The Corporate Transparency Act: Penalties and How To Avoid Them

As we approach the end of the year, it’s a good time to remind you of a new law taking effect on Jan. 1, 2024, that will significantly affect business entities: the Corporate Transparency Act. When it goes into effect, all business entities registered with a state must report information about their beneficial owners. If you don’t report this information, you could be liable for serious civil or criminal penalties, including thousands of dollars in fines or a prison sentence.

In addition to the threat of penalties, the CTA will have other significant impacts on your corporation, limited liability company, or business trust. Before it takes effect, learn more about the CTA and its impact on business entities.

Key Takeaways:

• The CTA requires business entities, including corporations, LLCs, and business trusts, to file a beneficial ownership report with the federal government.
• The law carries various penalties for noncompliance, including civil fines and prison time.
• While the law goes into effect on Jan. 1, you have one full year to file an initial report.
• Even though you have some time, you can take steps now to prepare for the CTA and make sure your LLC or other business entity complies with the legislation.
• If you’re unsure how to comply with the CTA, speak with a business advisor who can provide additional guidance.

What Is the CTA?

The CTA is a federal law that requires business entities to file information about their ownership. Businesses will report this information to the Financial Crimes Enforcement Network, part of the United States Department of the Treasury. Passed by Congress in 2021, the legislation aims to prevent financial crimes, such as money laundering, by requiring businesses to disclose ownership information. The law’s main objectives include:

• Boosting transparency: The CTA aims to increase transparency about who owns or controls businesses.
• Uncovering hidden ownership: The law will help the federal government discover the hidden ownership of certain companies.
• Preventing crimes: The purpose of the CTA is to prevent individuals from using shell companies or opaque ownership structures to hide their financial crimes, such as tax evasion and money laundering.
• Improving investigations: If financial crimes occur, the CTA will provide law enforcement agencies and financial institutions with the resources to investigate those crimes thoroughly.

As part of the law, entities must submit information about their beneficial owners. Under the CTA, a beneficial owner is anyone who owns or controls a company, either directly or indirectly. This definition includes individuals who:

• Own or control 25% or more of the company’s ownership interests.
• Exercise substantial control over a company, such as senior officers and key decision-makers.

Which Entities Must Comply With the CTA?

The CTA applies to all business entities, known as reporting companies. Some businesses, such as federally regulated businesses and large companies with over 20 full-time employees, will be exempt from the CTA because they already provide similar ownership information under other laws.

The CTA will have the largest impact on small businesses in the U.S. Specifically, here are the entities that must comply with the reporting requirements of the CTA:

• Corporations: Both C corporations and S corporations will need to abide by the CTA, including domestic and foreign corporations.
• LLCs: All domestic and foreign LLCs fall under the CTA, including both single-member and multi-member LLCs.
• Limited partnerships: A limited partnership registered to do business in the U.S. must comply with the CTA.
• Business trusts: Many business trusts, including real estate investment trusts, will need to meet the CTA’s requirements.

Penalties for Failure to Comply With the CTA

The CTA is a significant piece of legislation and will carry penalties for noncompliance. If you own or control a business entity, it’s important to understand the penalties for failing to comply with the CTA. According to FinCEN, noncompliance includes any of the following:

• Failing to report beneficial ownership information.
• Attempting to provide false or fraudulent beneficial ownership information, such as a false identifying document.
• Causing a company not to file a beneficial ownership report or to report incomplete information.

Noncompliance with the CTA will result in civil or criminal penalties and can also damage your business reputation. Here’s a closer look at each penalty and what it involves.

Civil Penalties

Failing to comply with the CTA will bring civil penalties. Specifically, you can be fined up to $500 per day for each day the violation continues.

Criminal Penalties

There will also be criminal penalties for failing to follow the CTA’s requirements. You can face a prison term of up to two years and/or a fine of up to $10,000.

Reputational Damage

The civil and criminal penalties are serious, but you should also consider the other ramifications of failing to comply with the CTA. You can damage your entity’s reputation, which can impact your ability to secure financing or enter into contracts. In this way, noncompliance can negatively affect how you do business in the future.

How to Comply With the Corporate Transparency Act

With such serious penalties in place, you want to ensure your entity complies with the CTA once it takes effect next year. Here are some steps you can take to comply with the CTA.

Step 1: Identify Beneficial Owners

Beneficial ownership is central to the CTA, so take time to identify all beneficial owners within your entity. First, determine which people have substantial control over the company. These may include senior officers, board members, and company decision-makers. Next, determine who holds ownership interests, such as equity, stock, voting rights, capital or profit interests, convertible instruments, options, and privileges. Finally, calculate the percentage of individuals’ direct or indirect ownership interests to identify who owns at least 25% of the company.

Step 2: Understand the Reporting Obligations

To comply with the CTA, make sure you understand your entity’s reporting obligations. The CTA requires you to submit information about the company and all beneficial owners. If you create or register a company after Jan. 1, 2024, you must also file information for a company applicant. A company applicant is someone who files the formation documents with the state or oversees this filing.

Here’s what you need to submit in each area:

Reporting Company

For the reporting company itself, you need to provide the following information:

• The company’s legal name.
• Any trade name or “doing business as” name.
• Address of the company’s primary place of business.
• Jurisdiction of formation or registration.
• Taxpayer identification number, including an employer identification number.

Beneficial Owners and Company Applicants

For each beneficial owner and company applicant (if applicable), you must submit the following:

• Full legal name.
• Date of birth.
• Current address.
• An identifying number from a U.S. passport, state driver’s license, or other identification document issued by a state, local government, or tribe.
• An image of the identifying document.

Step 3: Amend Your Operating Agreement

While optional, it doesn’t hurt to amend your operating agreement to ensure compliance with the CTA. We recommend including a provision in your LLC operating agreement that requires every member who has substantial control or has at least 25% in ownership interests to comply with the CTA. When you do this, you can protect your business from civil fines that may result if you don’t follow the law’s reporting requirements.

Video: Changes to the CTA in 2023 You Need To Know

When Does the CTA Go Into Effect?

Though passed in 2021, the CTA has yet to take effect. It will officially go into effect on Jan. 1, 2024. Business entities can begin filing their beneficial ownership information on that date. However, existing companies have one full year to file their initial report, due on Jan. 1, 2025. While that deadline may seem far in the future, we advise you to start taking action now to make sure you comply with the new law.

After Jan. 1, 2024, you will need to comply with the CTA if you create or register a new company through the state. As a new business entity, you’ll have 30 days to comply with the CTA. The 30-day period starts when you receive an official notice or when the secretary of state publishes a public notice, whichever comes first.

Prepare for the CTA With Anderson Advisors

With only a few months left until the CTA goes into effect, the time to act is now. Don’t risk civil fines — or worse, criminal penalties — by failing to report your entity’s beneficial owners to FinCEN. At Anderson Advisors, we’re well-versed in the complexities of the CTA and can provide guidance on how to stay compliant once the law goes into effect. Contact us for more information about how your corporation, LLC, or business trust can comply with the CTA.