The Corporate Transparency Act (the “CTA”) is a new federal law that became effective on January 1, 2024. Aiming to provide law enforcement with the tools and information to detect, prevent, and punish financial misconduct via business entities, this new law requires certain businesses to report “Beneficial Ownership Information” (or BOI) to the US Department of the Treasury’s Financial Crimes and Enforcement Network (FinCEN). Since failure to comply with these new obligations could bring civil and criminal penalties, it is essential for business owners to be informed of the law and to comply with the CTA’s reporting requirements.
● Who needs to report?
The term “reporting companies” includes all entities—unless an exemption applies—that are formed or registered to do business in the United States by filing a document with a secretary of state or a similar office (e.g., corporations, LLCs, LLPs). If an entity was not created by such a state filing (e.g., most trusts), the entity is not subject to the CTA.
● Who is exempt?
There are 23 categories of entities that are exempt from CTA’s reporting requirements. These entities include, among others, public companies, investment advisers, insurance companies, and tax-exempt entities. Generally, exempt entities are those subject to regulation by another authority. As a result, the CTA will disproportionately impact small businesses, with an estimated 32 million small businesses projected to be classified as “reporting companies” in 2024 alone.
● What gets reported?
A reporting company will be required to submit BOI reports to FinCEN. Each BOI report must disclose certain information about the reporting company (name, address, taxpayer identification number) and its “beneficial owners” and “applicants” (full legal name, date of birth, address, and passport or driver’s license number, with a photocopy of such documents).
“Beneficial owners” include any individual who, directly or indirectly, (i) exercises substantial control over the entity (e.g., any senior officer) or (ii) owns or controls 25% or more of the ownership interests. “Applicants” include a maximum of two individuals: (i) the person who directly files the formation or registration document of the reporting company and (ii) the person who was primarily responsible for directing such filing. Entities formed before January 1, 2024, will not need to provide BOI reports for their applicants.
● When to report?
Existing entities formed before January 1, 2024, will have until January 1, 2025, to file their initial BOI report. New entities formed on or after January 1, 2024, must file their initial BOI report within 90 calendar days after their formation. New entities formed on or after January 1, 2025, must file their initial BOI report within 30 calendar days.
After the initial report, there is no annual or quarterly filing requirement. As ownership of the entity changes, however, reporting companies must file an amendment of the BOI report within 30 days after any such changes.
● What are the penalties for non-compliance?
The CTA establishes penalties for failing to provide accurate and up-to-date information to FinCEN. An individual may be held liable under the CTA if he caused the failure or was a senior officer at the time of the failure. Violators may face (a) civil penalties of up to $500 per day for each violation or (b) criminal penalties of up to $10,000 and imprisonment for up to two years.
Please contact your Kang Haggerty attorneys if you have any questions. We are happy to assist you in matters concerning the CTA, including any reporting obligations you may have.