partnership, or any other entity created by the filing of a document with the secretary of state or any similar office under the law of the state or Indian tribe.
Foreign reporting companies are corporation LLCs, or other entity crated under the law of a foreign country that is registered to do business in the U.S., state, or tribe jurisdiction by the filing of a document with the secretary of state or any similar office.
Sole proprietorships are not required to file unless it was created in the U.S. by filing a document with a secretary of state or similar office.
Reporting companies typically include:
- Limited liability partnerships
- Limited liability limited partnerships
- Business trusts
- Most limited partnerships, where entities are created by filing with a secretary of state or similar office.
The law provides for twenty-three (23) exemptions from reporting, these include:
- Issuers of a class of securities registered under section 12 of the Securities Exchange Act of 1934 or that are required to file supplementary and periodic information under section 15(d) of the Securities Exchange Act of 1934;
- Large operating companies, which include any entity that (i) employs more than 20 employees on a full-time basis in the United States; (ii) filed in the previous year federal income tax returns in the *United States demonstrating more than $5,000,000 in gross receipts or sales, excluding gross receipts or sales from sources outside the United States; and (iii) has an operating presence at a physical office within the United States;
- Entities already required to disclose BOI publicly or to federal regulators – e.g., banks, credit unions, depository institution holding companies, insurance companies, registered money services businesses, broker/dealers, investment companies, investment advisers, certain venture capital fund advisers, and exchange or clearing agencies.
- Pooled investment vehicles operated or advised by a bank, a credit union, a broker/dealer, an investment company or investment advisor, or an exempt venture capital fund advisor;
- Registered entities as defined in section 1a of the Commodity Exchange Act, including futures commission merchants, introducing brokers, swap dealers, major swap participants, commodity pool operators, or commodity trading advisors;
- Public accounting firms registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002;
- State-licensed insurance producers subject to supervision by the insurance commissioner or a similar official or agency of a U.S. state and that have an operating presence at physical offices within the United States;
- Certain tax-exempt entities, including (i) 501(c)-tax exempt entities, (ii) political organizations, as defined in section 527(e)(1) of the U.S. Internal Revenue Code (Code), and (iii) trusts described in paragraph (1) or (2) of section 4947(a) of the Code, and entities that operate exclusively to provide financial assistance to, or hold governance rights over, the tax-exempt entities listed in this paragraph;
Certain subsidiaries of exempt entities, e., any entity whose ownership is controlled or wholly owned, directly or indirectly, by an Exempt Entity, except the subsidiaries of (i) money services businesses, (ii) pooled investment vehicles, (iii) entities that assist a tax-exempt entity, and (iv) inactive entities.
Further clarification to respect of the “large operating company” exemption is as followings:
- Full-time employee: Companies may not consolidate employee headcount across affiliated entities; the entity in question must have the requisite twenty-one (21) or more full-time employees, as defined by the Internal Revenue Service.
- Federal Income Tax Filing: The requisite $5,000,000 threshold for gross sales or receipts must have been reported on the reporting entity’s prior year IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under federal income tax principles.
- United States Presence: Under the BOI Reporting Rule, an entity with an “operating presence at a physical office within the United States” is one for which a physical office is owned or leased by such entity, and that such office is physically distinct from the place of business of any other unaffiliated entity.
Who is a beneficial owner?
All beneficial owners as defined below will be required to be disclosed with the filing of the report. Beneficial ownership information report to FinCEN will be stored in a secure, non-public database using rigorous information security methods and controls typically used in the Federal government to protect non-classified yet sensitive information systems at the highest security level.
A beneficial owner can fall into one of two categories defined as any individual who, directly or indirectly, either:
- Exercises substantial control over a reporting company, or
- Owns or controls at least 25% of the ownership interests of a reporting company
The purpose of the two categories is to close the loopholes and ensure all owners are identified. The main difference is that beneficial owners are categorized as those with ownership interests reflected by capital and profit interests in the company.
Beneficial owners are persons who exercises substantial control of the company, if they are any of the following:
- Senior officer (president, chief financial officer, or other officer who performs similar functions)
- An individual with authority to appoint or remove certain officers or a majority of directors
- An important decision maker for the reporting company
- Or someone who would otherwise qualify under the rules outlined above
All beneficial owners as stated above, will be required to provide the following information, their “full legal name, date of birth, current residential address, and an identifying number and image from documents such as U.S. Passport, U.S. driver’s license, U.S. identification card or if no U.S. issued document is available, a foreign passport.
Who are company applicants?
Company applicants are only reported for companies created or registered on or after January 1, 2024, will need to report their company applicants.
Company applicants can only be:
- The individual who directly files the document that creates the entity, or the document that first registers the entity to do business in the U.S.
- The individual is primarily responsible for directing or controlling the filing of the relevant document by another.
Company applicants under CTA rules are individuals who directly file the document that creates or registers the company, as well as the individual who is primarily responsible for directing or controlling the filling, if more than one person was involved.
Is there a charge to report and do I file annually?
There is no charge to file the report. The report is not required to be filed annually, it only needs to be updated if any of the reporting information changes or a correction to the report needs to be filed.
Where do I file?
To access the form, go to the FinCEN BOI website linked here.
Unique FinCEN identifier
A unique FinCEN identifier is a unique number that is issued for an individual or company. Beneficial owners, company applicants and reporting companies can apply for the unique identifier with an application found on the FinCEN webpage.
The application filed by the beneficial owner or company applicant would provide all their personal information that otherwise would have to be reported in the beneficial ownership information report. And that individual can provide the FinCEN identifier to each reporting company in which he or she is a beneficial owner applicant, rather than giving each one their personal information and ID. The file could then be set forth in the beneficial ownership information report. And if any of the information provided in the application for FinCEN identify changes, with an accurate one filed and updated or corrected application would have to be filed within 30 days.
This option would be a convenient method for individuals that are beneficial owners of multiple companies or company applicants that report for multiple companies.
Implementation and Compliance
To begin the filing requirement, first gather all the necessary information about the company, and beneficial owners as stated above. Then to go the FinCEN BOI webpage to file electronically through a secure system.
Companies that fail to comply with the law by failing to report or update their beneficial ownership information or provide false BOI information can be subject to both civil and criminal penalties. Those include fines of $500 a day, up to maximum of $10,000, and up to two years in prison.
Fraudulent Warning
New laws create the opportunity for scam artists to take advantage of individuals who do not have sufficient information on who is required to register with FinCEN.
Be aware of URL or scan QR codes that promise to process your report. The only website where you can file the report is located on the FinCEN BOI website.
In closing, the new law has been established for the U.S. Congress to curtail money laundering, the financing if terrorist activities, and other crimes. It is recommended that the reporting company file their report as soon as possible, for the requirement is not overlooked as the year progresses.
After you review this information and have additional questions, please contact your tax preparer or attorney.
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