Designed to enhance transparency and combat illicit financial activities, the Corporate Transparency Act (CTA) requires entities to report the individuals with ownership and controlling stake to the federal government. In this article, we will dive into the specifics of the Corporate Transparency Act, exploring what it entails, its objectives, and, most importantly, how it will affect your business.

What Is It and What Does It Mean For Your Business?

The Corporate Transparency Act (CTA) is a federal law enacted in 2021 as part of the National Defense Authorization Act. Its primary objective is to prevent money laundering, terrorism financing, and other illicit financial activities by promoting transparency within corporate structures.

What Does the Corporate Transparency Act Do?

The Corporate Transparency Act aims to achieve several key objectives, including:

Combating Illicit Financial Activities

By requiring beneficial ownership reporting, the CTA seeks to deter criminals from using anonymous entities to conduct illegal financial transactions. This increased transparency helps law enforcement agencies identify and investigate suspicious activities more effectively.

Enhancing National Security

The CTA contributes to national security by providing valuable information to intelligence agencies, enabling them to detect and combat threats from illicit financial networks. By closing loopholes that previously allowed for anonymous ownership, the Act improves the ability to identify potential risks and take appropriate action.

Protecting Legitimate Businesses

While the Corporate Transparency Act imposes new reporting obligations, it also protects legitimate businesses from unfair competition. By minimizing the use of shell companies for illegal purposes, the Act promotes a level playing field and fosters an environment of trust and integrity in business transactions.

How Does the Corporate Transparency Act Accomplish its Goals?

Beneficial ownership reporting is a vital tool for achieving the CTA's objectives. Beneficial owners are individuals who have substantial control over or receive substantial economic benefits from a legal entity. Beneficial ownership reporting requires legal entities to disclose the identities of their beneficial owners, which FinCEN specifically defines as:

• Senior officers of the company (including those who perform duties similar to senior officers, regardless of their official title)
• Anyone with the authority to remove senior officers
• Anyone with substantial influence over decisions around the business, finances, or structure of the company
• Anyone with substantial control over the company
• OR anyone who owns 25% or more of the entity.

By revealing the individuals behind these entities, it becomes more challenging for criminals to hide illegal activities behind anonymous shell companies.

Beneficial ownership reporting promotes a more transparent and trustworthy business climate for legitimate businesses. It helps prevent unfair competition from entities engaging in illicit activities, creating a more level playing field for all businesses. In this way, the CTA fosters transparency, enhances security, and safeguards the integrity of business transactions through beneficial ownership reporting.

Under the CTA, reporting companies must report information related to their beneficial owners to FinCEN, a bureau of the US Department of Treasury responsible for combating financial crimes.

Examples of key information that must be reported include:

• The entity’s name and any trade or DBA names
• State of formation
• The entity’s federal EIN
• The entity’s primary address within the US
• Full legal name of each beneficial owner
• Date of birth
• Current residential address
• Unique identifying number from an acceptable identification document (such as a driver's license or passport)

How Does the Corporate Transparency Act Impact Your Business?

If you are a business registered in the United States, it's essential to understand how the Corporate Transparency Act will affect your operations. Here are some key points to consider:

Reporting Requirements

Reporting companies must meet the CTA's reporting requirements. This includes submitting beneficial ownership information to FinCEN within specified timeframes.

Timeframes for Initial Reporting

The reporting requirement became effective on January 1, 2024. FinCEN began accepting beneficial ownership information reports on that date. Any company created or registered to do business in the US that meets the definition of a reporting company and is not exempt from that definition will be required to file before January 1, 2025.

Any company created or registered to do business in the US between January 1, 2024, and January 1, 2025, will have 90 calendar days from receiving actual or public notice that its creation or registration is effective to file its initial BOI report, while companies created or registered on or after January 1, 2025, will have 30 calendar days.

Updates to Beneficial Ownership Information

In addition to initial reporting, there is also an obligation to keep the information updated. Changes to previously reported information must be reported to FinCEN within 30 days after a change occurs. This includes any changes in the beneficial owners or their information, such as a change in address or contact details. The onus is on the reporting companies to ensure their information is current and accurate.

