The Corporate Transparency Act (CTA), the federal initiative to limit money laundering, tax evasion, and other illicit activities, took effect on Jan. 1, 2024. The CTA requires many businesses and their owners to register with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), and for the majority of affected businesses, the deadline for compliance is rapidly approaching.
Persons and companies that violate the CTA’s reporting requirements by failing to report at all or by providing false information to FinCEN may be subject to civil penalties of $500 for each day the violation continues and may also risk additional criminal fines and imprisonment.
For entities formed this year, the initial report must be filed within 90 days of formation. All entities that were created before the start of 2024 have until Dec. 31, 2024 to submit a beneficial ownership information (BOI) report to FinCEN.
The reporting requirements of the CTA mainly apply to smaller entities that might otherwise slip under the federal government’s radar. These companies are classified as having a higher risk of abusing anti-money-laundering rules. While there have been legal challenges to the CTA, FinCEN has indicated that it will continue to enforce the law while these challenges are ongoing.
The CTA states that FinCEN must collect and maintain a federal database for BOI of companies. Unless there is an applicable exemption, all entities that are formed or registered to do business in the U.S. and have registered with the Connecticut Secretary of State (or a similar office in a different state) need to register on the BOI database.
Exemptions
The CTA provides 23 different categories of exemptions, which include exemptions for entities that already make substantial public disclosures, such as financial institutions and tax-exempt charities. Most notably, there is also a more general exemption for larger organizations that have a physical presence in the U.S., employ 20 or more full-time employees, and report more than $5 million in annual revenue to the IRS.
No filing will be required if an entity is exempt, but compliance with the criteria will be determined on a continual basis. For example, if an entity drops below the 20-employee threshold, a prompt filing will be required.
Reporting
FinCEN’s reporting portal can be found at boiefiling.fincen.gov. Entities that are not exempt from BOI reporting must provide the following information for each “beneficial owner” of a company: full legal name, date of birth, current residential or business address, and a copy of an acceptable identification document (such as a driver’s license or passport).
A beneficial owner is considered to be an individual who exercises substantial control over the entity or owns or controls at least 25% of the ownership interests of the entity. Most C-suite officers (for example, CEOs, CFOs, COOs, and general counsel) will fall under the category of possessing substantial control over the entity.
To ensure the purpose of the CTA is being fulfilled, ownership is generally reported at an individual level and not through another reporting company. Thus, the reporting owner may be someone who is several levels up in a company’s organizational chart if holding companies are used.
Reporting ownership interests held by trusts may pose a challenge. A trust by itself is not subject to the reporting requirements under the CTA. However, if a trust holds a 25% or more ownership interest in an organization that is subject to the CTA, the trust’s grantors, trustees, and beneficiaries may all be required to be reported, depending on the specific terms of the trust.
For entities formed in or after 2024, at least one company applicant must also be identified for each entity. A company applicant includes the individual who controls the formation filing with the applicable secretary of state or the individual who actually submits the filing.
Compliance Is Key
Given the CTA’s significant penalties, it is advisable to make your CTA registration a high priority and complete the required filing as soon as possible.
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