The Corporate Transparency Act: A Checklist for Compliance

As 2023 draws to a close, all relevant business entities across the country will soon need to comply with the Corporate Transparency Act, a sweeping mandate requiring the disclosure of beneficial ownership information to the United States Department of the Treasury. As failure to comply may result in monetary penalties and potential imprisonment, it’s in your interest as a corporate owner or practitioner to be knowledgeable about the law’s expectations and abide by them. To help you stay legitimate in the view of the federal government, we’ve provided here an overview of the CTA and a checklist for compliance.

Key Takeaways:

• The CTA requires business entities such as corporations and limited liability companies to submit a report identifying beneficial owners.
• The purpose of the CTA is to prevent the exploitation of legal business structures to carry out illegal activities such as money laundering and tax fraud.
• The penalties for noncompliance include a civil fine and possible imprisonment. The civil fine amounts to $500 per day up to $10,000 per violation, while prison time may amount to two years for willful violators.
• The CTA recognizes two types of reporting companies and specifies 23 exemptions.
• A beneficial owner is any individual who has substantial control over the company or a minimum of 25% ownership interest in it.
• Reporting companies don’t have to disclose the information of beneficial owners who meet certain exception criteria.
• To file their BOI, reporting companies must use the Financial Crimes Enforcement Network’s Beneficial Ownership Secure System, which is still under development as of early October 2023. The earliest possible date of submission will be Jan. 1, 2024. 

An Overview of the CTA

Effective Jan. 1, 2024, the CTA will institute new reporting requirements for corporations, limited liability companies, and similar business entities regarding BOI. Under the new rules, any such entity, designated as a reporting company, must disclose the identity of all beneficial owners to FinCEN, a bureau of the U.S. Department of the Treasury. By removing the anonymity of beneficial owners, the CTA aims to prevent bad-faith actors from using business structures to carry out criminal acts such as money laundering and tax fraud.

Every reporting company must provide its full name, address, federal employer identification number, and state of jurisdiction, as well as specific details about its beneficial owners. In addition to certain personal information, photo identification is also necessary to confirm that the BOI relates to the beneficial owner.

If the reporting company was created or registered before the effective date of Jan. 1, 2024, it has one year to provide its initial report to FinCEN. A reporting company created after this effective date has just 30 days. Should any of the beneficial owners undergo a name or address change, the reporting company must file an updated report. 

Penalties for Noncompliance With the CTA

Reporting companies that fail to comply with the CTA are subject to a civil fine of $500 per day, with a cap of $10,000. If that seems like a small penalty to pay, keep in mind that it applies on a per-violation basis. So, if a reporting company fails to report the BOI of five beneficial owners, the fine would amount to $2,500 per day, with a cap of $50,000 overall. There’s also the possibility of two years’ imprisonment for willful violators.

A Checklist for Compliance With the CTA

Because the CTA is complex and may prove challenging to navigate, refer to the following compliance checklist to ensure conformity with the law:

1. Determine Whether the CTA Applies to Your Business Entity

The CTA acknowledges two types of reporting companies:

• Domestic: A corporation, limited liability company, or other business entity “created by the filing of a document with a secretary of state or any similar office under the law of a U.S. state or Indian tribe.”
• Foreign: A corporation, limited liability company, or other business entity “formed under the law of a foreign country and registered to do business in any U.S. state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a U.S. state or Indian tribe.”

If your business operation meets either of the above definitions, it’s likely subject to the new reporting requirements. However, the CTA also specifies 23 types of business entities that do not qualify as reporting companies. The following entities are exempt from reporting:

• Securities-reporting issuers.
• Governmental authorities.
• Banks.
• Credit unions.
• Depository institution holding companies.
• Money services businesses.
• Securities brokers or dealers.
• Securities exchanges or clearing agencies.
• Business entities registered under the Securities Exchange Act of 1934.
• Business entities registered under the Commodity Exchange Act.
• Investment companies or advisors.
• Advisors to venture capital funds.
• Insurance companies.
• State-licensed insurance producers.
• Accounting firms.
• Public utilities.
• Financial market utilities.
• Pooled investment vehicles.
• Tax-exempt entities.
• Entities that assist tax-exempt entities.
• Large operating companies.
• Subsidiaries of any of these entities, with the exceptions of money services businesses, pooled investment vehicles, and entities that assist tax-exempt entities.
• Inactive entities.

2. Identify Your Company’s Beneficial Owners

To be a beneficial owner, an individual must exercise substantial control over the company or have a minimum of 25% ownership interest in it. Substantial control relates to several roles, including:

• Senior officers.
• Those who are empowered to appoint or remove a senior officer or the majority of the board of directors.
• Those who can direct or exercise substantial influence over important decisions made by the reporting company.

3. Identify Exemptions Among Beneficial Owners

There are exemptions when it comes to beneficial owners as well. You do not have to submit BOI concerning any of the following classes of individuals:

• Minors. 
• Agents, nominees, intermediaries, or custodians of beneficial owners, such as advisors.
• Non-senior officer employees who lack substantial control or whose economic benefits derive only from their employment status.
• Those whose sole interest in the reporting company is a future interest gained through inheritance.
• Creditors who meet no other definitions of beneficial owner.

4. Gather Information About Your Company

Your report to FinCEN must include specific details about your company. These details are:

• Legal name.
• Trade names, if applicable. 
• Current street address.
• Jurisdiction where the business was formed or first registered in the U.S.
• Federal employer identification number (for domestic reporting companies) or an equivalent tax identification number issued by a foreign jurisdiction.

5. Gather BOI

You must provide specific details regarding each of the company’s beneficial owners, or you risk being in violation of the CTA. These details are:

• Full legal name.
• Date of birth.
• Residential address.
• Unique identifying number, such as a driver’s license or passport number.
• Scanned copy of photo identification.

6. Designate the Company Applicant

The company applicant is the person who files the document creating the reporting company. If the filing involves more than one person, the applicant is also the one who’s principally responsible for overseeing the process. Often, they are one of the reporting company’s beneficial owners, though they don’t have to be. A third party may serve as the applicant if they’re responsible for filing corporate documents on the company’s behalf. A lawyer or a paralegal would be an appropriate choice for an applicant.

rel=”comment_5117216″>Note that the requirement regarding company applicants applies only to entities formed or registered in the U.S. on or after the effective date of Jan. 1, 2024. Reporting companies formed before that date are exempt. 

7. Gather Information About the Applicant

If your organization must designate a company applicant, you will need to report information to identify them. The identifying details are identical to BOI except that you must provide their business address rather than their residential address. 

8. File Your Report With FinCEN

The final item on the checklist is to file your report with FinCEN within the specified timeline. For reporting companies created or registered before the effective date, you must complete the filing within one year of Jan. 1, 2024. For all other companies, the deadline is 30 days after the creation or registration date. 

To file, reporting companies must use FinCEN’s Beneficial Ownership Secure System, which is still under development as of early October 2023. FinCEN will not accept any reports before Jan. 1, 2024, so you can use the interval to go over your requirements and get your information and proving documents in order.

Time is running short though, so it’s best to act fast. The sooner your company collects its information, the more energy you can devote to confirming the thoroughness and accuracy of your report to FinCEN. Should you need help making sense of everything, we welcome you to get in touch with us at Anderson Advisors. We can help you navigate the CTA’s many nuances, including whether your organization is subject to its reporting requirements and who among your company qualifies as a beneficial owner.