Examples of changes that would require an updated beneficial ownership information report include:

• Any change to the information reported for the reporting company, such as registering a new business name.
• A change in beneficial owners, such as a sale that changes who meets the ownership interest threshold of 25 percent or which changes the individuals with substantial control.
• A change in senior officers, such as a new CEO.
• Any change to the entity’s information or any previously reported individual's name, address, or unique identifying number previously provided to FinCEN. If a beneficial owner obtained a new driver’s license or other identifying document that includes a changed name, address, or identifying number, the reporting company also would have to file an updated beneficial ownership information report with FinCEN, including an image of the new identifying document.

Exemptions from Reporting

While the CTA broadly applies to most legal entities, there are specific exemptions to consider. For instance, more heavily regulated entities, such as banks, credit unions, investment companies, and entities already required to report certain information to the federal government are exempt from the CTA's reporting requirements. (Read the full list below.)

Penalties for Non-Compliance

Failure to meet the reporting obligations under the CTA can result in significant penalties. These penalties may include fines of over $500 per day or even criminal charges. Therefore, businesses must ensure timely and accurate reporting.

Understanding Beneficial Ownership Under the CTA

Beneficial ownership refers to individuals who ultimately own or control a legal entity. These individuals have significant influence or economic interest in the entity, even if their ownership is indirect or obscured through layers of intermediaries. By identifying and disclosing beneficial owners, authorities can gain insights into the true stakeholders behind an organization.

To illustrate this concept, let's consider a hypothetical scenario involving a company called ABC Inc. ABC Inc. is owned by XYZ Holdings LLC, which in turn is owned by John Doe. While ABC Inc. may publicly list XYZ Holdings LLC as its owner, it is essential to dig deeper and identify John Doe as the ultimate beneficial owner behind both entities.

Types of Information Required for Reporting

Organizations should be prepared to provide specific details about their legal entities and owners when reporting beneficial ownership information. The following organization details are required as part of the BOI report:

• The organization’s name
• Any trade or DBA names
• State of formation or registration
• Federal EIN
• ID number from its domicile Secretary of State
• Primary address within the US

Additionally, the following details about all beneficial owners must be included:

• Full legal name
• Date of birth
• Residential address
• Photo ID and issuing jurisdiction

Corporate Transparency Act Exemptions

While many businesses must comply with the Beneficial Ownership Reporting requirements laid out by the CTA, specific exemptions relieve certain organizations from filing. There are 23 types of entities that are exempt from reporting:

1. Securities reporting issuers
2. Governmental authorities
3. Banks
4. Credit unions
5. Depository institution holding companies
6. Money services businesses
7. Brokers or dealers in securities
8. Securities exchange or clearing agencies
9. Other Exchange Act registered entities
10. Investment companies or investment advisers
11. Venture capital fund advisers
12. Insurance companies—Including any company whose “primary and predominant business activity is the writing of insurance or the reinsuring of risks underwritten by insurance companies,” as per 15 U.S.C. 80a-2
13. State-licensed insurance producers
14. Commodity Exchange Act registered entities
15. Accounting firms
16. Public utilities
17. Financial market utilities
18. Pooled investment vehicles
19. Tax-exempt entities—Under Sections 501(a), 501(c), 527(a), 527(e)1, and 4947(a) of the Internal Revenue Code of 1986
20. Entities assisting a tax-exempt entity—Any entity that exclusively governs or financially assists the above tax-exempt entities
21. Large operating companies—Companies with over 20 full-time employees and over $5 million in annual sales
22. Subsidiaries of certain exempt entities—Exemptions 1–21, excluding #6 and #18
23. Inactive entities—Entities that existed on or before January 1, 2020, which currently aren’t engaged in any business activity or hold any assets, and haven’t had any ownership changes or received over $1,000 in the previous 12 months

It is essential to note that while these exemptions exist, businesses should carefully review their eligibility for each exemption category and consult legal counsel if needed.