On January 1, 2021, Congress enacted the Corporate Transparency Act (CTA). As the CTA’s reporting mandate–which begins on January 1, 2024–gets closer, business owners need to be aware of this new law and the broad, ongoing implications it will have for their organizations.
The CTA requires the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of Treasury, to establish a national database of beneficial ownership information (BOI) for nearly every business organization in America. The law primarily aims to combat financial crimes and promote a fair and secure business environment. To do this, the Act mandates reporting companies to disclose detailed information about their control structure such as its company management, beneficial owners, and related parties.
Every corporation, LLC, and any other business organization created from a filing with a government authority (e.g., a state) must report their BOI, unless an exemption applies. CTA exemptions fall into two general categories: inactive companies and companies known to be operating in highly regulated industries that report similar data under other laws. To be considered inactive a company: (i) must be in existence on or before January 1, 2020; (ii) cannot be engaged in an active business; (iii) cannot be owned in whole or part (directly or indirectly) by a foreign person; (iv) cannot have changed ownership in the last 12 months; (v) cannot have sent or received (directly or indirectly) more than $1,000 in a financial account in the last 12 months; and (vi) cannot hold any kind or type of assets, in the United States or abroad.
As such, nearly every U.S. company with assets or operations—whether large or small—is required to report its BOI to FinCEN during calendar year 2024.
Who is a Beneficial Owner?
The CTA establishes two standards for identifying the individuals whose information is reportable under the CTA: (i) any person who owns or controls at least 25% ownership interest; and (ii) any person with any kind of substantial control over the organization.
The “substantial control” test is highly fact sensitive. Senior officers, any person with authority to appoint a senior officer or majority of directors (or similar body), any important decision maker, and individuals with any other form of substantial control all must report. Beyond that, at this early stage of implementation and enforcement, little is known about the “substantial control” standard to which companies will be held. So, out of an abundance of caution, companies might over-disclose until FinCEN provides additional regulatory guidance or courts have had an opportunity to weigh in.
Expect no limit to the number of persons whose BOI needs disclosure. Competent legal counsel can help you make decisions about your company’s disclosure obligations.
Compliance Period for Existing Companies
All existing companies need to report BOI during calendar year 2024. The CTA includes an ongoing obligation for reporting companies to update its BOI as changes occur. Changes in any reported information (e.g., exemption status, ownership percentages, owner details) must be updated with FinCEN within thirty (30) days following the event causing the change.
Compliance for New Businesses
Businesses organized after January 1, 2024 have thirty (30) days following organization to submit BOI to FinCEN. In addition to data about the beneficial owners, new companies must also submit information about the company’s filers and advisers who prepared and/or submitted the chartering documents with government agencies.
Non-compliance or Supplying False Information
The CTA imposes stiff penalties on organizations that are found out of compliance or that have provided false information. The specific penalties include:
- Civil or criminal fines up to $500 per day (up to $10,000)
- Up to two (2) years in prison
Severity of the non-compliance, the nature of the false information supplied, and other relevant factors will impact the actual penalty imposed.
Although compliance may be burdensome, completing all required filings timely and accurately will avoid the risk of facing any penalties.
How to Prepare
The implementation of the CTA places new, ongoing obligations on business owners. Maintaining, understanding, and reporting current and accurate information about beneficial owners of the company–including those with substantial interests or control–will be necessary to meet the company’s duty to file. Businesses with a process for maintaining current records will be in the best position to avoid potential penalties.