The Corporate Transparency Act (CTA) went into effect on January 1, 2024, and impacts both newly established and existing small businesses. This bipartisan piece of legislation was established as a federal anti-corruption law to counter illicit financial crimes such as money laundering, tax fraud, and financing of terrorism. This is done by forcing a broad range of organizations to report information regarding their ownership to the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the U.S. Treasury.
Businesses need to know about this new Corporate Transparency Act to avoid potential criminal or civil penalties for not filing their reports. Under this new legislation, businesses that meet certain criteria must submit a new report to the FinCEN to become part of a new centralized database federal enforcement authorities will use. The purpose is to prevent U.S.-registered companies from being used by owners who may commit financial crimes. A skilled business law attorney can guide you through how this Act may affect your company.
Applicability of the Corporate Transparency Act
The Corporate Transparency Act is applicable to any privately held corporation that was created by filing a document with the secretary of state or any similar office in the U.S., with some exceptions. Reporting companies include foreign and domestic organizations, limited liability companies, and even single-member LLCs. Corporations should be sure to determine whether or not they qualify as a reporting company by examining the exemptions for reporting requirements in FinCEN’s Small Entity Compliance Guide.
Filing will be mandated differently based on when a company was created or registered to do business. Here are the three separate deadlines noted by FinCEN:
- Existing Companies: Companies that were created or registered before January 1, 2024 will have one year to file their Beneficial Ownership Information report by January 1, 2025.
- New 2024 Companies: After the CTA went into effect on January 1, 2024, any new reporting companies created through January 1, 2025, will only have 90 days from the date they were confirmed effectively registered.
- Companies Created in 2025 Onward: Any reporting companies created or registered on or after January 1, 2025, will have 30 calendar days to report from the date they were confirmed effective.
Exemptions for Reporting Requirements
Sole proprietorships, unincorporated associations, common law trusts, and general partnerships do not need to report beneficial ownership information. In addition, there are 23 types of entities that are exempt from reporting requirements. Exemptions apply for companies that are already under close federal and state regulations, such as:
- Governmental authorities
- Banks and financial institutions
- Security broker or dealer
- Securities exchange or clearing agency
- Insurance companies or state-licensed insurance producers
- Accounting firms
- Tax-exempt entities
- Large operating companies
- Publicly-traded companies
- Inactive entities
These categories do not automatically guarantee exemption. Each category has qualifying criteria, and FinCEN provides an easy checklist for exemptions in its Small Entity Compliance Guide. Companies should review this guide, available online in over 10 languages, to determine whether they need to report.
Reporting Information Required by the Corporate Transparency Act
Those filing Beneficial Ownership Information Reports will need to provide the following information for each of their beneficial owners:
- Name
- Address
- Date of birth
- Identifying number and issuer details from an unexpired state, local, or tribal government, such as a U.S. passport, driver’s license, state ID, or, if none of those exist, a foreign passport. The submission must include a photo of the ID document.
Companies will also have to provide self-identifying information, such as any legal or trade names, Taxpayer Identification Numbers, and current street addresses within the U.S. The Beneficial Ownership Information reports are not an annual or quarterly task and must only be filed again when information needs to be updated or corrected.
Reporting companies created after the Corporate Transparency Act went into effect will also have to submit information about the company applicants or individuals who formed the company. Companies must report up to two company applicants, including the individual who filed for the creation or registration of the company and any secondary responsible individual involved in the creation or registration. An accountant or lawyer could be considered a company applicant if they were overseeing the preparation or directly filing the incorporation documents.
Beneficial Owners Are Required to Report
Beneficial owners are defined as individuals who own 25% or more of the reporting company or who exercise “substantial control” over a reporting company. Substantial control is defined by FinCEN’s Small Entity Compliance Guide and includes senior officers, people with authority to appoint or remove senior officers, and important decision-makers. There is no set limit on the number of beneficial owners.
Typical titles for applicable individuals will include company president, chief financial officer, chief executive officer, general counsel, or board of directors. Important decision-makers include any individual who would hold important control over finances, major investments, incentive programs, business focus and direction, and organization structure. Individuals who have an ownership interest are also required to report. Refer to Chapter 2.1 “What is substantial control?” of FinCEN’s Small Entity Compliance Guide for a thorough list.
Some individuals do not count as beneficial owners if they have future ownership interests but have not inherited them yet, or are employees whose control or benefits are derived from their role as an employees, minors, or creditors of the reporting company. An assistant, agent, or intermediary of another individual who meets the definition of a beneficial owner would also not apply.
Filing Your Beneficial Ownership Information Report
Designed to be user-friendly, FinCEN’s website offers two ways to submit your Beneficial Ownership Information report online. You can download a blank form from the website and then upload a completed PDF. This method requires an Adobe Acrobat license in order to open and edit the PDF. The other approach is to complete the Beneficial Ownership Information report directly on the FinCEN platform. You must upload photos of the required identification documents for each beneficial owner.
During this process, it can be helpful to create a procedure in which your company will later revisit updating information if and when changes occur. If senior leadership changes or a sale of the company causes a shift in ownership, you only have 30 days to make the update to your Beneficial Ownership Information report in FinCEN’s database.
While FinCEN designed this to be a straightforward process, some companies have found it helpful to hire a third party to handle the details of filling out their report. Contact our legal team at Feldman & Feldman to learn how we can help you file and keep track of beneficial ownership information.
Updating Your Beneficial Ownership Information Report
There is no need to report the historical beneficial ownership of the reporting company. However, if there are changes that require an update to your beneficial ownership details after the Act went into effect, you will have 30 calendar days to file those changes. Here are some examples of when a change would have to be made to a Beneficial Ownership Information report:
- A change occurred to the reporting company’s name.
- Beneficial ownership changed such as a new CEO or company president.
- Updates are needed for a beneficial owner’s name, address, or identification that was previously provided to FinCEN, including any driver’s license or passport updates.
- You noticed an inaccuracy in the file pertaining to the company, beneficial owners, or company applicants and need to update it.
- If the reporting company becomes exempt after filing, an updated Beneficial Ownership Information report will be filed with only the entity identification and a checkbox denoting the exempt status.
Privacy for Reported Information
The purpose of the Corporate Transparency Act is to provide certain government officials and financial institutions with information to best assist in combating financial crimes and money laundering. The information recorded in the Beneficial Ownership Information report will not be available to the public. The information can only be viewed by federal, state, local, and tribal officials, as well as some foreign officials, who file a request through the U.S. Federal government.
Penalties for Not Reporting or Reporting False Information
If a reporting company does not report beneficial ownership information to FinCEN or fails to correct or update information within the set timeframe, it could face civil and criminal penalties. A willful failure to report or an attempt to falsify or fraudulently submit beneficial ownership information can result in civil fines of up to $500 per day for the violation. Company representatives could face criminal penalties, including up to two years of imprisonment, a fine of up to $10,000, or both.
FinCEN will determine the appropriate penalty depending on the willfulness involved in the action or omission. Individual beneficial owners and senior officers may be found liable for not reporting, reporting late, or falsifying information.
Get Legal Help Filing Your Information from Feldman & Feldman
If you need help filing your Beneficial Ownership Information report or have questions regarding business legal issues, contact the Houston business lawyers at Feldman & Feldman. Our experienced legal team will review your business information to see if you qualify as a reporting company, and help you determine your beneficial ownership and any company applicants, if applicable. Avoid potential late filing penalties, and get started today.