Beneficial ownership

ARTICLE | January 12, 2024

Title: Unveiling the Corporate Transparency Act and Its Impact on Beneficial Ownership Reporting

In an era of increasing scrutiny on corporate governance and transparency, the Corporate Transparency Act (CTA) has emerged as a central piece of legislation that is redefining reporting requirements for businesses. Enacted as part of the National Defense Act for Fiscal Year 2021, the CTA is aimed at combating financial crimes like money laundering and tax evasion by mandating the disclosure of beneficial ownership information. 

The CTA has not been incorporated under the tax code, but rather the Bank Secrecy Act, which mandates record-keeping and reporting on specific financial transactions. Reporting under the CTA will not be directed to the Internal Revenue Service (IRS), but rather to the Financial Crimes Enforcement Network (FinCEN). FinCEN is an agency within the Department of Treasury responsible for combating domestic and international money laundering, terrorist financing, and other financial crimes. 

The disclosure mandate of the CTA requires a broad spectrum of businesses, both domestic and foreign, to report beneficial ownership information (BOI). This includes corporations, limited liability companies (LLCs), and similar entities, created or registered both within the U.S. and abroad. Exceptions exist for entities that are not formed by filing with a secretary of state or similar office, and certain exempt entities such as publicly traded companies, banks, tax-exempt organizations, and certain large operating entities.

One of the major changes introduced by the CTA is the extensive definition of "beneficial ownership". Under the Act, a beneficial owner is any individual who either exercises "substantial control" over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company. This definition goes beyond traditional business ownership and seeks to identify those individuals who wield actual power or derive significant benefits from a business. 

Reporting companies are required to disclose comprehensive information about the company and its beneficial owners. This includes the full legal name of the reporting company, any trade names or DBAs, business address, state or tribal jurisdiction of formation, and IRS Tax Identification Number. Personal information about beneficial owners, such as full legal name, date of birth, current residential or business street address, and identification information is also required. 

The timeline for reporting under the CTA is equally critical. New entities must file within 90 days if created in 2024 and within 30 days if registered after 31st December 2024. Existing entities, those created before 1st January 2024, must file by 1st January 2025. Updates to beneficial ownership information must be filed within 30 days of the change. 

Non-compliance with the CTA could result in severe penalties. This includes daily fines of up to $500, maximum fines of $10,000, and potentially up to two years of imprisonment. Therefore, it is imperative for companies to understand these requirements and ensure their information is accurate, complete, and timely updated.

The introduction of the CTA and its reporting requirements necessitates a reevaluation of existing corporate structures and governance practices. For businesses, especially smaller ones or those with complex ownership structures, this may pose challenges. However, they are critical steps towards fostering a more transparent, responsible, and ethical business environment. 

In conclusion, the Corporate Transparency Act is a groundbreaking move towards eliminating corporate anonymity and promoting transparency in the U.S. business landscape. While it may impose new responsibilities on businesses, it also reinforces the importance of accountability and transparency in corporate practices, contributing to a more robust and ethical business environment.