The Corporate Transparency Act: Requirements and Definitions

The Corporate Transparency Act (CTA) is a new piece of legislation that will require small businesses with fewer than 20 employees to file their beneficial ownership information report (BOI) to the Financial Crimes Enforcement Network (FinCEN). It goes into effect on January 1, 2024. 

Despite its name, the CTA directly impacts small businesses, whether registered as a limited liability company or a corporation. 

As a small business owner, you may feel confused and uncertain about what the CTA means for your business. Here’s what you need to know to comply with the requirements and protect the integrity of your business. 

Corporate Transparency Act: Key Takeaways

• The Corporate Transparency Act (CTA) is a new set of regulations that requires small businesses to share their beneficial ownership information with the federal government. 

• This new legislation aims to prevent financial crimes and make business ownership more transparent. 

• Small businesses with fewer than 20 employees and less than $5 million in sales or gross receipts will have new reporting requirements under the CTA. 

• The Corporate Transparency Act goes into effect on January 1, 2024. 

What Is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) is a new law that aims to combat financial crimes and promote transparency in business ownership. The primary purpose of the CTA is to prevent illicit activities, including money laundering, terrorism financing, and tax evasion, by identifying the actual owners, also known as beneficial owners, of certain companies. 

The CTA was enacted as a part of the National Defense Authorization Act in 2021 to make it harder for criminals and entities engaged in illicit activities to hide their identities behind anonymous shell companies. 

The CTA requires corporations and LLCs to report their beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. The idea is to create a centralized database accessible to law enforcement agencies and other relevant authorities for better transparency around who ultimately owns or controls certain companies. 

What Does the Corporate Transparency Act Mean for Small Businesses?

Experts expect the CTA to have a wide-reaching impact. FinCEN estimates that approximately 32 million companies will have to report their beneficial ownership information to the federal government in the first year of the program. Approximately 5 million new reporting companies are expected each year after that.[1]

The CTA purposefully focuses on smaller businesses. If your small business matches the reporting requirements, you must report your beneficial ownership information to FinCEN.

Penalties for Not Complying

The Corporate Transparency Act imposes severe penalties for non-compliance. While specific penalties can vary based on the nature and severity of the violation, business entities failing to comply can expect the following potential consequences: 

• Civil penalties: Violations of the CTA can result in penalties of up to $500 per day for every day the violation continues. 

• Criminal penalties: Individuals or business entities providing false, fraudulent, or incomplete beneficial ownership information can face fines of up to $10,000 and imprisonment for up to two years. 

• Ineligibility for federal contracts: Non-compliant businesses may become ineligible for federal contracts and assistance from federal agencies. 

• Revocation of business licenses: Some states may be able to revoke business licenses or take other regulatory actions against businesses that don’t comply with the CTA. 

• Reputational damage: Not complying with the CTA can damage your relationships with customers and partners, negatively impacting your small business. 

The consequences of not complying with the Corporate Transparency Act can be quite serious, but they’re easily preventable. The first step is determining whether your small business faces beneficial ownership information reporting requirements. If yes, it’s essential to file the required information accurately and on time. 

Reporting Companies

You will need to report your business’s beneficial ownership information (BOI) if: 

• Your business was formed under the state law by filing with a secretary of state or a similar office 

• Your business had fewer than 20 full-time employees in the year preceding the reporting year

• Your business had less than $5 million in gross receipts or sales in the year preceding the reporting year 

The CTA purposefully targets smaller businesses. While its name may make you think that it only applies to large operating companies, its focus is actually on limited liability companies and corporations with fewer employees. 

Under the Corporate Transparency Act, foreign entities registered to do business in the United States are subject to the same reporting requirements as domestic entities. If your foreign entity falls within the scope of the CTA, you need to share your beneficial ownership information with the FinCEN. 

