The Corporate Transparency Act (CTA) took effect on January 1, 2024. It imposes significant compliance burdens on small businesses by requiring them to report information on their "beneficial owners" to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury.

Compliance with the CTA requires analysis of both the CTA's legal requirements and the structure of your business. To avoid costly missteps, it is imperative to work with experienced legal counsel.

The Corporate Transparency Act was first enacted in 2021 as part of the National Defense Authorization Act (NDAA). To increase transparency around corporate ownership and crack down on the use of shell companies to conduct money laundering and other illicit activities, it requires certain business entities to file, in the absence of an exemption, reports with the FinCEN that identify and provide certain information concerning their individual "beneficial owner(s)." On September 30, 2022, FinCEN issued a final rule governing the beneficial ownership reporting system, which went online on January 1, 2024.

The first step in CTA compliance is to determine whether you are a covered entity. Companies subject to the CTA's reporting requirements are called "reporting companies." They include:

  • Domestic reporting companies: Corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
  • Foreign reporting companies: Entities (including corporations and limited liability companies) formed under the law of a foreign country that has registered to do business in the United States by the filing of a document with a secretary of state or any similar office.

There are 23 types of entities that are exempt from the CTA's reporting requirements. They include banks, credit unions, investment companies, broker-dealers, publicly traded companies meeting specified requirements, many nonprofits, and certain large operating companies.

A beneficial owner is an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company's ownership interests.

Reporting companies are required to identify all individuals who own or control at least 25 percent of the ownership interests of the company. An ownership interest is broadly defined as an arrangement that establishes ownership rights in the reporting company. Examples of ownership interests include shares of equity, stock, voting rights, or any other mechanism used to establish ownership.

As outlined in FinCEN guidance, there is no limit to the number of individuals who can be reported for exercising substantial control. An individual exercises substantial control over a reporting company if the individual meets any of four general criteria:

  • The individual is a senior officer (the company's president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function).
  • The individual has the authority to appoint or remove certain officers or a majority of directors (or similar bodies) of the reporting company.
  • The individual is an important decision-maker for the reporting company.
  • The individual has any other form of substantial control over the reporting company.

For non-exempt entities formed on or after January 1, 2024, information about the "company applicant(s)" must also be included. A "company applicant" is defined as the individual who files the document that creates the reporting entity and, without duplication, the individual responsible for directing or controlling that filing.

A company's filing deadline with depend on when your company was established. For instance, if your company existed before January 1, 2024, it must file its initial beneficial ownership information report by January 1, 2025.

If your company was created or registered on or after January 1, 2024, and before January 1, 2025, then it must file its initial beneficial ownership information report within 90 calendar days after receiving actual or public notice that its creation or registration is effective. The clock starts ticking of the 90-calendar day deadline when your company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier.

If your company was created or registered on or after January 1, 2025, it must file its initial beneficial ownership information report within 30 calendar days after receiving actual or public notice that its creation or registration is effective.

Under the CTA, each reporting company must report its:

  • Full legal name.
  • Trade names or d/b/a names.
  • Principal place of business (for a foreign Reporting Company, its primary location in the United States).
  • State, tribal, or foreign jurisdiction of formation. For a foreign Reporting Company, the State or tribal jurisdiction where it first registers.
  • Unique taxpayer ID number.

Additionally, a reporting company must also provide the following information for each beneficial owner (and each applicant if required) concerning the reporting company:

  • Full legal name.
  • Date of birth.
  • Current residential or business street address.
  • Unique identifying number from an acceptable identification document (passport, driver's license, or other government-issued identification document) or a FinCEN identifier.

Companies do not need to file CTA reports annually. However, businesses must promptly update their reported beneficial ownership information (BOI) should any changes occur. As described by FinCEN, examples of changes requiring an updated BOI report include:

  • Any change to the information reported for the reporting company, such as registering a new DBA.
  • A change in beneficial owners, such as a new Chief Executive Officer, a sale that changes who meets the ownership interest threshold of 25 percent, or the death of a beneficial owner.
  • Any change to a beneficial owner's name, address, or unique identifying number is provided in a BOI report.

An updated BOI report is due no later than 30 days after the date on which the change occurred. Similarly, if an inaccuracy is identified in a BOI report that your company filed, you must correct it no later than 30 days after the date your company became aware of the inaccuracy or had reason to know of it.

There can be significant civil and criminal penalties if you fail to submit BOI reports on a timely basis or if the information that you report is inaccurate, incomplete, or untruthful. Under the CTA, the penalties for such violations include a civil penalty of up to $500 per day. Moreover, a fine of not more than $10,000, and/or imprisonment for up to two years.

FinCEN warns of fraudulent attempts to gather data from those under Corporate Transparency Act reporting rules. Furthermore, the fraudulent correspondence may be titled Important Compliance Notice. This correspondence asks the recipient to click on a URL or to scan a QR code. The e-mails or letters are fraudulent, as FinCEN does not send unsolicited requests.

Entities under CTA must diligently assess reporting status and exceptions under its 23 provisions. Stay compliant with the law. If you are subject to the CTA's requirements, the next step is to identify all beneficial owners. Begin compiling the necessary information for submission of your BOI report to FinCEN.

Scarinci Hollenbeck has assembled a CTA Working Group to assist clients in complying with the Corporate Transparency Act. We encourage you to contact us for further information about how we can ease your compliance burdens.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.