What is the Corporate Transparency Act (CTA)?

This article tells you about the background, requirements, and potential impact of the CTA, with a focus on its effects on small businesses

The Corporate Transparency Act (CTA) is a U.S. federal law enacted in 2021 as part of the Anti-Money Laundering Act of 2020. It aims to combat illegal activities like money laundering, terrorist financing, tax fraud, and other financial crimes by increasing transparency in corporate ownership. The CTA requires certain businesses, called “reporting companies,” to disclose information about their beneficial owners – those who exercise significant control over the company or own at least 25% of its ownership interests – to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).

Who Must File a Report?

Most businesses structured as corporations or LLCs must file a Beneficial Ownership Information (BOI) report under the CTA. The CTA applies to domestic reporting companies, including corporations, LLCs, and other entities formed in the U.S., as well as foreign reporting companies registered to do business in the U.S.. The law broadly aims to capture information about individuals associated with the reporting company.

Defining a Beneficial Owner Under the CTA

The sources provide a clear definition of a beneficial owner according to the Corporate Transparency Act (CTA). A beneficial owner is an individual who meets at least one of the following criteria:

  • Exercises substantial control over the reporting company: This means the individual has significant influence over the company’s decisions or operations. The sources provide some specific examples of individuals who would be considered to have substantial control:
    • A senior officer, such as the president, chief financial officer, general counsel, CEO, COO, or anyone performing a similar function.
    • An individual with the authority to appoint or remove certain officers or a majority of the board of directors (or a similar governing body).
    • An important decision-maker for the company.
    • Someone who qualifies under the rules outlined in FinCEN’s Small Entity Compliance Guide, which provides additional details and examples.
  • Owns or controls at least 25% of the reporting company’s ownership interests: This refers to an individual’s direct or indirect ownership stake in the company. The sources do not explicitly define “ownership interests,” but one source mentions that examples include shares of equity, stock, voting rights, or any other mechanism used to establish ownership.

It’s important to note that the CTA’s definition of a beneficial owner focuses on individuals. Entities, such as corporations or trusts, are not considered beneficial owners under the CTA, even if they hold ownership interests or exercise control over a reporting company.

The sources emphasize that the CTA’s beneficial ownership reporting requirements are designed to identify the real people behind companies, not just the legal structures used to hold ownership.

Exemptions to the Corporate Transparency Act

Exemptions to the Corporate Transparency Act

The Corporate Transparency Act (CTA) includes 23 categories of businesses that are exempt from its reporting requirements. The sources provide several examples of these exemptions:

  • Sole proprietorships are not required to file a Beneficial Ownership Information (BOI) report.
  • Foreign entities not registered to do business in the United States are exempt from the CTA.
  • Unincorporated associations are not subject to the CTA’s reporting requirements.
  • Various financial institutions are exempt, including:
    • Banks
    • Credit Unions
  • Financial advisors, wealth planning trusts, and securities-related agencies are not required to file BOI reports.
  • Insurance companies are exempt from the CTA.
  • Tax-exempt entities classified as 501(c) in the Internal Revenue Code do not have to file a BOI report.
  • Public Utilities are exempt from the CTA’s reporting requirements.
  • Publicly traded companies are exempt from filing a BOI report.
  • Inactive entities are not required to report beneficial ownership information.
  • Specific trusts are exempt from the CTA.
  • Accounting firms do not have to file a BOI report.

Large Operating Companies

The CTA also exempts large operating companies if they meet the following criteria:

  • Number of employees: They must employ more than 20 full-time employees in the United States.
  • Physical presence: They must have an operating presence at a physical office within the United States.
  • Financial threshold: They must have filed a U.S. federal income tax or information return for the previous year showing more than $5 million in gross receipts or sales.

Entities Already Subject to Regulation

Many exemptions apply to entities already subject to substantial federal or state regulation. These entities include:

  • Entities that file reports with the SEC
  • Money services businesses
  • Securities brokers and dealers
  • State-licensed insurance producers
  • Pooled investment vehicles
  • Financial market utilities
Information Required in a BOI Report

Information Required in a BOI Report

Reporting companies must provide specific information about the company itself and each individual who qualifies as a beneficial owner. This includes:

For the Company:

  • Legal name
  • Trade name (if applicable)
  • Principal or business street address in the U.S.
  • Taxpayer ID (EIN/SSN/ITIN)

For Beneficial Owners and Company Applicants:

  • Legal name
  • Date of birth (DOB)
  • Residential address (business address for company applicants who register companies in the course of their businesses)
  • Number from ID document
  • Issuing state/jurisdiction of document
  • Image of document

Company Applicant

Companies formed or registered on or after January 1, 2024, must also identify up to two company applicants in their BOI report. A company applicant is the individual who files the paperwork to create or register a company, or, if more than one person is involved, those who primarily control the company.

Filing Deadlines

Reporting companies have varying deadlines to file their initial BOI report, depending on when the company was formed:

  • Companies formed before January 1, 2024: January 1, 2025
  • Companies formed between January 1, 2024, and January 1, 2025: within 90 days of receiving actual or public notice of formation
  • Companies formed on or after January 1, 2025: within 30 days of receiving actual or public notice of formation

Updating Information

The CTA doesn’t require annual reports, but companies must update their BOI report within 30 days of any changes to previously reported information. This includes changes in beneficial ownership, business addresses, owner addresses, or unique identifying numbers.

How to File a BOI Report?

BOI reports are filed electronically through FinCEN’s website. You can either file the report yourself or designate an authorized agent, like an attorney or accountant, to file on your behalf.

Penalties for Noncompliance

Companies that willfully fail to comply with the CTA’s reporting requirements face civil and criminal penalties:

  • Civil Penalties: Fines of $500 per day, up to a maximum of $10,000
  • Criminal Penalties: Up to two years in prison

It’s important to note that the CTA does not include provisions for non-willful or negligence penalties.

Impact on Small Businesses

The CTA has been criticized for placing a disproportionate burden on small businesses. Many small businesses don’t qualify for the large operating company exemption and may struggle to comply with the complex reporting requirements. Critics argue that the CTA targets a small number of bad actors while burdening the vast majority of legitimate small businesses.

In November 2023, FinCEN made some changes to the CTA rules, including:

  • Extending the filing deadline for companies formed in 2024 to 90 days
  • Amending rules to allow the use of FinCEN identifiers in BOI reports. FinCEN identifiers are unique numbers individuals and companies can obtain from FinCEN after providing the required BOI information, aiming to simplify the reporting process.

A federal court in Alabama ruled the CTA unconstitutional in March 2024 in a case brought by the National Small Business Association. However, FinCEN has stated that it will continue to enforce the CTA for all other businesses not involved in the lawsuit. The constitutionality of the CTA is likely to be further challenged in court.

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