Exempt Companies

There are exemptions to the Corporate Transparency Act. Certain businesses don’t have to report their beneficial ownership information to the FinCEN, including:[2] 

• Tax-exempt entities 

• Companies that file reports with the Securities and Exchange Commission

• Credit unions and banks 

• Broker-dealers

• Government authorities

• Insurance companies

• Accounting firms 

• Investment companies 

• Subsidiaries whose ownership interests are either controlled or owned by an exempt entity 

• Large operating companies with more than 20 full-time employees or a federal tax return showing over $5 million in gross receipts or sales in the year preceding the reporting year 

• Inactive entities formed on or before January 1, 2020, that meet other requirements

• Foreign pooled investment vehicles operated or advised by a qualifying bank, credit union, investment company, public accounting firm, or other qualifying financial institution 

CTA Reporting Requirements

The Corporate Transparency Act aims to enhance business transparency and prevent illicit activity for businesses across the U.S. 

One of the CTA’s main objectives is to make it harder for individuals and entities to hide behind anonymous shell companies. This is why the CTA requires businesses to report beneficial ownership information (BOI). 

Here are more details on the reporting requirements you can expect under the Corporate Transparency Act. 

What to Include in Your Report

1. Reporting Company Information

In your report to the FinCEN, you must include information about your reporting company. You can expect to provide your company’s full legal name, trade names (if any), current street address of the principal place of business, jurisdiction of formation, and taxpayer identification number. 

2. Beneficial Owners

In the context of the CTA, “beneficial owner” refers to individuals who ultimately own or have substantial control over a legal entity, such as a corporation or a limited liability company. The CTA specifically targets businesses that are not publicly traded and aims to identify the true individuals behind these entities. 

A beneficial owner can be either: 

• someone who holds substantial influence over a company

• someone who owns or controls at least 25 percent of the ownership interests 

Beneficial owners can include individuals who exercise significant control over the company even if they don’t meet the 25% ownership threshold. 

There are five exceptions to the definition of beneficial ownership:[3]

• Minor child: If an individual is a minor under the laws of the state in which the business was registered, the reporting company doesn’t have to identify this individual as a beneficial owner.

• Nominee, intermediary, custodian, or agent: If an individual acts on behalf of an actual beneficial owner, they don’t have to be included in the BOI report.

• Employee: As long as an employee derives substantial control and economic benefits only from their employment status and is not a senior officer of the reporting company, they don’t have to be reported to the FinCEN.

• Inheritor: If the reporting company has a future inheritor, they don’t have to be reported as a beneficial owner yet.

• Creditor: If an individual receives substantial control or economic benefits from the reporting company through a loan or a debt, they don’t have to be identified as a beneficial owner.

It’s essential to provide complete and accurate information about the beneficial owners of your company. When preparing a CTA report, include key details about beneficial owners, such as: [4] 

• Full legal names

• Addresses

• Dates of birth 

• Unique identification documents (passport, driver’s license, or another government-issued document) and issuing jurisdictions

3. Company Applicants

You may be required to provide identifying information for company applicants to comply with the CTA. A “company applicant” is defined as: 

• An individual who filed the documents to form a legal entity with the state (in the case of a foreign entity, this would be the person who registers the business entity in the US) 

• An individual who controls or directs the filing of relevant documents if someone else completed the actual filing

You need to provide the following information about the company applicants: 

• Full legal names

• Addresses

• Dates of birth 

• Unique identification documents (passport, driver's license, or another government-issued document) and issuing jurisdictions

Remember that this requirement only applies to companies formed on or after January 1, 2024. If you registered your business before January 1, 2024, you don’t need to submit company applicant information to the FinCEN. 

FinCEN Identifiers

Once you submit the complete beneficial ownership information to the FinCEN, you may apply for a FinCEN identifier. It’s a unique identifying number that you can use to report beneficial ownership information in place of the four required pieces of information (full legal name, address, date of birth, and unique identification documents with issuing jurisdictions). 

When to File Your BOI Report

The Corporate Transparency Act (CTA) goes into effect on January 1, 2024. Reporting companies registered before January 1, 2024, will have until January 1, 2025, to file their initial BOI reports. If you formed your company on or after January 1, 2024, you will have 30 days after receiving notice of your company’s registration to file the initial report.[5]

If there is a change in the beneficial ownership information after you file your initial report, you must file an updated report with the FinCEN within 30 calendar days. Changes can include: 

• Changes in personal information: If there are changes in the personal information of the beneficial owners, such as legal name, address, or unique identification number. 

