The Corporate Transparency Act: The Ultimate Guide to Compliance

ARTICLE | December 22, 2023

The Corporate Transparency Act (CTA), enacted on January 1, 2021, has brought significant changes to the financial landscape in the United States. This legislation, which is part of the National Defense Authorization Act, is aimed at curbing financial crimes such as money laundering, tax evasion, and terrorism financing. It mandates that certain entities, primarily small and medium-sized businesses, report their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department. 

The Act defines reporting companies as domestic or foreign corporations, limited liability companies, or other entities created by filing a document with a Secretary of State or similar authority. These entities are mandated to report beneficial ownership information (BOI) unless they fall under one of the specified exemptions. The exemptions typically apply to entities already heavily regulated by the government and large operating companies with more than 20 full-time employees, a physical office in the U.S., and gross receipts or sales exceeding $5 million.

Under the CTA, beneficial owners are individuals who either exercise substantial control over a reporting company or own or control at least 25% of its ownership interests. The concept of "substantial control" is comprehensive, including individuals who are senior officers, have authority over the appointment or removal of certain officers or directors, or exert significant influence over the company's decisions. 

The CTA has laid out a phased implementation plan. Companies created or registered after December 31, 2023, must submit their BOI reports within 90 days of their formation or registration. Existing entities, those formed or registered before January 1, 2024, have until January 1, 2025, to file their reports. All changes to previously reported information or inaccuracies discovered in filed reports must be updated within 30 days.

The information required for the BOI report includes the full legal name of the reporting company, its primary place of business in the U.S., state or foreign jurisdiction of formation or registration, and IRS Taxpayer ID Number. For beneficial owners and company applicants, the report must include their full legal name, date of birth, current address, a unique identifying number, and an image of an acceptable identification document.

Non-compliance with the CTA can result in severe penalties. Companies that fail to report complete or updated BOI information or attempt to provide false or fraudulent information may face civil penalties up to $500 per day of violation and criminal penalties, including a $10,000 fine and up to two years of imprisonment.

In light of these new requirements, organizations should assess their obligations under the CTA and take steps to ensure compliance. This may include identifying the beneficial owners within the organization, implementing processes to monitor changes in beneficial owners, and seeking legal guidance to understand the nuances of the Act.

The CTA represents a significant step towards greater financial transparency in the U.S. While it adds new reporting obligations for many businesses, it also provides a tool for combating financial crimes. Companies should proactively address the CTA's requirements to avoid penalties and contribute to the broader goal of financial transparency.