The Corporate Transparency Act: How it affects your small business
As a small business owner, you will likely be impacted by a new law called the Corporate Transparency Act (CTA) and its corresponding Beneficial Ownership reporting requirements. Understanding the law, what beneficial ownership information is, and how your small business will be affected will help keep your business in compliance to avoid penalties and other consequences.
What is the Corporate Transparency Act?
Congress passed the Corporate Transparency Act as part of the Anti-Money Laundering Act in 2021 to help law enforcement investigate financial crimes. The CTA requires certain businesses to report beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN), an agency within the U.S. Treasury Department. The purpose of this new requirement is to prevent “bad actors” from hiding their identities through the use of shell companies.
What businesses are subject to the Corporate Transparency Act?
All domestic businesses created by registering with a state will be subject to the Corporate Transparency Act. This includes corporations, LLCs, limited partnerships, and limited liability partnerships (LLPs) to name a few. Foreign businesses that make a filing with any state are also subject to the CTA.
FinCEN estimates that over 32 million businesses will be required to report Beneficial Ownership Information in the first year of the program.
What businesses are exempt from the Corporate Transparency Act?
There are three main categories of businesses that are exempt from Corporate Transparency Act requirements.
- Businesses that are not created by registering with any state, such as sole proprietorships and general partnerships
- Businesses that are already federally regulated, such as financial institutions, publicly traded companies, and insurance companies
- Large businesses with at least 20 full-time employees, over $5 million in gross receipts, and a substantial U.S. presence
What is beneficial ownership information?
As the name implies, Beneficial ownership information is facts about owner(s) and individuals who control a company, according to FinCEN.
Under the Corporate Transparency Act, ownership includes those that own 25% or more of a company either directly or indirectly. This includes stockholders, partners, LLC members, and owners of a business that own another business that is subject to BOI reporting.
For example, ABC LLC is owned by Abby, Bob, and Champion LLC equally. Champion LLC has one member, Jeff, who owns 100% of the business. Under the Corporate Transparency Act, Abby and Bob are direct owners of ABC because each personally has a stake in the business greater than 25%. Jeff is an indirect owner because he is considered to own more than 25% of ABC due to his ownership of Champion LLC. According to the CTA, Abby, Bob, and Jeff’s information would need to be included in the BOI report for ABC LLC.
Now, let’s talk about what constitutes control of a company. Control for this purpose refers to those that either directly or indirectly lead, determine, or influence the decisions of the company. Generally, this includes the business’ senior officers and managers.
Continuing the example above, Jim is hired to manage and control ABC LLC’s day-to-day operations. Per the Corporate Transparency Act, Jim would be considered in control of the business and his information would need to be included in the BOI report.
What information is included in a Beneficial Ownership Information report?
Now that you know who a beneficial owner is let’s talk about what beneficial ownership information will be requested. The business will be required to submit an electronic form that includes the following information:
- A name, address, birth date, and a unique ID number for each beneficial owner
- A unique ID number could be a driver’s license number or passport number
- The unique ID may not be the owner’s social security number
- A name, address, registered agent, and tax ID number for the business
- Type of BOI filing (initial filing, correction, or update)
- For newly created businesses, information about company applicants (more on this in the next section)
What is a company applicant?
A company applicant is a person(s) who creates/registers entity formation documents with the state or is responsible for the person who does. This can be the business owner or another individual, such as an attorney or CPA. Up to two company applicants can be listed in the Beneficial Ownership Information report.
For example, Jill from Jill’s Auto LLC hired her friend Shay’s law firm to fill out all the required paperwork to form the business. Shay’s assistant drafts the documents and files them with Shay’s approval. In this situation, Shay and his assistant are both company applicants. Jill must include their information when she provides information to FinCEN, per the Corporate Transparency Act reporting requirements.
Only business entities created on January 1, 2024, or after will need to report information about company applicants. Businesses in existence before 2024 do not need to report company applicant information.
How is beneficial ownership information going to be reported?
As of publication of this article, FinCEN is in the process of creating an online portal where beneficial ownership information can be filed when adhering to the Corporate Transparency Act reporting standards. Businesses will be required to make one initial report to FinCEN. Additional amended reports are required only when there is a change to the information provided, such as a change in ownership or to correct a mistake.
Keep in mind, the BOI report is not part of your tax return and doesn’t go to the IRS.
When is the Beneficial Ownership Information report due?
When the Beneficial Ownership Information report is due depends on when you formed your entity. For entities created prior to January 1, 2024, the report is due by January 1, 2025. No reports will be accepted prior to January 1, 2024.
For businesses that will be created on or after January 1, 2024, the report will be due within 30 days from the time the business receives notice that its registration is effective by the state.
For example, Jill begins the process of filing her LLC, Jill’s Auto LLC, on June 1, 2024. Jill receives notice that the state approved her registration, effective June 5, 2024. In this case, Jill has 30 days, until July 5, 2024, to report the information to FinCEN and avoid penalties.
How much does it cost to file the Beneficial Ownership Information report? Are there penalties for not filing?
FinCEN does not charge anything to file the BOI report through the online portal.
The penalties for failure to comply with the Corporate Transparency Act are serious and something you should be aware of. There are three types of reporting violations that are subject to penalty:
- Willful failure to file a report
- Providing false information
- Unauthorized disclosure of information
For failing to file a report or providing false information, individuals could be subject to a fine of $500 per day up to $10,000 and up to 2 years in prison.
FinCEN beneficial ownership information will only be available to authorized law enforcement agencies and financial institutions. The penalty for anyone with access to this information disclosing it without proper authorization is a fine of $500 per day up to $25,000 and up to 5 years in prison.
What should I do now?
This is a lot of information to take in and we understand the urge to act urgently. As of this article’s publication, the FinCEN Beneficial Ownership Information reporting system is not yet live. The agency expects the portal to be ready to accept reports on January 1, 2024.
Businesses created prior to January 1, 2024 will have a full year to submit their Beneficial Ownership Information report. For now, rest assured that being aware of the law and its new requirement is the first step in staying compliant.