The Corporate Transparency Act
The Most Significant New Law Impacting Small Businesses
Beginning January 1, 2024, nearly all small businesses will be profoundly impacted by a new law – the Corporate Transparency Act (the CTA).
This pivotal component of the Anti-Money Laundering Act of 2020 is intended to enhance financial transparency and combat illicit activities like money laundering, tax evasion, and terrorism financing. It mandates “reporting companies” to disclose beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), thereby creating a nonpublic registry to assist law enforcement in tracing and curbing financial crimes facilitated through anonymous corporate entities.
It is groundbreaking legislation that has significant implications, particularly for small businesses. It sounds scary and should be taken seriously. If you’re an entrepreneur, early-stage startup, creative professional, or, any business owner, read on to learn whether your business must comply, what you have to do, and what the penalties are for failing to timely or properly file your report.
Who Must Comply?
All non-exempt domestic corporations, limited liability companies (LLCs), and certain foreign entities registered to conduct business in the US are considered “reporting companies” that must comply with the CTA reporting requirements. The definition of “reporting company” encompasses businesses formed after, as well as before, the Jan. 1, 2024 effective date.
Several categories of regulated entities are exempt, including certain tax-exempt organizations, larger operating companies meeting specific criteria, public companies, investment companies, certain financial institutions and accounting firms, and other companies in highly regulated industries. Unfortunately, it’s the mom-and-pops, entrepreneurs, early-stage start-ups, and other small creative professionals and service providers that will be the most effected.
What Must be Reported?
Central to the CTA is the identification of "beneficial owners" and "company applicants."
“Beneficial owners” are those individuals who ultimately own or control a considerable portion of a company or who have substantial influence over its operations, assets, and decision-making processes.
Such individuals may wield great power over a company, without necessarily being listed or registered with any regulatory authorities. It is this anonymity that the CTA seeks to make more transparent. Under the CTA, beneficial owners typically fall into one of two categories: Individuals with Substantial Control and Owners with Significant Ownership Interests.
Individuals with Substantial Control directly or indirectly exercise considerable authority or influence over the company. Primary examples are senior officers, key decision-makers, and those responsible for appointing or removing senior management. Owners with Significant Ownership Interests own or control at least 25% of the ownership interests in the company. This can encompass direct or indirect ownership stakes, irrespective of the title or role officially held by the owner.
Under the CTA, companies must include information for all such persons and states that every company must have at least one. The information required to be reported is comprehensive, including beneficial owners’ full legal names, dates of birth, current addresses, and unique identifying numbers from official identification documents (like driver’s licenses or social security numbers).
In addition to beneficial owners, any reporting company that was created or registered after the effective date must disclose information about the company applicant. The "company applicant" is the individual responsible for filing the company’s formation or registration document. For example, if a company’s legal counsel or CPA filed the corporation’s “Articles of Incorporation” or the LLC’s “Articles of Organization”, that legal counsel or CPA would need to be disclosed.
But wait, there’s more. Under the CTA, reporting companies must disclose specific information about themselves too. The company’s full legal name, addresses, jurisdiction of formation, and taxpayer identification numbers.
When and How to Report?
Reporting companies established before January 1, 2024, have until January 1, 2025, to file their initial beneficial ownership information report. However, companies established or registered on or after January 1, 2024, must file within 90 days of creation or registration confirmation. If a previously exempt company loses its exemption, it must file an initial beneficial ownership information report within 30 days after the exemption ceases to apply.
What are the Consequences of Noncompliance?
Do not delay in filing your company’s beneficial ownership information report, and certainly do not provide false or incorrect information. The penalties are serious.
Failing to accurately report beneficial ownership information may come with both civil and criminal liability. Fines can be up to $10,000 for inaccurate information, and willfully providing false information or failing to report could result in imprisonment for up to two years. Yikes.
The Corporate Transparency Act is a landmark and transformative law. If you're unsure about your obligations, get guidance from an accountant, compliance expert, or attorney who specializes in financial regulations or small business. If you don’t have someone you trust, contact us today to safeguard yourself and your business.
Jessica Shraybman - Founder & Managing Partner