• Change in ownership percentage: If there’s a change in the percentage of ownership or control that a beneficial owner holds in the company. 

• Change in beneficial owners: If there are new individuals who meet the criteria for being beneficial owners or if existing beneficial owners no longer meet the criteria.

• Changes to the company: If your business undergoes important legal changes, such as switching from an LLC to a corporation.

How to File Your BOI Report

Starting January 1, 2024, you can file BOI reports electronically using FinCEN’s secure filing system. Reports will be accepted starting on January 1, 2024. No reports will be accepted prior to this date. 

There are associated costs with filing your BOI report with the FinCEN. FinCEN estimates the majority of BOI reports to cost approximately $85.[6]

Who Can Access Your Reported BOI

The main objective of the Corporate Transparency Act (CTA) is to identify and keep track of business ownership in the United States to prevent financial crimes. To achieve this goal, FinCEN will create a centralized database to store the BOI reports. 

The beneficial ownership information will only be shared with authorized users for specific legal purposes. Your business’s BOI will not be a part of the public record. The dedicated BOI database will use rigorous information security measures to protect the beneficial ownership information. 

FAQs

What is the Corporate Transparency Act 2024?

The Corporate Transparency Act (CTA) is a new legislation enacted on January 1, 2024. It requires small businesses to report their beneficial ownership information to the FinCEN. 

What is the main purpose of the Corporate Transparency Act?

The Corporate Transparency Act’s main objective is to enhance transparency around business ownership and prevent financial crimes, including money laundering, terrorism financing, and tax evasion. The CTA will make it harder for individuals and entities to remain anonymous behind shell companies and improve national security. 

Who does the Corporate Transparency Act apply to?

If your business was formed under state laws, has fewer than 20 employees, and has filed for less than $5 million in sales or gross receipts on its federal income tax return, it will face the new reporting requirements. 

Who is exempt from the Corporate Transparency Act?

The final rule exempts 23 specific types of business entities from reporting and filing requirements. Companies with a large operating presence, publicly traded companies, and banks are examples of exempt entities. You can find the full list here. 

How do I prepare for the Corporate Transparency Act?

First, it’s crucial to figure out whether your business will need to comply with the new reporting requirements. If so, prepare the required beneficial ownership information and report it to the FinCEM by the appropriate deadline. Alternatively, get ahead of this upcoming mandate with our BOI report filing service.

What is the Corporate Transparency Act checklist?

The federal government doesn’t provide a specific Corporate Transparency Act checklist. To stay compliant, it’s essential to identify your business’s beneficial owners, gather their information, and keep your report to the FinCEM up to date. 

What are the effects of the Corporate Transparency Act?

The Corporate Transparency Act is expected to enhance transparency in business ownership, prevent financial crimes, and improve national security. The new regulations will affect small businesses with less than 20 employees and less than $5 million in annual sales or gross receipts. 

When does the Corporate Transparency Act take effect? 

The Corporate Transparency Act will go into effect on January 1, 2024. If your business was registered before January 1, 2024, you will have until January 1, 2025, to submit an initial report to the FinCEN. If your business was registered after January 1, 2024, you’ll have 30 days to report your beneficial ownership information. 

Bibliography

1. Federal Register: The Daily Journal of the United States Government. “Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifies for Entities.” Accessed November 5, 2023. 

2. Attorneys at Law RichMay. “The Corporate Transparency Act: Understanding the Reporting Requirements.” Accessed November 5, 2023. 

3. FinCEN. “Small Entity Compliance Guide.” Accessed November 5, 2023. 

4. American Bar Association. “The Corporate Transparency Act: Augmented Federal Anti-Money Laundering Legislation Brings New Reporting Requirements of Company Ownership.” Accessed November 5, 2023. 

5. FinCEN. “Small Entity Compliance Guide.” Accessed November 5, 2023.  

6. FinCEN. “Beneficial Ownership Information Reporting Rule Fact Sheet.” Accessed November 5, 2023.