What Is the Corporate Transparency Act?

The Corporate Transparency Act: an Overview of FinCEN’s New Act

On January 1, 2021, Congress enacted the Corporate Transparency Act (CTA). This sweeping legislation affects millions of businesses across the United States by creating additional BOI reporting requirements for existing businesses and businesses yet to be created.

The reporting requirements under the CTA begin on January 1, 2024, and business owners must be aware of their new compliance responsibilities.

What Is the Corporate Transparency Act?

The Corporate Transparency Act was passed as a part of the Anti-Money Laundering Act of 2020. As a result, nearly every new and existing small business must report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). FinCEN is a U.S. Department of Treasury division created specifically to combat financial crimes.

The term “beneficial owners” doesn’t include just the individuals who hold equity in the company. Instead, it also includes anyone who exercises control over the company, owns 25% or more of the company (directly and indirectly), or receives substantial economic benefits from the company. Beneficial owners could include corporate officers and directors, LLC managers, partners, or anyone acting similarly.

The reported information will not be publicly accessible but will allow government authorities or financial institutions to access the information only in certain instances. Both U.S.-based businesses and foreign businesses operating in the U.S. are subject to the reporting requirements.

Why Is the Corporate Transparency Act Important?

The goal of the CTA is to decrease financial crimes and increase transparency. Requiring businesses to disclose their beneficial owners assists FinCEN in identifying individuals and companies involved in money laundering, tax fraud, and even funding terrorist activities.

According to FinCEN, two million new companies are created each year in the United States, and over 30 million companies already exist. Each state has its own rules about how business entities must file with the Secretary of State and what information they must provide.

In some states, creating a business without revealing ownership information is possible. More public and anonymous corporations are formed in the United States than in any other jurisdiction. Unfortunately, the business-friendly environment of the United States provides opportunities for abuse.

Help to Combat Illegal Activities, Tax Evasion, Terrorist Financing

Foreign entities attempting to avoid U.S. sanctions can use a corporate veil to continue benefiting from the U.S. economic system or launder their money through vehicles like real estate and trusts. Without transparency, this money can even be used for financing terrorism, ultimately weakening national security.

But it’s not just foreign actors who can use the current lack of transparency to their benefit. For example, within the U.S., shell companies are often utilized to avoid paying taxes and abuse government benefits, such as the Paycheck Protection Program.

The CTA makes it easier to identify illicit funds by identifying the ultimate beneficiaries. This transparency also benefits small businesses by leveling the playing field and aids in the prevention of money laundering.

How does the Corporate Transparency Act or CTA Impact Businesses?

The CTA requires small businesses to identify beneficial owner information beginning in January 2024. Existing businesses must begin reporting beneficial ownership as of January 1, 2024, but they have until January 1, 2025, to complete their reports. Businesses with a formation date after January 1, 2024, must make their reports within 90 calendar days of the entity creation date.

What Information Is Reported?

Under the CTA, companies must gather and report information for each beneficial owner, including:

• Name
• Date of birth
• Residential or business address
• A unique identifying number, such as a driver’s license number or a passport
• Image of the document with the identifying number

Each reporting company must also provide information about itself, including:

• Full legal name
• Trade or doing business as (DBA) names
• Current address
• Jurisdiction of formation
• Federal taxpayer identification number

Changes and Updates to Your BOI Report

In addition to the initial reporting requirement, companies have 30 calendar days to notify FinCEN if any of this information changes. Examples of reportable changes include address changes (whether for the beneficial owners or the company itself) or a beneficial ownership change.

Companies formed after January 1, 2024, must also provide this information about their company applicant. The company applicant is the person who creates the business entity or, for a foreign company, the person who registers the company to do business in the United States. They must provide the same information as beneficial owners.

What If My Business doesn’t Comply?

Non-compliance comes with a hefty penalty of $500 per day up to $10,000 for anyone who fails to provide the required information or knowingly provides false information. In addition to the civil penalties, anyone knowingly filing fraudulent information may also receive up to two years of jail time.

Who Has to File a BOI Report?

Nearly all newly formed and existing companies operating in the United States must file a Beneficial Ownership Information (BOI) report under the Corporate Transparency Act beginning January 1, 2024. This includes corporations, limited liability companies, and other entities created by filing relevant documents with state secretaries of state. Foreign companies registered to do business in any U.S. state also must report.

What Exceptions Are There?

There are nearly two dozen exemptions for companies that meet the exemption criteria according to FinCEN. Some examples are: 

1. Certain types of securities reporting issuers.
2. A U.S. governmental authority.
3. Certain types of banks.
4. Federal or state credit unions as defined in section 101 of the Federal Credit Union Act.
5. bank holding company as defined in section 2 of the Bank Holding Company Act of 1956, or any savings and loan holding company as defined in section 10(a) of the Home Owners’ Loan Act.
6. Certain types of money transmitting or money services businesses.
7. Any broker or dealer, as defined in section 3 of the Securities Exchange Act of 1934, that is registered under section 15 of that Act (15 U.S.C. 78o).
8. Securities exchanges or clearing agencies as defined in section 3 of the Securities Exchange Act of 1934, and that is registered under sections 6 or 17A of that Act.
9. Certain other types of entities registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934.
10. Certain types of investment companies as defined in section 3 of the Investment Company Act of 1940, or investment advisers as defined in section 202 of the Investment Advisers Act of 1940.
11. Certain types of venture capital fund advisers.
12. Insurance companies defined in section 2 of the Investment Company Act of 1940.
13. State-licensed insurance producers with an operating presence at a physical office within the United States, and authorized by a State, and subject to supervision by a State’s insurance commissioner or a similar official or agency.
14. Commodity Exchange Act registered entities.
15. Any public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002.
16. Certain types of regulated public utilities.
17. Any financial market utility designated by the Financial Stability Oversight Council under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010.
18. Certain pooled investment vehicles.
19. Certain types of tax-exempt entities.
20. Entities assisting a tax-exempt entity described in (xix) above.
21. Large operating companies with more than 20 full-time employees,more than $5,000,000 in gross receipts or sales, and an operating presence at a physical office within the United States.
22. The subsidiaries of certain exempt entities.
23. Certain types of inactive entities that were in existence on or before January 1, 2020, the date the Corporate Transparency Act was enacted.

What Should Businesses Do to Comply With the CTA?

FinCEN is working on setting up a compliance portal; however, businesses can’t file their BOI information until January 1, 2024.

The Corporate Transparency Act may ultimately benefit the U.S. economy by promoting transparency and imposing civil and criminal penalties for bad actors engaged in illicit activities. However, businesses are responsible for reporting their information to FinCEN and ensuring that any changes are reported within thirty days.

FileForms provides a streamlined filing of BOI Reports through innovative technology solutions to simplify the compliance burden of the new reporting obligations set forth in the CTA. We can help to ensure your business meets these disclosure requirements while saving you time and money.