LEGAL UPDATE: Corporate Transparency Act – What every small business needs to know about the upcoming reporting requirementsby Katie Robinson | September 18, 2023
What is the Corporate Transparency Act?
The Corporate Transparency Act (CTA) is a federal law enacted as part of the Anti-Money Laundering Act of 2020 meant to reduce financial crime in small businesses across the United States. Specifically, the CTA requires that smaller, otherwise unregulated, companies file a report with the US Department of Treasury’s Financial Crimes Enforcement Network within their new Beneficial Ownership Secure System (BOSS), which the network may share with other government agencies and financial institutions who request it. The Act will come into effect on January 1st, 2024, for newly formed companies and on January 1st, 2025, for already existing companies.
What are the Companies Required to Report?
The CTA states that any domestic or foreign entity that has fewer than 20 employees or less than $5 million in revenue and is registered to do business in any US state is considered a “reporting company.” These reporting companies are required to provide the Financial Crimes Enforcement Network with a report detailing the reporting company’s full legal name, any trade or D/B/A names, current street address, jurisdiction of creation, taxpayer identification number, and information regarding beneficial owners and company applicants.
What is “Information Regarding Beneficial Owners and Company Applicants”?
Beneficial owners refer to any individual who either exercises “substantial control” over the reporting company or owns and controls at least 25 percent of the company. In this case, “substantial control” means
i) The individual serves as a senior officer;
ii) has the authority to remove a senior officer or a majority of the board of directors (or similar body); or iii) otherwise directs, determines, or has substantial influence over important decisions of the reporting company.
The CTA provides exemptions from beneficial owner status if an individual is a minor, is acting on behalf of another, derives influence solely from their employment, has an interest in the company as a result of inheritance, or is a creditor of the company. In the company’s filing within BOSS, each beneficial owner must provide their full legal name, date of birth, residential street address, and a copy of a valid identification document (passport, driver’s license, etc.).
Company applicants refer to any individual who either files the document to create the company or is primarily responsible for directing that filing. Each company may claim up to two individuals as company applicants in their filing within BOSS. For each of those individuals, the reporting company must provide the same data as they would for a beneficial owner, except that they would use the address of their place of business rather than their street address. Importantly, this requirement is only required for newly formed companies, and already existing companies only need to report their beneficial owners.
Are any companies exempt from filing this report?
The CTA outlines a number of entities that are exempt from the CTA’s requirements including, but not limited to, certain financial services and investment companies, publicly traded companies, and companies in certain highly regulated industries.
Are there Ongoing Requirements of the CTA, and what are the Penalties for Non-Compliance?
Companies formed on or after January 1st, 2024 must file a report with the Financial Crimes Enforcement Networks within 30 days of the creation of the company. Companies created before January 1st, 2024 must file a report with the Financial Crimes Enforcement Network by January 1st, 2025. Additionally, if there are any changes to information regarding the reporting company’s beneficial owners or company applicants after filing, you must update the information in the BOSS database within 30 days of the change.
Willful violations of these reporting standards can result in fines of up to $10,000 and up to 2 years of imprisonment, meaning regular compliance with the CTA is essential.
What steps should small businesses take to ensure compliance?
As of right now, the Financial Crimes Enforcement Network is still developing its electronic reporting system, meaning businesses will have to wait until that is completed to file their reports. In the meantime, existing businesses should create a system for recording and updating relevant information relating to their beneficial owners and company applicants in preparation for filing these reports. Businesses should also set reminders to re-file their report with the Financial Crimes Enforcement Network whenever there are changes or updates to any of the information that is being collected.
- The Corporate Transparency Act – Preparing for the Federal Database of Beneficial Ownership Information | American Bar Association
- Beneficial Ownership Information Reporting Frequently Asked Questions | Financial Crimes Enforcement Network (FinCEN)
- Beneficial Ownership Information Reporting | Financial Crimes Enforcement Network (FinCEN)