The Corporate Transparency Act (CTA), enacted in 2021, was passed to enhance transparency in entity structures and ownership to combat money laundering, tax fraud, and other illicit activities. It is designed to capture more information about the ownership of specific entities operating in or accessing the U.S. market.
The effective date of the Corporate Transparency Act is fast approaching on January 1, 2024, and people are starting to panic.
Who does the Corporate Transparency Act affect?
According to a recent Small Business Administration report, 27,104,006 small businesses were termed “nonemployer firms” and had no employees. The Corporate Transparency Act is designed to improve business activity transparency through the reporting of Beneficial Ownership Information (BOI) and is particularly targeted to these smaller businesses.
Who needs to file?
Reporting companies are identified as either domestic or foreign:
- Domestic reporting companies are corporations, partnerships and any entity 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 reporting companies are a corporation, LLCs, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office. Sole-proprietorships that don’t use a single-member LLC are not considered a reporting company.
Reporting companies typically include:
- Limited liability partnerships
- Limited liability limited partnerships
- Business trusts
- Most limited partnerships, where entities are generally created by a filing with a secretary of state or similar office.
- C & S corporations
Exemptions include securities issuers, domestic governmental authorities, banks, companies with more than 20 employees and many more that don’t fall into the above categories. However, exemption eligibility needs to be continuous all year long.
Beneficial owners
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.
Having two categories is designed to close any loopholes and ensure all owners are identified. The key difference is that beneficial ownership is categorized as those with ownership interests reflected through capital and profit interests in the company.
The beneficial owners must report to FinCEN their name, date of birth, address, and unique identifier number from a recognized issuing jurisdiction and a photo of that document. If an individual decides to file their information to FinCEN directly, they may be issued a “FinCEN identifier” which can be provided on a BOI report instead of the required information.
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 United States.
- The individual is primarily responsible for directing or controlling the filing of the relevant document by another.
This responsibility may fall under the scope of advisory services for an accounting professional. However, the report does not require information on the company applicant. This is an important consideration when defining the scope of engagement for advisory services with a client.
When do reports need to be filed for the Corporate Transparency Act?
The Corporate Transparency Act comes into effect on January 1, 2024. Reporting companies that are in existence on the effective date must file their initial reports within one year or by December 31, 2024.
Reporting companies created after the effective date have 30 days after receiving notice of their creation or registration. However, FinCEN has proposed to extend the initial filing deadline for BOI reports from 30 to 90 days for entities created or registered in 2024.
However, filing requirement is NOT only on annual basis. Reports must be updated within 30 days of a change to the beneficial ownership, e.g., through the sale of a business, merger, acquisition, or death, or 30 days upon becoming aware of or having reason to know of inaccurate information previously filed.
With high penalties and the potential for imprisonment, this is an area that should be closely monitored. Non-compliance can result in high penalties and possible imprisonment. The escalating fines range from $500 to $10,000 per violation and jail time of up to two years.
Staying compliant will also require frequent monitoring for changes and updates to the Corporate Transparency Act.