The Corporate Transparency Act (CTA) represents a significant shift in business compliance, introducing rigorous new reporting requirements for millions of small businesses and corporations. Under these regulations, “reporting companies”—defined as U.S.-based and foreign businesses with under $5 million in annual revenue and fewer than 20 employees must disclose detailed beneficial ownership information directly to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
If you own or manage a small business in the United States, these requirements likely apply to you. With deadlines approaching, understanding and fulfilling your CTA obligations is critical to avoid costly fines, criminal penalties, and even jail time.
What is the Corporate Transparency Act?
The CTA, enacted in 2021 as part of the National Defense Authorization Act, aims to strengthen national security and combat financial crimes by increasing transparency in business ownership across the United States. The Act specifically applies to smaller entities, as most large corporations are already subject to similar disclosure requirements under existing laws.
Historically, individuals could set up shell companies to conceal their identities, making it easier to engage in money laundering, tax evasion, and other financial crimes. The CTA targets this loophole by mandating disclosure of beneficial ownership—meaning the identities of individuals who control or benefit from a business—across most small businesses and corporations.
The main purpose of the CTA is to establish a confidential database that assists law enforcement in detecting and preventing financial misconduct. By adhering to these requirements, reporting companies support a broader national effort to protect the integrity of the U.S. financial system.
Corporate Transparency Act Requirements
The CTA introduces substantial changes to corporate reporting practices, particularly for small and medium-sized businesses that may not be accustomed to federal filing obligations. Aimed primarily at businesses with less than $5 million in annual revenue and fewer than 20 employees, these requirements apply to “reporting companies,” which include:
- Domestic reporting companies: Corporations, LLPs, LLCs, or any other entity created by filing a document with a secretary of state or similar office under the law of a state, territory, or Indian tribe.
- Foreign reporting companies: Any non-U.S. entity that is registered to do business with any U.S. state, territory, or Indian tribe.
It’s important to note that the CTA requires businesses to submit their BOI directly to FinCEN. Providing ownership details to certain financial institutions, as many businesses may already do, does not satisfy the CTA’s filing requirements. Non-compliance, including inaccurate or delayed reporting, can lead to steep penalties, including fines and criminal charges for willful violations.
How to File
The process requires reporting companies to create an account on the FinCEN website, where you can electronically file the necessary information.
The system is designed to be straightforward, allowing users to:
- Register for a FinCEN account.
- Access the BOI filing portal.
- Enter company information as required.
- Provide detailed beneficial ownership data.
- Submit the report and receive confirmation of filing.
While third-party service providers can assist with preparation, the ultimate responsibility for accuracy lies with the reporting company. FinCEN offers resources and guidance to help businesses navigate the process confidently and successfully.
Required Information for Compliance
On September 30, 2022, the U.S. Department of the Treasury issued final regulations for reporting. These include:
- Reporting Company Information. This includes the company’s legal name, trade name, address, jurisdiction of formation, and Employer Identification Number (EIN). Foreign companies must provide a foreign tax ID if they lack an EIN.
- Beneficial Ownership Information (BOI). Companies must identify their beneficial owners, defined as individuals who either exercise substantial control over the company or own/control at least 25% of the ownership interests.
- Company Applicants. For companies formed after January 1, 2024, up to two individuals involved in the company's formation must be reported. This includes the person who files the formation documents and the individual primarily responsible for directing or controlling the filing.
- Required Individual Information. For each beneficial owner and company applicant, the report must include full legal name, date of birth, current residential address, and an identifying number and image from an identification document like a passport or driver’s license.
Reporting companies may also use a FinCEN identifier—a unique number issued by FinCEN— for easier reporting and added privacy. Individuals can request a FinCEN identifier on or after January 1, 2024, by completing an online form or by checking a box on the beneficial ownership report upon submission.
Corporate Transparency Act Deadlines
The CTA went into effect on January 1, 2024. However, CTA filing deadlines for affected businesses depend on the date of formation:
- Companies formed before January 1, 2024, must file initial reports by January 1, 2025.
- Companies formed in 2024 must file within 90 days of formation.
- Companies formed after January 1, 2025, must file within 30 days of formation.
Going forward, reporting companies must submit information updates within 30 days of any change.
Exemptions to the Corporate Transparency Act
The CTA provides several exemptions to its reporting requirements, primarily for entities that are already subject to regulatory oversight or are considered low risk for financial crimes. In general, the following types of organizations are exempt:
- Banks and other bank-type entities, such as regulated private trust companies.
- Large operating companies, or companies that have a physical office in the U.S., that have more than 20 full-time U.S. employees and reported more than $5 million in gross receipts on a U.S. federal income tax return in the previous year.
- Publicly traded companies registered under the Securities Exchange Act of 1934.
- Tax-exempt entities, such as 501(c) and 501(a) organizations.
- Sole proprietorships that don’t operate as a single-member LLC.
- Inactive companies formed before 2020.
- Companies owned or controlled by exempt entities.
Penalties for Non-Compliance
Non-compliance with the CTA carries significant legal consequences. Reporting companies that willfully violate the BOI reporting requirement may be subject to civil penalties of $591 for each day the violation continues. Additionally, they may be subject to criminal penalties of up to $10,000 and potential imprisonment for up to two years. These penalties underscore the seriousness of the CTA’s requirements and reflect the government’s intent to deter financial crime by holding companies accountable for accurate reporting.
Non-compliance can also expose a business to increased scrutiny and potential investigation by FinCEN and other regulatory agencies, which may examine records and transaction histories more closely. This means that even unintentional errors or delays in reporting could create legal risks if they’re perceived as negligent.
Next Steps
For business owners impacted by the CTA, taking timely action is crucial to meet upcoming deadlines and ensure compliance. To avoid penalties, consider taking these essential steps:
- Review Applicability. Confirm if your business falls under CTA reporting requirements or qualifies for an exemption.
- Educate Yourself. Familiarize yourself with the specifics of the CTA. Understanding who qualifies as a "beneficial owner" and what information needs to be reported is crucial.
- Register with FinCEN. Create an account on FinCEN’s website to access the BOI filing system and submit reports.
- Prepare Your Documentation. Start gathering necessary documents and information about beneficial owners in your business. This proactive approach will save you time and stress as the deadline approaches.
- Implement Compliance Systems. If you haven’t already, set up systems within your business to regularly collect and update the required information. This will make ongoing compliance more manageable.
- Seek Professional Advice: Consider consulting with a legal or financial expert who specializes in small business regulations. You can also reach out to your EP Wealth Advisor for personalized guidance.
- Stay Informed. Keep a close eye on any developments or changes related to the CTA, including potential delays or amendments. Staying informed will help you adapt quickly to any changes and ensure compliance with the law.
Ensuring compliance with the Corporate Transparency Act not only potentially protects your business but also may possibly strengthen its legal and financial foundation. By preparing proactively and establishing the right systems within your business, you may likely safeguard against costly penalties and potential disruptions, as outlined by the CTA.
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