Small business owners there’s one new regulation that needs your immediate attention before the end of 2024. The Corporate Transparency Act (CTA) requires most small businesses operating in the United States to create transparency in business ownership to prevent illicit activities such as money laundering, tax evasion, and financing of terrorism. The CTA is a game changer, aiming to combat financial crimes by requiring businesses to disclose detailed ownership information to the Financial Crimes Enforcement Network (FinCEN).
Failure to comply could result in hefty penalties, so getting this done before the end of the year is critical. This blog post will break down what the CTA is and how you can ensure your small business remains compliant.
The Corporate Transparency Act is part of the Anti-Money Laundering Act of 2020. At its core, the CTA requires most businesses in the U.S. to file a Beneficial Ownership Information (BOI) report with FinCEN, disclosing who owns or controls the business. This information will be stored in a secure database accessible to authorized government agencies and financial institutions.
Who Must Comply with the CTA?
The CTA applies to a broad range of businesses, particularly small and medium-sized entities. If you have less than 20 full-time employees or less than $5 million in annual revenue this regulation is directed towards you.
Businesses Required to File:
- Corporations, LLCs, and Other Entities: Most legal entities formed in the U.S. or registered to do business in the U.S. must comply.
- Small Businesses: The rule targets smaller companies that historically have not been required to disclose ownership information.
Exemptions:
Some businesses are exempt from reporting under the CTA, including:
- Large Companies: Businesses over $5 million in gross receipts or sales, and a physical office in the U.S.
- Regulated Entities: Financial institutions, publicly traded companies, insurance providers, and nonprofits.
- Dormant Entities: Companies that have no active operations, revenue, or employees.
If your business doesn’t fall under an exemption, you’re likely required to file.
What Is Required Under the CTA?
To comply with the CTA, your business must submit a Beneficial Ownership Information (BOI) report to FinCEN.
Key Information to Report:
- Identifying Information for the Company:
- Legal name, trade name (if applicable), address, and EIN or tax ID number.
- Identifying Information for Beneficial Owners:
- Full legal name.
- Date of birth.
- Residential address.
- Unique identifying number (e.g., driver’s license or passport number).
- Information for Company Applicants (if applicable):
- For newly formed entities, the individual who files the registration documents must also be disclosed.
Who Qualifies as a Beneficial Owner?
Anyone who exercises substantial control over the company (e.g., C-Suite officers: President, CEO, COO, Controller, General Counsel, etc.) and any owner(s) holding at least 25% stake in the business. Depending on your company structure, this could be anyone who holds 25% or more of voting rights, equity, stock, capital interest, or similar, including investors.
Ownership held in a trust must report the trustee(s), beneficiaries, and grantor(s).
If ownership is held in a parent/holding company, you must report the owners and directors of the parent company (the goal is to name the actual people at the end of the business structure hierarchy).
Why Is the CTA Important?
The goal of CTA is to make all business comply with disclosure requirements, particularly smaller entities that previously operated under less scrutiny.
- Combatting Financial Crimes: The law helps the government identify and prevent illegal activities by increasing transparency in business ownership.
- Leveling the Playing Field: Larger companies have long been required to disclose ownership information. The CTA extends this requirement to smaller businesses, promoting fairness.
- Protecting National Security: By ensuring all entities disclose ownership, the government can track and prevent potential misuse of U.S. businesses.
What Are the Deadlines for Compliance?
Compliance deadlines vary based on when your business was formed:
- Existing Businesses: Businesses formed before January 1, 2024, must file their BOI report by January 1, 2025.
- Newly Formed Businesses (After January 1, 2024): Entities must file their BOI report within 30 days of registration.
What Are the Penalties for Non-Compliance?
Failing to comply with the CTA can result in severe consequences, including:
- Fines: Up to $500 per day for each day the violation continues, up to a maximum of $10,000.
- Criminal Penalties: Up to two years of imprisonment.
- Reputational Damage: Non-compliance could harm your business’s credibility with financial institutions and partners.
Compliance with the Corporate Transparency Act doesn’t have to be overwhelming. Here are steps to help your business meet the requirements:
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Determine If Your Business Is Subject to the CTA
Review the exemptions and determine if your business falls under the reporting requirements. If you’re unsure, consult a legal or compliance expert.
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Identify Beneficial Owners
Compile a list of individuals who meet the criteria for beneficial ownership or substantial control in your business. Ensure you have accurate information, including their full legal names, addresses, and ID numbers.
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Update Your Business Records
Ensure your records are up-to-date and aligned with the information you’ll report. This is particularly important for entities with complex ownership structures.
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Familiarize Yourself with the Filing Process
Visit FinCEN’s website to understand the BOI reporting process. The system will likely be online, so ensure your information is prepared and ready for submission. Here’s a link to more details on how to efile: https://boiefiling.fincen.gov/resources/BOIR_E-File_Online_Quick_Reference_Guide.pdf
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Consult a Professional
Work with a legal advisor or compliance specialist to ensure your report is accurate and complete. Mistakes in reporting could lead to penalties.
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Plan for Ongoing Compliance
The CTA isn’t a one-time requirement. Businesses must update their BOI reports within 30 days of any ownership changes. Create a process for regularly reviewing and updating your information.
Common Questions About the CTA
Q: Will my ownership information be public?
No. The BOI database is confidential and accessible only to authorized government agencies and financial institutions conducting due diligence.
Q: What if my business doesn’t have any beneficial owners?
If your business doesn’t meet the criteria for beneficial ownership, you may still be required to file a report stating this.
Q: Can I file the report myself, or do I need a professional?
You can file the report yourself, but working with a professional is recommended to ensure accuracy.
How the CTA Impacts Small Businesses
For many small businesses, the CTA introduces an additional layer of compliance. While this may feel like a burden, the law also brings benefits:
- Transparency Builds Trust: Compliance demonstrates professionalism and credibility to partners, clients, and financial institutions.
- Streamlined Operations: Updating records and ownership information ensures your business is well-organized.
- Fairer Playing Field: The CTA levels the regulatory landscape, ensuring businesses of all sizes are held to similar standards.
The Corporate Transparency Act marks a new era in business compliance for small businesses. While the requirements may seem daunting, preparing now can save you from fines, legal trouble, and reputational damage.
By understanding the law, disclosing your beneficial owners, and filing your report accurately and on time, you’ll not only stay compliant but also position your business for success in a more transparent and secure marketplace.
If you’re unsure where to start, consult a professional advisor to guide you through the process. Remember, compliance is not just about following the law—it’s about building a stronger, more trustworthy business. Are you ready to ensure your small business is compliant? Don’t wait—start preparing today!
