The Corporate Transparency Act: Understanding Exemptions and Compliance Obligations

ARTICLE | October 21, 2024

The Corporate Transparency Act: Understanding Exemptions and Compliance Obligations

Introduction

As businesses navigate an increasingly complex regulatory environment, understanding new compliance obligations is essential. Starting January 1, 2024, the Corporate Transparency Act (CTA) introduces significant Beneficial Ownership Information (BOI) reporting requirements for many entities in the United States. Failure to comply could result in substantial penalties, making it crucial for companies to familiarize themselves with these new mandates.

Understanding the Corporate Transparency Act (CTA)

What Is the CTA?

The Corporate Transparency Act is a piece of legislation enacted as part of the National Defense Authorization Act for Fiscal Year 2021. While it is not part of the tax code, it amends the Bank Secrecy Act (BSA), enhancing the federal government's ability to combat financial crimes such as money laundering, tax fraud, and terrorism financing.

Purpose of the CTA

The primary goal of the CTA is to increase transparency in corporate structures by requiring entities to disclose information about their beneficial owners. By creating a centralized database of ownership information, the Financial Crimes Enforcement Network (FinCEN) aims to prevent the misuse of shell companies and anonymous entities in illegal activities.

Effective Date

The CTA's reporting requirements take effect on January 1, 2024. Entities must be aware of their specific deadlines, which vary based on when the company was formed and other factors. Timely compliance is critical to avoid penalties.

Who Must Comply with the CTA?

Definition of Reporting Companies

The CTA defines "reporting companies" broadly. It includes both domestic and foreign entities that are registered to do business in the United States by filing documents with a secretary of state or similar office. This generally encompasses:

• Corporations
• Limited Liability Companies (LLCs)
• Limited Partnerships
• Limited Liability Partnerships (LLPs)
• Business trusts and most other legal entities registered in the U.S.

Entities Required to Report

Unless an exemption applies, these entities must comply with the BOI reporting requirements. It's important to note that the CTA casts a wide net, and many businesses that have not previously been subject to such reporting may now have obligations under the act.

Exemptions to the CTA

The CTA outlines 23 specific exemptions from the reporting requirements. Understanding whether your entity qualifies for an exemption is a critical step in compliance planning.

Large Operating Companies

One significant exemption applies to "large operating companies." To qualify, a company must meet all of the following criteria:

• Size: Employ more than 20 full-time employees in the United States.
• Revenue: Report more than $5 million in gross receipts or sales on the prior year's U.S. federal tax return, excluding income from foreign sources.
• Physical Presence: Have an operating presence at a physical office within the United States.

Companies that meet these requirements are exempt because they are considered less likely to be used for illicit purposes due to their transparency and size.

Inactive Companies

Certain inactive entities may also be exempt if they meet all six of the following criteria:

• Were in existence on or before January 1, 2020.
• Are not engaged in active business operations.
• Are not owned, directly or indirectly, by a foreign person.
• Have not experienced any change in ownership in the preceding 12 months.
• Have not sent or received funds greater than $1,000 in the preceding 12 months.
• Do not hold any kind of assets, including ownership interests in other entities.

Entities that qualify under this exemption are generally dormant and pose a lower risk of facilitating illegal activities.

Other Exemptions

Additional exemptions include:

• Publicly traded companies registered under the Securities Exchange Act of 1934.
• Banks and credit unions regulated by federal banking agencies.
• Securities brokers or dealers registered with the Securities and Exchange Commission.
• Public accounting firms registered under section 102 of the Sarbanes-Oxley Act.
• Nonprofit organizations, including 501(c)(3) entities, charities, and religious organizations.
• Certain trusts and political organizations that meet specific criteria.

These exemptions exist because these entities are already subject to substantial federal and state regulation and reporting requirements, reducing the need for additional BOI reporting.

Beneficial Ownership Information Reporting Requirements

Definition of a Beneficial Owner

A "beneficial owner" is any individual who, directly or indirectly:

• Exercises substantial control over the reporting company; or
• Owns or controls at least 25% of the ownership interests of the reporting company.

Substantial control can include senior officers like presidents, chief executive officers, chief financial officers, chief operating officers, general counsels, and any other individual who performs similar functions or makes significant decisions on behalf of the company.

Information Required to Be Reported

For the Reporting Company:

• Full legal name of the entity.
• Any trade name or "doing business as" (DBA) names.
• Business street address.
• State or Tribal jurisdiction of formation or registration.
• Taxpayer Identification Number (TIN), such as an Employer Identification Number (EIN).

