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The Corporate Transparency Act: A Primer
The Corporate Transparency Act (“CTA”), 31 U.S. Code § 5336,
effective January 1, 2024, has already had a significant impact on small
businesses across the United States. Understanding the complexities of this
act and its potential implications is crucial for small business owners to
avoid potential criminal or civil penalties for non-compliance.
What is the Corporate
Transparency Act?
The CTA was written to combat illicit activities such as tax
fraud, money laundering, and terrorism financing by enhancing the
collection of ownership information for specific U.S. businesses. Under the
CTA, businesses that meet certain criteria must submit a Beneficial
Ownership Information (“BOI”) Report to the U.S. Department of Treasury’s
Financial Crimes Enforcement Network (“FinCEN”), disclosing individuals
associated with the reporting company.
Who is considered a
beneficial owner of a company?
An individual qualifies as a beneficial owner if they
directly or indirectly hold a significant ownership stake in a company.
This individual must have substantial influence over the reporting
company's decisions or operations, own at least 25% of the company's
shares, or exert similar control over the company's equity. While some of
these conditions are clearly objective, others are vague and subject to
interpretation. Sadly, this is very common in federal statutes.
What information must be reported
about a company’s beneficial owners?
Companies registered or established after January 1, 2024,
must provide details about the business, its beneficial owners, and its
company applicants — including owners’ and applicants’ names, addresses,
birthdays, and identification numbers, such as a license or passport
number, and the jurisdiction of the documents.
All reporting companies must provide their legal name and
trademarks, as well as their current U.S. address, which could be either
the address of its main business site or, for foreign-based companies,
their U.S. operational location. They’ll also need to provide a taxpayer
identification number and specify the jurisdiction where they were formed
or registered.
While no annual reporting requirement has been established,
updates to the original filing are necessary when certain changes occur.
Changes in a beneficial owner's address, legal name due to marriage or
divorce, or even the acquisition of a new driver's license may necessitate
an update to a company's BOI report. Even simple, internal operational
changes or a new delegation of authority could require a new BOI report
even if the person performing those duties does not own any of the
business. Further, transferring stock or membership interests from an
individual to the same individual’s trust, even a simple revocable trust,
might qualify as a change in beneficial ownership and thus require filing
an updated BOI report.
What is the beneficial ownership
information reporting process?
Starting January 1, 2024, reporting companies will have a
limited time to file their initial BOI reports. For qualifying reporting
companies established before the above date, the filing deadline is January
1, 2025. Those created between January 1, 2024, and January 1, 2025, will
have 90 days from either the actual notice of formation or public
announcement, whichever comes first, to file. Businesses established on or
after January 1, 2025, will have 30 days from notification or public
announcement of their formation to submit their first report to FinCEN.
Two types of reporting companies will be required to submit
BOI reports: domestic reporting companies, including LLCs, corporations,
and other entities formed through filing with a secretary of state or a
comparable office in the U.S.; and foreign reporting companies that are
registered to conduct business in the United States through filing with a
secretary of state or an equivalent office.
Where can business owners get
help with their beneficial ownership information reports?
While companies may choose to file their own BOI reports, it
may be a wise idea to seek professional assistance to ensure they’re
completed on time and to FinCEN’s standards. Many accounting and tax
professionals will be unable to provide this service due to potential
limitations with their errors and omission policies.
Challenges to the CTA
As of this writing, there have been multiple challenges to
the CTA including one successful injunction in the US District Court for
the Northern District of Alabama. While the injunction pertains only to the
named plaintiffs, i.e., it is not national in scope, another case or a
decision from the Eleventh Circuit Court of Appeals in Atlanta might alter
this analysis. I’ll have more on this in the next blog update.
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This article is provided for informational purposes only and
is not intended as legal advice. For further inquiry, please feel free to
contact me at the email or telephone listed below.
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