The new Corporate Transparency Act (“CTA”), effective January 1, 2024, is intended to aid law enforcement in combating illicit activity conducted through anonymous shell companies in the United States. The Corporate Transparency Act specifically targets LLCs and corporations with fewer than 20 employees.
It requires certain privately held entities to report beneficial ownership information (“BOI”) to the US Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). The reporting requirements are intended to apply broadly and impact small companies, many of whom have never made federal filings other than those with the Internal Revenue Service.
Non-compliance could lead to a $500/day penalty and possible jail time for disclosure violations of your business by January of 2025. Let’s stay informed and ahead of the game. Our Firm is now offering CTA reporting services to our clients. Please contact us with any questions or concerns you may have regarding the new Corporate Transparency Act.
Reporting Companies Must Submit a BOI Report to FinCEN
Both domestic and foreign entities can be reporting companies under the CTA. Domestic reporting companies are corporations, limited liability companies (LLCs), or other entities created by filing a document with the secretary of state or any similar office under the law of any commonwealth, territory, or possession of the US.
Foreign reporting companies are non-US entities that are corporations, LLCs, or other entities formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by the filing of a document with the Secretary of State or any similar office under the law of a state or Indian tribe.
A reporting company must disclose information about its individual beneficial owners and, for entities created or registered on or after January 1, 2024, its company applicants. As to each individual beneficial owner and company applicant, a reporting company must disclose their full legal name, their date of birth, their complete current address, a unique identifying number, and an image of the document with the unique identifying number. The unique identifying number must come from one of the following non expired documents issued to the individual: (1) a US passport issued by the US government, a state, local government or (2) a state-issued driver’s license.
A reporting company must also report the following about itself: full legal name, any trade names and any doing business as or trading as names under which it conducts business, whether or not formally registered; complete current address of the company’s principal place of business; its state, tribal, or foreign jurisdiction of formation and, for a foreign reporting company, the state or tribal jurisdiction where it first registered in the US; and its IRS taxpayer identification number, including an employer identification number.
Individuals Who are Considered Beneficial Owners Under the CTA
A beneficial owner is any individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls 25.0% or more of the ownership interests of the reporting company.
Importantly, however, an individual does not have to own the entity to be a beneficial owner; they may be a beneficial owner memory by exercising substantial control over. An individual exercises substantial control over a reporting company if the individual serves as a senior officer of the reporting company; has authority to appoint or remove either any senior officer or a majority of the reporting company’s board of directors or similar body; directs, determines, or has substantial influence over important decisions made by the reporting company; or has any other form of substantial control over the reporting company.
Examples of “substantial control” may include any of the following:
- board representation;
- owning or controlling a majority of the voting power or voting rights of the reporting company, rights associated with any financing arrangement, or interest in the reporting company;
- control over one or more intermediary entities that separately or collectively exercise substantial control over the reporting company, arrangements or financial or business relationships, formal or informal, with other individuals or entities acting as nominees; or
- any other contract, arrangement, understanding, relationship, or otherwise.
When Initial Reports and Changes to Reports Must be Filed
A reporting company that was created before January 1, 2024, has until January 1, 2025, to file its initial BOI report. If a reporting company is created on or after the effective date, it must file its initial BOI report within thirty (30) days, if created or registered on or after January 1, 2024.
A reporting company has 30 days to report any changes to information in its BOI report regarding itself or its beneficial owners and correct any inaccuracies in its BOI report if it becomes aware or has reason to know of the inaccuracy.
There are both civil and criminal penalties for violating the CTA, including a fine up to $10,000, imprisonment for up to two years, or both, for any person willfully providing or attempting to provide false or fraudulent BOI or failing to report complete or updated BOI to FinCEN. Penalties may also apply to reporting companies and individuals who cause a reporting company not to report, are senior officers of a reporting company at the time of its failure to fulfill its obligation to accurately report or update BOI or disclose or use the BOI reported to FinCEN in an unauthorized manner.
Steps to Take to Comply with the CTA
A reporting company must be able to determine the individuals who are beneficial owners, timely obtain the required personal information of its beneficial owners so the company can meet the CTA reporting deadlines and be promptly notified of any change in its beneficial owners’ required personal information so the company can timely report the change to FinCEN.
Given the examples above, one can clearly see that the provisions of this new law are drafted quite broadly, and one should seek a firm with the requisite expertise to advise both reporting companies and beneficial owners.
Our Firm will be offering CTA reporting services to our clients. For new entities, the initial CTA report may be included as part of our overall fee, and for former clients, we are happy to provide this service as a separate engagement agreement. Please contact us with any questions or concerns you may have regarding the new Corporate Transparency Act.