For Each Beneficial Owner:

• Full legal name.
• Date of birth.
• Residential street address (no P.O. boxes).
• A unique identifying number from an acceptable identification document, such as:
• U.S. passport.
• State-issued driver's license or identification card.
• Tribal identification document.
• For foreign individuals, a foreign passport.
• An image of the identification document showing the unique number.

Reporting Deadlines

The deadlines for submitting BOI reports are as follows:

• Existing Entities (formed before January 1, 2024): Must file by January 1, 2025.
• New Entities (formed between January 1 and December 31, 2024): Must file within 90 days of formation or registration.
• New Entities (formed on or after January 1, 2025): Must file within 30 days of formation or registration.

If there are changes to previously reported information, such as a change in beneficial ownership or a new senior officer appointment, the entity must file an updated report within 30 days of the change.

Company Applicants

For entities formed or registered on or after January 1, 2024, the BOI report must also include information about "company applicants." A company applicant is the individual who directly files the document that creates the entity (e.g., articles of incorporation). Up to two company applicants may need to be disclosed, including individuals assisting in the formation process.

Penalties for Non-Compliance

Non-compliance with the CTA's reporting requirements carries significant consequences:

• Civil penalties of up to $500 per day, capped at $10,000.
• Criminal penalties, including fines and imprisonment for up to two years.

Providing false information or willfully failing to report can trigger these penalties. However, entities may avoid penalties if they correct any inaccuracies within 90 days of the report's original deadline.

Legal Challenges and Updates

Recent Court Rulings

The CTA has faced legal scrutiny regarding its constitutionality. In March 2024, a U.S. District Court Judge in Alabama declared the CTA unconstitutional, asserting that it exceeds Congress's legislative authority. This ruling was a result of a lawsuit filed by the National Small Business Association (NSBA).

However, the court's decision applies only to the plaintiffs in that case, namely, the NSBA and its members. For all other entities, the CTA remains in effect, and the BOI reporting requirements are still enforceable.

Implications for Businesses

Despite ongoing legal challenges, the CTA's provisions are active and enforceable for the vast majority of businesses. Companies should not assume that the act will be invalidated or that compliance obligations will be lifted. Instead, entities are advised to proceed with compliance planning to meet the upcoming deadlines.

"The evolving landscape of the CTA underscores the importance of proactive compliance. Businesses must stay informed and prepared to meet these requirements to avoid penalties and ensure transparency in their operations." — Test Miller, Partner at MBN & Company LLP

How MBN & Company LLP Can Help

Navigating the complexities of the Corporate Transparency Act can be a daunting task for any business. At MBN & Company LLP, our Tax Services team is dedicated to helping clients understand their obligations and develop effective compliance strategies.

Our services include:

• Compliance Assessment: We help determine whether your entity falls under the CTA's reporting requirements or qualifies for an exemption.
• Beneficial Owner Identification: Our experts assist in identifying individuals who meet the definition of a beneficial owner or company applicant.
• BOI Report Preparation and Filing: We guide you through the process of gathering the required information and submitting accurate BOI reports to FinCEN.
• Ongoing Compliance Support: We provide continuous support to ensure timely updates and changes are reported as required by the CTA.
• Regulatory Updates: Our team stays abreast of legal developments related to the CTA, keeping you informed of any changes that may affect your reporting obligations.

With over 60 professionals specializing in tax services, including certified public accountants and tax law experts, MBN & Company LLP offers comprehensive support tailored to your business needs. We emphasize timely communication, proactive planning, and a deep understanding of the regulatory landscape to help you achieve compliance while focusing on your core business objectives.

Conclusion

The Corporate Transparency Act represents a significant shift in corporate reporting obligations, aiming to enhance transparency and combat illicit activities. For many businesses, this means new responsibilities and the need for diligent compliance efforts. Understanding whether your company is subject to these requirements, what information you must report, and the specific deadlines is critical.

By staying informed and seeking expert guidance, businesses can navigate these changes effectively. MBN & Company LLP stands ready to assist you in understanding and meeting your obligations under the CTA, ensuring that you remain compliant and avoid unnecessary penalties.

About the Author

Test Miller
Partner
Email: millerjamesc@live.com

With over 20 years of experience in tax advisory and compliance, Test Miller is a trusted leader in delivering comprehensive tax solutions to businesses of all sizes. As a Partner at MBN & Company LLP, Test specializes in helping clients navigate complex tax regulations, including the Corporate Transparency Act. His expertise spans corporate tax planning, mergers and acquisitions, and international tax strategies. Known for his proactive approach, Test partners closely with clients to develop customized tax strategies that align with their long-term business goals.