As we step into 2024, entity owners are facing a new regulatory landscape, significantly shaped by the Corporate Transparency Act (CTA) which was passed by bipartisan supermajorities in the House and Senate on January 1, 2021 and goes into effect on January 1, 2024. This article outlines what you should know about the CTA and how to take action to ensure compliance with the shift in regulations.
Understanding the Corporate Transparency Act
Facing pressure to implement a policy like Europe’s Economic Crime and Corporate Transparency Act to enhance transparency, curb anti-money laundering, and to counter terrorist financing, the Financial Crimes Enforcement Network (FinCEN), an agency of the U.S. Department of Treasury, will create and maintain a database of all U.S. individuals (this is a people database) with beneficial ownership and/or control of a “reporting company” as well as individuals involved in creating the entity.
Beneficial Ownership Information (BOI) will be kept confidential and secure by a government software program known as the BOSS (the Beneficial Ownership Secure System) which can only be accessed by law enforcement.
Who Qualifies Under the CTA?
There are two categories of reporting companies: a “domestic reporting company” and a “foreign reporting company.” In this article, we’ll focus on the rules for domestic reporting companies.
A domestic reporting company may include LLCs, family limited partnerships, and family LLCs, LLCs to hold real estate, corporations, and partnerships to own new businesses. There are 23 reporting company exemptions, including banks, credit unions, depository institutions, securities exchanges or clearing agencies, accounting firms, public utilities, tax-exempt entities, insurance companies, etc.
A significant exemption exists for large operating companies which meet three tests:
- Has more than 20 full time employees; and
- Has an operating presence at a physical office within the U.S. (i.e., if all employees work remotely, this test cannot be met); and
- Filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5,000,000 in gross receipts or sales, excluding gross receipts or sales from sources outside the U.S.
Most of these exemptions are in place because these types of entities are required to report to the government in some other fashion. See the BOI Small Compliance Guide for a full list of exemptions.
If you identify your company as a reporting company, you must then identify your beneficial owners. A “beneficial owner” is any individual who, directly or indirectly, exercises substantial control over a reporting company OR owns or controls at least 25% of the ownership interests of a reporting company. Any individual might be a beneficial owner through substantial control, ownership interests, or both.
A trust may also be considered a beneficial owner, but the trust itself will not be an acceptable beneficial owner for reporting purposes. Instead, the terms of the trust would have to be reviewed to determine the individual(s) who has substantial control over the trust assets. This individual would be the person required to report.
Deadlines to File Your Report
Your deadline to file a report is directly tied to when your entity was established:
- Beneficial owners of entities established in calendar year 2023 or before will be required to file a report by January 1, 2025.
- Beneficial owners of entities established in calendar year 2024 will have 90 days to file a report.
- Beneficial owners of entities established in calendar year 2025 and beyond will have 30 days to file a report.
Company applicants of entities created on or after January 1, 2024 must also file a report (company applicants for entities created before this date are not required to file). All company applicants must be individuals (i.e., companies or legal entities cannot be company applicants). This is the person who directly filed the document that created the domestic reporting company with the secretary of state. Otherwise, the individual who was primarily responsible for directing or controlling the filing of the creation document.
The penalty for failure to file in a timely manner is $500/day and up to two years in prison and/or a fine of up to $10,000. The fine and daily penalty appear to be unrelated, with no apparent daily penalty maximum.
What Information Will I Need to Report?
The information that must be collected and reported includes:
Reporting Company:
- Full legal name
- Any trade name or DBA name
- Complete current U.S. address
- State or Tribal jurisdiction of formation
- IRS Taxpayer Identification Number (TIN or EIN)
Beneficial Owners and Company Applicant(s):
- Full legal name
- Date of birth
- Complete current address (no P.O. boxes)
- Unique identifying number and issuing jurisdiction from, and image of, one of the following non-expired documents:
- U.S. passport
- State driver’s license
- Identification document issued by a state, local government, or tribe
If an individual does not have any of the three documents above, a foreign passport will be accepted.
IMPORTANT: If any of the above information changes (like if a beneficial owner moves, for example), an updated report must be filed within 30 days of the event. After 30 days, the $500/day penalties start to accrue.
Updating Your Financial Compliance Strategy Today
Now is the time to review and update your business’ financial compliance strategy. Here are some things to consider as you prepare to file your report:
- Review Your Entity Structure: Assess your current business structure to ensure it aligns with your financial goals and complies with the CTA. Consider consulting with a legal expert to navigate any complexities.
- Organize Beneficial Ownership Data: Gather and organize information about all beneficial owners of your entity. This includes anyone with at least a 25% ownership stake or who exercises substantial control over the company.
- Enhance Your Reporting Processes: Implement or update systems to ensure you can efficiently gather and report the required information. This might involve investing in new software or training your team.
- Stay Informed on Regulations: Keep abreast of any updates or changes to the CTA and other related regulations. This proactive approach can save you from future headaches and non-compliance issues.
Financial Planning and Growth
The implementation of the CTA also presents an opportunity to reevaluate your financial strategies to maximize your business efficiencies. Along with your advisor, consider the following:
- Revisit Your Business Plan: Align your business plan with the new financial landscape. This might involve revising your growth strategy, funding methods, or investment plans.
- Explore Funding Opportunities: With increased transparency, there may be new opportunities for funding. Transparent operations can attract investors who are keen on ethical business practices.
- Budget for Compliance Costs: Set aside a budget for any costs associated with complying with the CTA, such as legal advice, software upgrades, or administrative expenses.
- Consider Privacy Implications: While transparency is key, also consider the privacy of your beneficial owners. Work with legal counsel to understand how to balance transparency with privacy rights.
The introduction of the CTA marks a significant shift in the regulatory environment for businesses in 2024. By understanding and preparing for these changes, you can not only ensure compliance but also leverage this transparency to foster trust with clients, investors, and partners. Remember, staying informed, organized, and proactive are your best tools in navigating these new waters.
