A significant change in the landscape of corporate compliance is on the horizon, and it will affect the vast majority of small businesses. On January 1, 2024, reporting under the Corporate Transparency Act (the “CTA” or “Act”) will officially begin, and business owners will find themselves facing federal reporting obligations unlike anything they have previously experienced. This piece is intended to serve as a brief overview of the CTA’s reporting requirements and to provide some guidance on this new law’s applicability to your business.

To call the CTA a new law would be a misnomer. In fact, the CTA is a direct result of the 2021 National Defense Authorization Act, which was officially enacted on January 1, 2021 — a full three years prior to the beginning of the CTA’s own reporting requirements. In the simplest of terms, the CTA requires certain business entities, known as “Reporting Companies” in the Act’s parlance, to file a registration with the Financial Crimes Enforcement Network (“FinCEN”) of the Department of the Treasury. The registration must include certain personal information of each “Beneficial Owner” of the registering business entity. Under the CTA, the term “Reporting Company” means a corporation, limited liability company (“LLC”) or other similar entity that is either (a) formed as a domestic business entity by filing a document with a secretary of state or similar office under the laws of a state or Indian Tribe, or (b) formed as a foreign business entity and registers to do business in the U.S.

If it seems like the CTA is aiming to bind business entities in an extremely broad sense, you would be correct. This is, in fact, by design. The aim of the CTA is to enhance transparency in the structure and ownership of business entities to combat money laundering by creating a sort of national registry — not just of business entities themselves, but of the business entities’ owners. Despite the breadth of the CTA, there are some notable exceptions, the full list of which can be found at 31 U.S.C. §5336(a)(11)(B). Entities including governmental authorities, entities that already have significant oversight (such as banks and credit unions), tax-exempt entities, large operating companies, subsidiaries of the foregoing, and inactive entities (those that were inactive before January 1, 2021) are among those exempt from the CTA’s reporting requirements. While there is no need to report an exemption to FinCEN, it is important to confirm that your entity is exempt, as an inadvertent yet incorrect failure to register could expose you to potential civil and/or criminal penalties for failing to abide by the CTA’s reporting requirements. Additionally, if your business was previously exempt from reporting under the CTA but loses that exempt status, you will have 30 calendar days to bring the business into compliance.

As discussed above, the overarching goal of the CTA is to gather information on Reporting Companies and their Beneficial Owners. A Beneficial Owner is any individual (i.e. a person, not another business entity) who either (a) has at least a 25% ownership interest in a Reporting Company, or (b) exercises substantial control over a Reporting Company. As usual, certain exceptions apply. Minors, individuals acting as a nominee, intermediary, custodian or agent on behalf of another individual, employees, individuals whose only interest in a Reporting Company is through a right of inheritance (though the reporting requirement will become applicable once the interest is actually inherited), and secured creditors are all exempt from the CTA’s definition of “Beneficial Owner.”

When it comes to the information that will be reported to FinCEN, Reporting Companies must disclose (i) the full legal name of the business entity, (ii) any trade names or DBAs, (iii) the current address of the business entity (for domestic business entities, this will be the principal place of business), (iv) the jurisdiction of formation/registration, (v) the business entity’s tax ID, (vi) the required Beneficial Owner information, and (vii) “Company Applicant” information (but only for businesses formed after January 1, 2024). A Reporting Company may have up to two (2) Company Applicants, and the term “Company Applicant” is defined by the CTA to mean (i) the individual who directs or controls the filing of the documents creating the entity, and (ii) the individual who directly files the documents creating the entity.

The information required on Beneficial Owners includes (i) the full legal name of the Beneficial Owner, (ii) the Beneficial Owner’s date of birth, (iii) the Beneficial Owner’s residential address, and (iv) the ID number on a non-expired, U.S.-issued photo ID (e.g. a driver’s license or passport) and a scan of the same. Similarly, the CTA requires information on Company Applicants’ (i) full legal name, (ii) date of birth, (iii) business address, and (iv) ID number on a non-expired, U.S.-issued photo ID and a scan of the same. It is important to update Beneficial Owner information, although a Reporting Company is not responsible for updating Company Applicant information.

While the CTA’s reporting requirements formally go into effect on January 1, 2024, it is important to “check your local listings,” as the deadline to provide the required information depends on when an entity was formed. For Reporting Companies formed prior to January 1, 2024, the registration and supporting information must be filed by January 1, 2025. Businesses formed on or after January 1, 2024, but before December 31, 2024, must filed within 90 days of formation. Then, any business formed on or after January 1, 2025, will have 30 days to make the required filings.

While the CTA serves a valid federal interest in reducing financial crimes, business owners may very well find the contours of its reporting requirements staggering. In no event should you ignore this important piece of federal legislation, but, before proceeding on your own, it is best to seek the advice of an attorney who can explain in detail what is required of you and your business. Your attorney may also be able to either assist you directly with making the filings required by the CTA or direct you to a service agency that would be able to help you navigate the Act’s filing requirements.