Clarifying the Corporate Transparency Act
Introduction
What is the Corporate Transparency Act (CTA)? That’s a great question! This piece of legislation, part of Congress’s National Defense Authorization Act (NDAA) passed in the beginning of 2021, is aimed at improving business ownership transparency, particularly for small businesses (3). In addition to this aim, its goal is to increase awareness regarding an entity’s structure and potential illicit activities, including tax fraud. We will review pertinent information including the provisions of the act, who qualifies, and what action you, or your accountant, need to take to ensure you are an informed and prepared business owner.
Beneficial Ownership
The CTA takes effect January 1, 2024, and requires disclosure of beneficial ownership information for certain entities from their respective owners. A beneficial owner is another way to say who has the power or substantial authority to exercise control over the entity. The Act refers to individuals who, either directly or indirectly, own at least 25% or exercise substantial control in the form of capital or profit interests (1). Substantial control denotes individuals who possess roles such as a senior officer, or an important decision-maker, and can make choices that impact the business, finances, and structure. It is important to note that an individual who is an intermediatory or acts on behalf of another may possess indirect ownership. Reporting companies, such as corporations, LLCs or LLPs, are not restricted to being domestic, but include foreign entities too. If a foreign company is registered for business in any state or jurisdiction, like a domestic entity that files a document with the secretary of state or similar office, the foreign entity qualifies. However, there are exempt businesses, including nonprofit entities, banks, insurance companies, and governmental authorities that already undergo identification requirements. A full list of exempt entities is provided via the reference link at the end of this email (1).
BOI Report
The document, called the Beneficial Ownership Information (BOI) report, will be filed with the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the U.S Department of the Treasury responsible for safeguarding the financial system (2). This document is not filed with the Internal Revenue Service and will not be publicly available. For most entities, they will have one year—until January 1, 2025—to file their reports, but for those created after the effective date, it will be 30 days after receiving notice of creation (1). Furthermore, if there has been a change of beneficial ownership, reports must be updated within 30 days of a change, such as a sale, acquisition, or merger. Alongside this, if a company becomes aware of an error in its BOI report, it has 30 days to file a corrected report to avoid civil and criminal penalties.
Report Information
The pertinent information filed in the report includes both the information about the business and the respective beneficial owners. For the business, details include the name or trade name, address, place of formation, location of principal place of business, and taxpayer identification number (TIN). For each respective beneficial owner, details include full legal name, date of birth, residential address, and a uniquely identifying document, such as a driver’s license accompanied with an image of that document (1). This information is also required for newly formed businesses and for individuals who become beneficial owners. Reporting entities have the option of requesting a FinCEN identifier, which is a unique identifier used to classify information according to which business it belongs.
Company Applicants
Companies registered on and after January 1, 2024, will be required to report company applicants. There are two classes of company applicants, and individuals will fall into one of the two categories. The first is the individual who directly files the document that creates or registers the entity and the second is the individual who is responsible for directing or controlling the filing (1). It is important to note that most companies will not need to undergo this process as they were created before January 1, 2024. As a point of clarification, accountants and lawyers could be company applicants depending on their involvement with creating or registering a reporting company.
Penalties
Understandably, there are penalties for filing false or incomplete information, as well as failing to file an updated report. These include both civil and criminal penalties depending on the nature of the offense. Typically fines range from $500 per day until corrected to $10,000 per violation and jail time up to two years (3). It is best to speak with legal counsel to fully ensure compliance is met.
Conclusion
Overall, the Corporate Transparency Act (CTA) is a new addition to the landscape of legislation aimed at reducing financial malpractice while increasing awareness about the ownership behind businesses. This increased awareness takes the form of the BOI report, which is intended to document the beneficial owners of certain qualifying entities. This new provision, taking effect as of January 1, 2024, will require those beneficial owners to file the Beneficial Ownership Information (BOI) report with FinCEN in a timely manner to ensure compliance. While the steps necessary to obtain the required information may be challenging, the action taken will not only enhance an individual’s understanding of a business but strengthen the larger network of domestic and international financial transparency.
References
- Beneficial Ownership Information Reporting | FinCEN.gov
- What We Do | FinCEN.gov
What to know about the Corporate Transparency Act (thomsonreuters.com)
