The Corporate Transparency Act is a piece of legislation that’s likely to affect most businesses operating in the United States, both domestic and foreign. Starting on Jan. 1, 2024, corporations, limited liability companies, and similar entities will have to file reports identifying their beneficial owners to the Financial Crimes Enforcement Network of the U.S. Department of the Treasury, or else they may face potentially steep civil and criminal penalties. 

Given that 99.9% of all U.S. firms have fewer than 500 employees, most affected entities will be small to medium-sized businesses. With that in mind, if you’re a business owner who will be affected by the CTA, you should learn as much information as possible about the legislation and its implications. 

The US Corporate Transparency Act Affects You. Learn if you have to file by taking this easy 6 step quiz.

Key Takeaways:

• A reporting company is any domestic or foreign business entity registered with a state, which includes corporations and limited liability companies.
• The stated purpose of the CTA is to combat illegal activities made possible by corporate anonymity, such as money laundering, tax fraud, and terrorist funding.
• Initially, the CTA may cause a sense of uncertainty among business operators who are unsure whether their businesses qualify as reporting companies. At this time, there may also be uncertainty concerning how to file reports to FinCEN.
• Individuals within companies may resist supplying their personal information to FinCEN, potentially causing internal contention.
• Companies may need to update their LLC operating agreements to overcome internal contention and ensure CTA compliance.
• Failure to comply with the CTA may lead to civil or criminal penalties. Every violation may cost a company $500 per day for as long as the violation continues, and beneficial owners may be imprisoned for up to two years.

What Are the Requirements of the CTA?

The CTA requires qualifying business entities, called reporting companies, to disclose identifying information to FinCEN on the companies and their beneficial owners. Any domestic or foreign entity registered with a state is considered a reporting company, so the legislative requirement will apply to corporations, LLCs, limited liability partnerships, and more. Though there are 23 exemptions specified in the law, most businesses operating in the U.S. will be affected by the new requirements.

When the CTA takes effect on Jan. 1, 2024, reporting companies created before the effective date have a full year to comply, and those created afterward have 30 days (potentially 90 days, depending on the resolution to a proposal introduced by FinCEN on Sept. 27, 2023). The reports, submitted via FinCEN’s secure online filing system, must include the following details (if applicable):

• The reporting company: Name, trade name(s), address, jurisdiction of formation/first registration, and taxpayer identification number or foreign equivalent.
• Each of the company’s beneficial owners: Name, date of birth, residential address, unique identifying number (e.g. driver’s license), and a scanned copy of photographic identification.

Companies created or registered in the U.S. after Jan. 1, 2024, must also include identifying information for up to two company applicants. The applicant details are identical to those of beneficial owners, except the address must be a business address, not a residential one.

What Is the Purpose of the CTA?

The stated purpose of the CTA is to combat illegal activities such as money laundering, tax fraud, and terrorist funding. The limited liability structure of a corporation or LLC has allowed bad-faith actors to operate anonymously, and, as FinCEN itself reported in 2006, “this lack of transparency in the formation process poses vulnerabilities both domestically and internationally.”

By requiring the disclosure of beneficial ownership information, the CTA aims to remove the veil of anonymity that protects these bad-faith actors from identification and prosecution. While the information will be confidential, officials at the federal, state, local, and tribal levels, as well as certain foreign officials, will be able to obtain BOI related to authorized matters of law, intelligence, and national security. Financial institutions may also access the information in some instances, as long as they have the approval of the reporting company.

The Implications of the CTA for Small To Medium-Sized Businesses

While the CTA’s requirements may help to uncover bad-faith actors and illegal activities, it will also affect beneficial owners who want to stay anonymous for legitimate and entirely innocent reasons. Given this fact, the CTA will have several implications for small to medium-sized businesses operating in the U.S., such as the following:

Uncertainty

As an owner or manager of a small to medium-sized business, you may be unsure if you qualify as a reporting company or as one of the 23 exemptions specified in the legislation. If you do qualify as a reporting company, you may not know how to proceed. As of mid-October 2023, though the CTA reporting requirements are well publicized, questions remain about the filing process. Also, because there are exemptions from the beneficial owner definition, you may be unsure who is considered a beneficial owner.

With the uncertainty surrounding the CTA requirements, we’ve put together some resources to help clarify some of the confusing points. Take our CTA quiz to determine whether or not your business is a reporting company, and refer to our checklist for CTA compliance to make sure you don’t overlook any of the principal preparatory and filing steps.

Internal Contention

A beneficial owner is anyone in your company who exercises substantial control or has a minimum of 25% ownership interest. Therefore, the CTA requirements apply to people with significant influence in your organization, and some of them may not want to give their personal information to FinCEN. Such disagreements ultimately affect your company, as you can’t comply with the CTA unless each of the beneficial owners complies with it, too. In turn, disputes may arise, potentially creating conflicts within your organization that require mediation to resolve.

The Need To Update the LLC Operating Agreement

An operating agreement helps govern your business’s internal operations, and if you encounter internal contention over CTA compliance, you may have to update your operating agreement to avoid difficulties down the line. The update should be an added provision that requires everyone who qualifies as a beneficial owner to comply with the CTA. 

If any beneficial owner refuses to comply with the provision, they may be expelled and/or required to compensate your company for any associated losses. The provision should also apply to any third party, such as a lender, who could potentially acquire equity in the company or exercise a degree of control over it.

Civil and Criminal Penalties

As an owner or manager of a reporting company, if you fail to file a BOI report or provide false information, your company may be fined. For every violation, your company must pay $500 per day until the violation is resolved. Though there’s a cap of $10,000 per violation, the total financial penalty can amount to a hefty chunk of money for a small to medium-sized business. There’s also a potential criminal penalty of up to two years of imprisonment for beneficial owners who violate the CTA. 

How Small To Medium-Sized Businesses Can Ensure Compliance With the CTA

To overcome the implications of the CTA on small to medium-sized businesses, you must comply with the new law. To do so, make sure that you fully understand it by referring to FinCEN’s Small Entity Compliance Guide, which is probably the most comprehensive guide on the CTA’s requirements, definitions, procedures, and more. In addition, we recommend looking through our resources, which include videos on our YouTube page and articles on our blog about navigating the nuances of the requirements and making sure to update your LLC operating agreement to help ensure internal accord.

Once you’ve taken these first steps, CTA compliance is a matter of identifying the beneficial owners and gathering the necessary information. Be mindful of FinCEN’s criteria for beneficial owners and exemptions and confirm that the information you collect is accurate and up to date. Keep in mind, too, that if your business experiences any changes to its beneficial ownership, including personal changes for existing beneficial owners, you’ll have to file an updated report with FinCEN within 30 days of the change.

If you need help at any point in the process, we invite you to reach out to us at Anderson Advisors. We can not only help you amend your LLC operating agreement but also guide you in identifying your organization’s beneficial owners and exemptions. Call 800-706-4741 to speak to one of our advisors today and stay ahead of the curve with the CTA.