What small businesses need to know about the Corporate Transparency Act (CTA)

Did you know that the new year brought new reporting regulations that affect most small businesses? According to the NFIB Research Center, 90% of American small businesses aren't even aware of the change. The update to reporting requirements took effect on January 1, 2024, and they’ll likely affect your company.

This reporting change is part of the Corporate Transparency Act (CTA).

Enacted by Congress in 2021, the CTA is designed to deter illegal financial activities such as money laundering, drug trafficking, terrorism, and tax evasion.

Most companies with 20 or less full-time employees will be required to file beneficial ownership information (BOI), which details who owns or controls the company, with the Financial Crimes Enforcement Network (FinCEN).

Learn more about the beneficial ownership information form and other BOI requirements here, and continue reading this article to stay informed about and compliant with the Corporate Transparency Act.

Who is required to report, and who is exempt

Companies who are required to report to FinCEN are referred to as reporting companies. Reporting companies include:

• Corporations
• Limited Liability Companies (LLCs)
• Limited Partnerships
• Foreign companies registered to do business in any US state
• Any other business who filed documents to do business with the secretary of state or similar legal entity of any state or Indian tribe

Some companies who fit these criteria are exempt because they operate in a regulated industry. Publicly traded companies, non-profit organizations, and investment advisers for instance, already have ownership reporting requirements.

At the time of publication, there are 23 reporting company exemptions:

Larger companies are also exempt from this new reporting requirement. This includes any business entity with more than 20 full-time employees, over $5 million in gross receipts or sales, and that operates from a physical office in the United States.

What information is required from reporting companies

The CTA wants to know who owns or has substantial financial interest in each reporting company. It will establish a comprehensive database of business ownership information for both domestic and foreign entities. The information required includes:

• Full legal name
• Full residential address
• Date of birth
• Unique ID number, jurisdiction, and photo of:
• State driver's license
• US passport
• State, government, or tribal ID

Alternatively, individuals can use the same information to obtain a FinCEN ID. That ID can then be used on all future reports.

This information is required for each individual who qualifies as a beneficial owner.

What, or who, is a beneficial owner

A beneficial owner is a person who has substantial control over the company, and/or someone who owns and controls 25% or more of it.

The beneficial owner definition means that even someone who does not actually own part or all of the company must still be reported to FinCEN. A CEO exerts substantial influence on a company, for instance, as does a board of directors, finance officers, and general legal counsel.

FinCEN's small business compliance guide explains that many senior executive positions fall under the definition, as do a variety of other positions.

Ownership interest is also broadly defined. It includes anyone with equity, stock, options, or voting rights; or someone with interest in the assets and profit of the company.

How and when to report

Reporting began on January 1, 2024. All reports must be submitted through the secure online filing system in development by FinCEN. Business ownership information cannot be reported before then, but both new and existing companies have time to submit reports.

If your company already existed on January 1, 2024, you have one full year to file your initial report. New companies created after January 1, 2024 but before January 1, 2025 must file within 90 calendar days of officially registering the company.

These same rules apply for foreign companies who register to do business in the United States.

What happens when information changes

When anything changes with your company or its beneficial owners, those changes must be reported to FinCEN within 30 calendar days. Since the reporting information required is quite detailed, even seemingly minor details must be reported. Examples include but are not limited to:

• A beneficial owner moves
• An executive officer is replaced
• The company moves offices
• Someone with ownership interest changes their name due to marriage or divorce
• A relevant party increases their holding interest above the 25% level
• A new investor is secured

The only change that doesn't have to be reported is when the company dissolves or ceases doing business.

What are the penalties for noncompliance

There are stiff civil and criminal penalties in place for any company or individual that does not comply with these new regulations. Penalties can include:

• Up to $500 per day in fines
• Up to two years in prison
• And/or a $10,000 fine

The CTA text states that penalties are for willful noncompliance, and providing false or fraudulent information about the company or any individual who fits the legislation's definition of a beneficial owner.

In other words, if you make an honest mistake, you have time to correct the problem without fear or penalty. If you purposely decline to file a BOI report with FinCEN, however, or you purposely file false information, your company and/or its executives can be held to both civil and criminal penalties.

How the information is used and secured

The database that FinCEN is creating will not be available for public use. It's designed to be a secure, private source of information that can only be accessed by specific entities. Access to the information can be requested from any of the following:

• A federal law enforcement agency
• A local, state, or tribal law enforcement agency through a court order
• A federal agency on behalf of a foreign country and in compliance with international agreements
• Financial institutions conducting due diligence authorized by the reporting company

Is your company ready for the CTA?

Most of the companies affected by this new regulation are small businesses. If your company has 20 or less full-time employees, it's likely affected too. If you haven't yet taken action to prepare for these changes, here are several suggestions:

1. Determine who is considered a beneficial owner in your company. Remember, this can include silent partners, significant investors, and your legal team.
2. Contact each person and ensure you have the full, updated information required for submitting to FinCEN. Keep in mind that you also need a copy of the individual's legal photo-ID.
3. If any of your company's beneficial owners objects to providing that information, have them apply for a FinCEN ID directly instead, then they can send that ID number to you for your records.
4. If in doubt, or you're feeling overwhelmed, consult with your legal or financial advisement team.

And if this is all new to you, remember that if your company existed in 2023, you have until January 1, 2025 to file your BOI reports. But if you're just starting your company, you have 90 days from the time your company's establishment is official.