Corporate Transparency Act: Shining Light on this New Compliance Requirement, Part 1

Professional reading about the Corporate Transparency Act on the FinCEN website

In this blog post we’re going to break down the basics of the Corporate Transparency Act, which introduces a new federal compliance requirement that will impact many businesses operating in the United States. Back in September of 2022, a 99-page final rule implementing the new reporting requirement was issued. While the lengthy document provides a lot of information, it’s important to note that many pieces of the CTA puzzle are still left to be determined by future rulings. For now, let’s get started on what we do know.

What is the Corporate Transparency Act (CTA):
The Corporate Transparency Act (CTA) is intended to support national security, intelligence and law enforcement efforts to combat money laundering, drug trafficking, and other financial crimes. The CTA and its implementing regulations will provide essential information to law enforcement, national security agencies, and others to help prevent criminals, terrorists, proliferators, and corrupt oligarchs from hiding illicit money or other property in the United States. Additionally, the act intends to bring the U.S. into compliance with international anti-money laundering standards.

How exactly will the CTA do that? Well, the new reporting requirements will give law enforcement agencies greater access to the true identity of the “beneficial owners” of these entities. As such, making it harder for criminals to hide their activity. Who are these “beneficial owners”? In a nutshell, they are the individual natural persons who own or control the companies. We’ll cover that area in more depth a little later.

Unfortunately, the legislation means new compliance/reporting requirements for many companies. So, let’s dive into that…

Who is and isn’t impacted by the CTA:
The Corporate Transparency Act will require most corporations, limited liability companies (LLCs), or similar entities—created in or registered to do business in the U.S.—to submit a filing to Financial Crimes Enforcement Network (FinCEN). In fact, millions of small and medium-sized businesses will be affected by the new compliance rule. FinCEN estimates that over 32 million existing companies will be impacted, as well as an additional 5 million per year thereafter.

That said, there are some 23+ types of entities that will be exempt from the impending reporting requirements. Those exempt entities are primarily those already more heavily regulated (i.e. financial institutions, public utilities, charities, accounting firms, etc.). Additionally, large reporting companies—those with over 20 full-time employees (in the U.S.) and with $5 million in gross receipts for the prior year—are also exempt. Finally, any entity that is not actively engaged in business, that does not own a subsidiary entity and has not sent or received funds over $1,000 is also exempt. But if that’s the case, you may want to consider administratively dissolving that entity—which is something we can assist with (learn more here).

While the CTA will have minimal impact on these exempt entities, it is likely that they will still have to file an initial report claiming the exemption status. Likewise, if at any time they lose their exemption status, they will need to file a report within 30 days of losing that status.

For those that will be affected, the rule breaks down those entities into two categories: “existing entities,” meaning those formed before January 1, 2024, and “new entities,” which are those formed after December 31, 2023. While both types are subject to reporting requirements, it varies slightly depending on the category.

What has to be reported?
For “new entities” subject to the new reporting requirements, the ruling describes who must file a beneficial ownership information (BOI) report, what information must be reported, and when a report is due. The rule requires new entities aka “reporting companies” to file reports with FinCEN that identify two categories of individuals: (1) the beneficial owners of the entity; and (2) company applicants. For “existing entities,” they only have to worry about identifying beneficial owner information; not that of company applicants.

Who is a beneficial owner?
Under the rule, a beneficial owner includes any individual who, directly or indirectly, (1) exercises substantial control over a reporting company, and/or (2) owns or controls at least 25 percent of the ownership interests of a reporting company. The final rule clarifies in more detail the terms “substantial control” and “ownership interest.” Essentially, the rule captures anyone who can direct, determine, have substantial influence, or make important decisions on behalf of the entity. 

What about a company applicant?
The ruling defines “company applicants” as the individual who directly files the document that first registers the entity to do business in the United States and the individual who is primarily responsible for directing or controlling the filing of the relevant document by another. There is still some debate over this area and we are awaiting further clarity from future rulings. That said, we do know that the number of company applicants will be limited to two.

When is the initial report due?
“Existing entities,” any of those formed before January 1, 2024, must file an initial report by January 1, 2025. That initial report is not required to include company applicant information. As for “new companies,” they must file an initial report 30 day after their formation and they must include company applicant information. Prepping this information before sending the initial formation document to the Secretary of State (or similar state agency), might be a good idea just to ensure that BOI deadline is met.

When do you have to update your report?
Once the initial report has been filed, both existing and new reporting companies will have 30 days from a change in beneficial ownership information to file updates.

What happens if you don’t meet the reporting requirements?
Failure to report the correct information or to update previously reported information can result in steep consequences. These may include civil penalties up to $500 per day until the violation is corrected, as well as a criminal fine of up to $10,000 and/or two years in prison. If incorrect or incomplete information is submitted, reporting companies can submit a correction (within 90 days of the original report) to prevent civil or criminal liability.

Who can view the information:
Beneficial ownership information will not be housed in a publicly accessible registry. In fact, FinCEN will be responsible for storing the information in a secure database. Unless you are with a law enforcement agency, you will not have access to this data. That said, financial institutions may gain access to specific information with authorization from the reporting company.

What we don’t know:
There are still ambiguities in several critical aspects of the CTA. FinCEN is still in the process of developing the infrastructure and system needed to administer the requirements as well as to store the information securely. Additionally, FinCEN is in the process of creating the forms by which entities will report the required information. As such, we aren’t yet certain what the process will look like as of yet.

More information on the topic:
We strongly recommend that anyone assisting in or directing the formation of entities (either directly or via a trusted service provider) read the final rule. Visit the FinCEN website to learn more. To read the final rule in its entirety, go here.