Small businesses have been rushing to better understand the implications of the newly enacted Corporate Transparency Act (“CTA”), which entered into effect on January 1, 2024. The CTA applies to over 32 million businesses in the United States, including many companies that filed a document with any secretary of state office. The CTA includes a new reporting requirement for small businesses who must now report information about their owners to the federal government.
What is the Corporate Transparency Act (“CTA”)?
The CTA is a part of an overall attempt by Congress to help curb corruption and money laundering. The legislation was enacted as part of the Anti-Money Laundering Act of 2020 to stop the flow of illicit money that may transpire through various corporate schemes or entities that on the surface appear to be legitimate. The purpose of the CTA’s reporting requirement is to identify entities and individuals who use their corporate structures to evade taxes or hide wealth accumulated through fraudulent means. The CTA includes enhanced whistleblower protections for anyone who cooperates in exposing sham or corrupt businesses and also imposes steep fines and penalties for anyone trying to evade it.
What is the new reporting requirement?
The CTA includes a new reporting requirement for many businesses, including small businesses who may already be exempt from other federal reporting requirements but will have to comply with the CTA. The law requires “reporting companies” to file a Beneficial Ownership Information (“BOI”) report which includes sensitive information about the owners of the company, such as their birthdate and identifying documents. Companies like limited liability companies and most small businesses that are registered to transact business through a secretary of state’s office will now need to file a BOI report. All BOI reports can be completed online through the U.S. Treasury Department’s Financial Crimes Enforcement Network’s (FinCEN) website at https://boiefiling.fincen.gov/fileboir. FinCEN will be responsible for receiving and processing all BOI reports.
Which companies have to file a BOI report?
While millions of businesses will now need to file a BOI report, some in heavily regulated sectors, like the financial industry or “large” businesses won’t. The businesses that won’t need to file a BOI report include those that:
- Have over 20 employees;
- Filed a tax return with more than $5 million in gross receipts or sales in the previous year; and
- Have an operating presence at a physical office within the United States.
Who is a beneficial owner for purposes of filing a BOI report?
The BOI report asks for information about beneficial owners of each company, meaning someone who either 1) directly or indirectly exercises substantial control over the reporting company, or 2) owns or controls 25% or more of the ownership interests of such reporting company. The BOI’s request for information on beneficial owners in essence asks for three things:
- Name and identifying information of beneficial owners;
- Their ID number on a qualifying document; and
- Their picture from the ID uploaded to the portal.
There are multiple ways that an individual can exercise “substantial control” over a business, including:
- Serving as a senior officer;
- Having authority over the appointment or removal of any senior officer (or a majority of the board of directors);
- Directs, determines or has substantial control over key decisions of the company, including those related to the company’s principal assets, the composition (or dissolution) of the company, major expenditures or debts, compensation plans for senior officers, decision-making capacity over significant contracts, and the ability to affect foundational or decision-making documents of the company.
Separately, “ownership interests” of the beneficial owner are defined as interests that may include:
- Equity, stock, joint venture or business trust;
- Any capital or profit interest in an entity;
- Any instrument convertible into a share or instrument described in 1 and 2;
- Option or privilege of buying or selling any share or instrument described in points 1 and 2;
- Any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.
CTA’s sanctions
Any company that fails to comply with the CTA (and is required to), could face substantial fines and penalties as a result. Failure to comply with the CTA can result in civil penalties of up to $500 a day. In addition, anyone who provides false information willingly can be fined up to $10,000 and subjected to up to two years in prison.
What is the current status of the CTA and how long do I have before I need to file a BOI?
A recent court decision declared the CTA to be unconstitutional, suspending its enforcement at least temporarily and placing the law in legal limbo for now. While currently there is no active reporting requirement given the recent decision, newly formed entities (since January 1, 2024) may want to continue to file their BOI report with FinCEN given that noncompliance could result in extremely high penalties should CTA ultimately be upheld. For businesses that existed prior to January 1, 2024, they will need to file their initial BOI by December 31, 2024. Once filed, a company will have up to 30 days to amend their BOI.
Rincker Law is able to provide guidance and assistance in this area. Please contact us at cari@rinckerlaw.com if you would like to set-up a consultation.