Navigating the Waters of the Corporate Transparency Act: A Comprehensive Guide

In just a few months, a new law will take effect that requires small corporations, limited liability companies, and other entities to report information about their ownership. The Corporate Transparency Act is an effort by the federal government to make it harder for shady individuals to skirt the rules by creating shell companies for their financial crimes, such as money laundering.

The implications of the new law will be far-reaching, especially for small businesses. That’s why we’ve put together this comprehensive guide to ensure you understand the Corporate Transparency Act, its requirements, and how you can comply with it. Learn more about the Corporate Transparency Act to ensure your business entity complies with the new law once it takes effect next year.

Key Takeaways:

• The Corporate Transparency Act requires certain business entities to report their beneficial owners, or those who own or have control of a company.
• The law takes effect on Jan. 1, 2024, and requires entities to file a report every year.
• Failure to comply with the law will result in serious civil or criminal penalties.
• Small businesses and similar entities should take specific actions before the law goes into effect to ensure they comply with the regulations.
• Work with an advisor who can provide guidance on the Corporate Transparency Act and direct you on how to remain in compliance.

What Is the Corporate Transparency Act?

The Corporate Transparency Act is a federal law requiring business entities, known as reporting companies, to report specific information about their beneficial owners. When the law takes effect in 2024, anyone who has created a business entity will need to provide information to the federal government about those who own or have substantial control over the company. They will report this information to the Financial Crimes Enforcement Network, part of the U.S. Department of Treasury. For each beneficial owner, a business entity will have to submit their:

• Legal name
• Date of birth
• Home address
• An identifying number from a driver’s license, passport, or other approved document
• A photocopied image of that document

Once filed, this information will become part of a FinCEN database. The purpose of the CTA is to create a central resource the government can use to curb illegal activities, such as money laundering and tax evasion, made possible through the creation of anonymous shell companies.

Who Can Access This Information?

Many people are wary of having their personal information become part of a government database. In today’s world, it’s easy to imagine a scenario where this data gets hacked and becomes public information. FinCEN says it has implemented security methods to protect this sensitive information. In addition, no one will have to provide their Social Security Number under the CTA.

 According to FinCEN, it will only share the information it collects in certain circumstances. The law allows federal, state, local, and tribal officials to request beneficial ownership information through a federal agency. These requests must be for matters of national security, intelligence, or law enforcement. With an entity’s consent, financial institutions can also access the information in certain circumstances.

Reporting Company Definition

The term “reporting company” is central to the CTA, but what does it mean? Under the law, a reporting company refers to a domestic company that has registered with the state’s secretary of state, a similar state office, or a tribal organization. The law also applies to foreign companies that have registered to do business in the United States.

For the most part, reporting companies include corporations, LLCs, limited partnerships, and business trusts. For example, if you’ve set up an LLC for real estate investing, you will be required to report the beneficial owners who own at least 25% of the company or who have substantial control over the LLC. While the law has good intentions, it will no doubt create an additional burden for small business owners.

Beneficial Owner Definition

Now that you know what companies have to report, you need to know who they will have to report, otherwise known as the beneficial owners. Under the law, a beneficial owner is defined as anyone who owns at least 25% of the entity’s ownership interests. It also includes anyone with substantial control over a company’s operating decisions. Who is and isn’t a beneficial owner is a core part of the CTA, so let’s break this definition down even further.

What Counts as an Ownership Interest?

An ownership interest is an arrangement that gives you at least 25% of the company’s ownership rights. You’re considered a beneficial owner whether you own or control those interests individually or through various business entities. An ownership interest includes any of the following:

• Equity
• Stock
• Voting rights
• Capital or profit interest
• Convertible instruments
• Options to buy or sell any of the above
• Any other instrument, contract, or mechanism to establish ownership

Related: Corporate Transparency Act: What It Means For Business Owners!

What Counts as Substantial Control?

The second part of the beneficial ownership definition is less clear. An individual has substantial control if they have influence over a company’s operational decisions. FinCEN says anyone who falls into one of these four categories is considered to have substantial control:

• A senior officer of a company, such as a president, chief financial officer, or general counsel
• Someone who has the authority to appoint or remove a senior officer or a majority of the board of directors
• Someone who makes important decisions about the company’s structure, finances, or business nature
• Someone who exercises substantial control in another way, such as through flexible corporate structures

Who’s Exempt From Being a Beneficial Owner?

There are five exemptions for people who would otherwise be considered beneficial owners under the CTA. A beneficial owner cannot be:

• A minor
• A nominee, intermediary, custodian, or agent of the beneficial owner
• An employee (not a senior officer) who has substantial control only because of their employment
• An inheritor whose only ownership interest comes from a future inheritance
• A creditor whose only ownership interest comes from a loan, debt, or similar predetermined payment

When Does the Corporate Transparency Act Take Effect?

We’ve answered the what and who, so let’s move on to when the CTA will take effect. The CTA officially takes effect on Jan. 1, 2024. Existing companies will have one full year to file their beneficial ownership information with FinCEN, so technically, if you’re already an existing entity, you won’t have to file an initial report until Jan. 1, 2025. After that, you’ll have to file again each year.

However, if you register a new company after Jan. 1, you only get 30 days to file an initial beneficial ownership information report. Your 30 days start when you receive official notice of the entity’s creation or registration. For example, once you get a public notice from the secretary of state’s office, you have 30 days to file under the CTA.

In addition, existing companies that make changes to ownership after Jan. 1, 2024, will have to file a new report within 30 days of the change. For example, you might need to file again if the company hires a new senior officer or if an owner dies and a beneficiary receives their interest.

What Are the Penalties If You Don’t Comply?

There are serious penalties if you don’t comply with the CTA reporting requirements. Failure to comply with the CTA is punishable by a fine of up to $500 each day the violation continues. The criminal penalties include imprisonment for up to two years and/or a fine of up to $10,000.

How To Remain Compliant With the CTA

While the law may be burdensome, the consequences of failing to comply with the CTA will be devastating for small businesses and other similar entities. No one wants to pay thousands of dollars or face imprisonment over this new legislation. Here’s some helpful advice for complying with the new law.

Make a Checklist

Before the law takes effect, make a checklist so you know exactly what you have to submit and for whom. This checklist should include all company information, including:

• Legal name of the company
• All “doing business as” or “trading as” names
• Physical address of the primary place of business
• The company’s jurisdiction of formation or registration
• The company’s taxpayer identification number

Make sure your checklist also includes the information for every beneficial owner. This information must include:

• The person’s name
• Their date of birth
• Their residential address
• An identifying number from a passport, driver’s license, or other form of identification
• An image of the identifying document

Update Your Operating Agreement

While optional, we recommend updating your LLC operating agreement to ensure all owners comply with the CTA. You can add certain provisions that require every member who’s a beneficial owner to comply with the law or risk expulsion. Additional provisions may also address:

• Mutual indemnifications for failure to comply
• Who controls the disclosure if members disagree
• Remedies for the entity and other members if one person refuses to comply

Know the Law

We hope this guide is helpful in understanding the intricacies of the CTA. For more information, you can consult FinCEN’s Small Entity Compliance Guide. Make sure you know the law so you know how to comply with it.

Prepare for the Corporate Transparency Act in 2024

The new Corporate Transparency Act is a law with many complexities. If you have a business entity registered for real estate investing, don’t wait to prepare for this new law until the last minute. Contact Anderson Advisors today for guidance on how to best prepare to comply with the Corporate Transparency Act once it takes effect in just a few months.