The Corporate Transparency Act is a legislative regulation with reporting rules that go into effect on January 1, 2024. It outlines the requirements and compliance criteria for certain types of corporations, limited liability companies, and similar entities to file certain ownership information and is part of the National Defense Authorization Act put into place for fiscal year 2021.

Under the CTA, businesses will need to report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network, or FinCEN. But what does this mean for business owners? The key points in this guide will help you get ready for the CTA. Learn more about Compliance with the Corporate Transparency Act

Key Takeaways:

• The reporting rules of the CTA go into effect on January 1, 2024 and will require corporations, LLCs, and similar entities to file beneficial ownership information reports with FinCEN.
• The CTA aims to combat illicit financial activities, including money laundering and terrorism financing facilitated by anonymous shell companies.
• Beneficial owners under the CTA are those who have substantial control of a company or who own 25% or more in company equity. 
• Exemptions exist for 23 types of corporate entities, including publicly traded companies, banks, credit unions, and other business entities that file annual reports with the U.S. Securities and Exchange Commission.
• There are civil and criminal penalties for failing to comply with the CTA’s filing requirements, including civil fines of up to $500 per day of violation and up to two years in prison.

Overview of the CTA

Congress passed the CTA in 2020 as part of a larger effort to combat terrorism financing, money laundering, tax fraud, and other illegal activities through the Anti-Money Laundering Act of 2020, part of the National Defense Authorization Act for fiscal year 2021.

Starting January 1, 2024, the CTA will require non-exempt privately owned companies to report BOI to FinCEN each year about individuals who have substantial control or own 25% or more of a company. If you’re a small business owner, it’s crucial to get ready for the CTA to ensure you’re in compliance, as failing to meet the compliance regulations may lead to some serious consequences.

Purpose of the CTA

The CTA’s primary purpose is to combat money laundering and financing of illicit activities through shell companies in the U.S. Before the enactment of the CTA, there were no BOI-type reporting requirements in the U.S. This made it more than a little challenging for law enforcement to investigate entities that posed as front and shell companies covering for illegal financial activities. Under the CTA, with access to BOI and the reporting system FinCEN regulates, federal and law enforcement agencies will have the means to check into these types of suspicious entities.

What’s the Advantage of the CTA?

One of the main advantages of the CTA is that it should be harder for criminals to hide their activities and individual identities under anonymous corporations and business entities. You may think of it as protection against shadow companies and black-budget operations. Even though the regulations can seem difficult for many business owners and trustees to observe, the CTA specifically aims to prevent criminal activities within the U.S. financial system.

Millions of businesses form every year with the potential to create new jobs and stimulate the economy. With the enactment of the CTA and collection of BOI, law enforcement and investigating authorities will have the tools to identify criminals who commit fraud, hide illegally obtained wealth, evade taxes, and otherwise hurt millions of law-abiding business owners through their use of shell companies. 

Who Are Beneficial Owners?

Under the CTA, beneficial owners are individuals who have a high level of control over a corporate structure or LLC. You’re also subject to compliance if you receive economic benefits from a corporation’s or LLC’s assets or own 25% or more of its interests. However, several types of people are exempt from these guidelines, including:

• Minors, if parents or legal guardians otherwise report ownership information appropriately.
• Nominees, intermediaries, custodians, or agents acting on behalf of someone else.
• Employees whose control in a company’s activities is solely because of their employment.
• Entity creditors, unless they otherwise meet the criteria of a beneficial owner.
• Individuals who gain interests in a company solely through inheritance.

Because the law is so far-reaching, it would be in your best interest to work with a legal and financial advisor to ensure proper compliance if you fall under the CTA.

Reporting Companies

A reporting company under the CTA refers to a corporation, LLC, or other entity that’s registered to do business in the U.S. If your business qualifies as a reporting company, you must follow the FinCEN reporting requirements for filing BOI. However, there are exemptions to reporting under the CTA, so it’s important to check with your advisor to see if your business falls within the exempt categories.

Company Applicants

Company applicants under the CTA include individuals who file an application to form a business in the U.S. or register foreign entities to do business in the U.S. There are no specific definitions of filing or registration under the CTA, which can be challenging if you’re establishing a new business. However, FinCEN should provide additional guidance on these key areas as the CTA’s enforcement date gets closer.

What Are the Exemptions Under the CTA?

According to the provision, exemptions exist for certain corporations, LLCs, and other entities registered to do business in the U.S. Some of these include government authorities, public utilities, banks and credit unions, insurance companies, accounting firms, tax-exempt entities, and inactive entities. In addition, money services institutions, securities brokers, securities exchange, and other Exchange Act-registered entities are exempt under the CTA. In all, there are 23 exemptions that fall under the Corporate Transparency Act.

FinCEN Filing Requirements

FinCEN outlines specific requirements for reporting companies, beneficial owners, and applicants filing BOI under the CTA. Reporting companies will need to file the following information:

• Full legal name.
• Trade name or DBA.
• Address of the physical place of business.
• Business formation jurisdiction.
• Taxpayer identification number or employer identification number.

Beneficial owners and applicants will need to provide:

• Individual’s full legal name.
• Applicant or owner’s date of birth.
• Company applicant’s business address or beneficial owner’s home address.
• Identifying numbers, such as a passport or driver’s license number.
• Image of the document for the identifying number.

How Often Do You Need To File Under the CTA?

If you form a business entity on or after January 1, 2024, FinCEN requires reporting within 30 days of receipt of notice that the business is effective or when the reporting company provides public notice that it’s registered to do business. Companies that formed prior to January 1, 2024, have until January 1, 2025, to meet the filing requirements. After you initially file under the CTA, you’ll need to make updates within 30 days if there’s any change to the information or if you become aware of any inaccurate information under previous filings.

What Are the Penalties for Failing To Report?

Failing to report properly under the CTA has civil penalties of up to $500 each day you are out of compliance. Criminal penalties also exist, with up to $10,000 in fines, up to two years of prison time, or both. In addition, disclosing information under the CTA without proper authorization carries the same civil penalties as failing to report and increases criminal penalties to include up to $250,000 in fines, up to five years in prison, or both. Unauthorized disclosure under the CTA can come from both government employees and third-party recipients of BOI.

Get Ready for the CTA

If you’re a non-exempt business owner, you can get ready for the CTA right now. Start by setting protocols for gathering the required information and determining who the beneficial owners are. It’s also important to establish a process for collecting and updating required filing information on a regular basis. This will ensure your company stays in compliance with initial filing and BOI update requirements.

Even though the CTA will remove a level of anonymity, managing a business lawfully means you’ll need to prepare to meet these obligations. At Anderson Advisors, we help businesses just like yours with entity management that ensures you don’t have to give up the privacy of your business assets. With a corporate registered agent, you can omit your name from formation articles for added protection. Don’t let January 1 catch you off guard. Complying with the CTA is necessary if your business isn’t exempt.