New Era of Business Transparency: Understanding the Corporate Transparency Act

ARTICLE | September 04, 2024

Title: Unpacking the Corporate Transparency Act: Beneficial Ownership Information Reporting Requirements

As a part of the National Defense Authorization Act, the Corporate Transparency Act (CTA) has garnered significant attention in the fiscal year 2021. The CTA has been enacted to counter illicit activities such as money laundering and terrorism financing, bringing about an enhanced level of transparency in business operations. The primary mechanism driving this transparency is the requirement for companies to disclose Beneficial Ownership Information (BOI).

Commencing from January 1, 2024, the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) started accepting BOI reports. The CTA is not a tax law but instead forms a part of the Bank Secrecy Act, aimed at governing record-keeping and report filing related to specific financial transactions. Consequently, BOI reports are not submitted to the IRS but to FinCEN. 

Who Needs to Report?

Not every business entity is required to disclose BOI. The reporting requirements apply to companies that are corporations or limited liability companies (LLCs) formed within the U.S. or foreign companies registered to do business within the U.S. Moreover, entities created by filing a document with a secretary of state or a similar office under a state or Native American tribe's law also fall under the reporting companies.

However, certain entities are exempt from these reporting requirements. The CTA lists 23 categories of exemptions, including publicly traded companies, banks, credit unions, securities brokers/dealers, public accounting firms, tax-exempt entities, certain large operating entities, and certain inactive entities, among others.

Defining Beneficial Owners

A beneficial owner, according to the CTA, is an individual who wields substantial control over a reporting company or owns or controls at least 25 percent of the company's ownership interests. This can include company executives and senior officers, regardless of their formal titles or ownership stakes in the company. The term "substantial control" is further defined in the detailed CTA regulations.

Reporting Guidelines and Deadlines

The information that needs to be reported includes the full name of the reporting company, its business address, state or tribal jurisdiction of formation, IRS taxpayer identification number (TIN), and any trade name. Additionally, data on the beneficial owners, like their full legal name, date of birth, residential or business address, unique identifying number from an acceptable identification document (e.g., driver’s license, passport), and an image of such document, must also be disclosed.

The deadlines for submitting BOI reports vary. Companies formed before January 1, 2024, have until January 1, 2025, to submit their initial reports. Those formed between January 1, 2024, and December 31, 2024, must file within 90 days. For companies formed after December 31, 2024, reports must be filed within 30 days. Any changes to the company or its beneficial owners must be reported within 30 days.

Consequences of Non-Compliance

Failure to comply with the BOI reporting requirements may result in both civil and criminal penalties. A willful violation can lead to a civil penalty of up to $500 per day the violation continues, a fine of up to $10,000, and a prison sentence of up to two years.

In conclusion, the Corporate Transparency Act is a significant step towards improving business transparency and combating illicit financial activities. Businesses should familiarize themselves with the reporting requirements, ensure they have gathered all the necessary information, and make timely submissions to avoid hefty penalties. If in doubt, always consult with a legal counsel or professional advisor to remain compliant with the CTA.