In 2024, U.S. Businesses Will Face Heightened Reporting Requirements.

On January 1, 2021, the federal government enacted the Corporate Transparency Act (“CTA”) – which will impact nearly all U.S. businesses within the next few months. Although the CTA was initially passed a few years ago, its reporting requirements go into effect on January 1, 2024. BDB is here to help facilitate your transition into a CTA compliant Corporation.

What is the CTA?
The CTA was established by the Anti-Money Laundering Act of 2020 in hopes of mitigating issues surrounding money laundering and terrorism. The CTA imposes strict reporting requirements on all American business stakeholders, and obligates the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) to establish (and maintain) a national registry of Beneficial Owners who maintain ownership within entities deemed “Reporting Companies”. Under the CTA, Reporting Companies will be required to report “beneficial ownership information” (“BOI”) to FinCEN. This reported information will be available to: (1) U.S. federal agencies for the purpose of national security, intelligence, and/or law enforcement; (2) the U.S. Department of the Treasury; (3) foreign law enforcement agencies and authorities (upon request and approval); (4) state, local, and tribal law enforcement agencies (with court authorization); (5) financial institutions for the purpose of evaluating customer due diligence (while simultaneously having the customer’s consent for information); and (6) federal and state regulators for the purposes of analyzing customer due diligence in financial institutions. All information collected pursuant to the CTA will be stored in a private database that can only be accessed when the limited circumstances permitted by the CTA apply.

What Companies Must Report?
Entities labeled as “Reporting Companies”, and thus subject to the CTA’s reporting requirements include: corporations, limited liability companies, and companies created by filing with a Secretary of State (“SOS”). Entities not formed by filing an SOS – such as a trust or general partnership – do not meet the requisite threshold to qualify as “Reporting Companies” pursuant to the CTA.

What Companies are Exempt?
In addition, the CTA exempts twenty-three forms of entities from its reporting requirements. The bulk of these exempted entities consists of publicly-traded companies, highly regulated companies (i.e., banks, credit unions, securities exchanges, etc.), tax-exempt entities, and “large operating companies”. For a business to be considered a “large operating company”, it must meet the following requirements: (1) maintain a physical presence in the U.S.; (2) employ a minimum of 20 full time employees; and (3) possess gross receipts and/or sales in excess of five million dollars on its federal income tax return.

What Information Must Be Reported?
Under the CTA, all Reporting Companies must report information on all of its Beneficial Owners to FinCEN – specifically, the full legal name, date of birth, residential address, and identification number(?) (typically a passport number or driver’ license – with a copy of the identification document). Additionally, the Reporting Company must file a “Company Application”, which includes information about the company itself – specifically: its legal name, all trade names, formation state, principal place of business address, and taxpayer identification number.

What is a Beneficial Owner?
A Beneficial Owner is an individual who either (1) owns at least 25% of a Reporting Company’s ownership interests, or (2) maintains “substantial control” over a Reporting Company. “Substantial control” is displayed through senior officers capable of exercising authority at a level of a president, chief financial officer, general counsel, chief executive officer, or any other officer with analogous responsibilities within the Reporting Company.

When Must Companies Begin Reporting?
The CTA established two primary reporting timelines – one for new companies, and one for existing companies. All new companies – formed on or after January 1, 2024 – must file BOI reports for both their Beneficial Owners and Company Applicants to FinCEN within 30 calendar days of their formation. All existing Reporting Companies – formed prior to January 1, 2024 – must file BOI reports for their Beneficial Owners no later than January 1, 2025.

What if Information Changes?
As companies evolve, it is crucial its information remain up to date. Thus, if any previously reported information changes, the Reporting Company must file an updated report within thirty calendar days of the change. Such changes include may occur in instances of ownership transfer, death of a Beneficial Owner, shift in exemption qualifications, etc. If an initially exempt company no longer meets said exemption requirements, they must file a report within thirty calendar days. In turn, a Reporting Company can file an updated report if they become eligible for CTA exemption. Another notable aspect of the CTA’s regulations regarding information changes, is its 90-day Safe Harbor Rule. In essence, if a company becomes aware of any inaccuracy in a previously filed report, they can avoid penalties by submitting a corrected report within 90 days of the date of the inaccurate filing.

What are the Penalties?
Failure to abide by the CTA’s reporting requirements will result in penalties. Willfully violating the CTA could result in civil penalties of up to $500 per day, criminal fines of up to $10,000, or imprisonment of up to two years. In addition, unauthorized use (or disclosure) of BOI could result in civil penalties of up to $500 per day, criminal fines of up to $250,000, or even imprisonment of up to five years.

How Should U.S. Businesses Prepare for the CTA?
To prepare for the CTA, all U.S. entities created prior to January 1, 2024 must determine whether they qualify as a Reporting Company. If so, the Reporting Company must then designate its Beneficial Owners, alert them of their designation, and begin collecting their required information and documentation. Additionally, some companies may find it valuable to begin developing procedures that help identify any company changes that are required to be reported to FinCEN.

Overall, the CTA heightens responsibilities placed on business owners – requiring a substantial portion of corporate entities to file Beneficial Owner reports with the federal government. As a result, discussing and implementing effective reporting procedures is essential to avoiding non-compliance penalties.