The Corporate Transparency Act (CTA), passed on a bipartisan basis in 2021, introduces new federal reporting requirements aimed at improving corporate transparency and combating illegal financial activities such as money laundering, tax evasion, and fraud.
To increase transparency, the CTA requires most businesses to report on the individuals who directly own or benefit from the activities of the entity. By collecting this information, the CTA provides the government with necessary information to pursue criminals who use illicit shell companies and complex structures to hide their financial crimes from law enforcement. While most individuals are law-abiding citizens, they will nonetheless be required to comply with the reporting requirements.
This post will provide an overview of why the CTA was considered necessary and how individuals can ensure their small business and investment entities comply with the requirements so that they avoid the severe penalties that will be imposed on those who fail to file the necessary information.
Why Was the Corporate Transparency Act Passed?
The purpose of the CTA is to create transparency for law enforcement agencies who are tasked with enforcing laws against money laundering, tax evasion, and fraud. By creating transparency, the CTA intends to deter individuals from committing financial crimes while making it possible for law enforcement to apprehend those who continue to engage in criminal activity.
Historically, anonymous shell companies and complex entity structures have provided cover for individuals trying to evade tax obligations, shelter assets, or bypass financial sanctions. The CTA is directed at these schemes by requiring businesses to report information about their beneficial owners.
Key Takeaway:
The CTA aims at improving corporate transparency to combat illegal financial activities.
Is the Corporate Transparency Act an Invasion of Privacy?
While increased transparency and the deterrence of financial crimes is an honorable objective, requiring the owners of most businesses to report their personal information to the government has led many to question whether the CTA is a government overreach that violates the US Constitution.
Accordingly, the CTA has been challenged in court. The current status of the case is summarized as follows on the Financial Crimes Enforcement Network (FinCEN) website (our emphasis added in bold):
“Updated March 11, 2024
On March 1, 2024, in the case of National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), a federal district court in the Northern District of Alabama, Northeastern Division, entered a final declaratory judgment, concluding that the Corporate Transparency Act exceeds the Constitution’s limits on Congress’s power and enjoining the Department of the Treasury and FinCEN from enforcing the Corporate Transparency Act against the plaintiffs. The Justice Department, on behalf of the Department of the Treasury, filed a Notice of Appeal on March 11, 2024. While this litigation is ongoing, FinCEN will continue to implement the Corporate Transparency Act as required by Congress, while complying with the court’s order. Other than the particular individuals and entities subject to the court’s injunction, as specified below, reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.
FinCEN is complying with the court’s order and will continue to comply with the court’s order for as long as it remains in effect. As a result, the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.
Update [March 11, 2024]: This notice was updated on March 11, 2024, to reflect that a Notice of Appeal has been filed regarding this case.”
To summarize, although the CTA is being challenged and the initial ruling is being appealed, FinCEN is still enforcing the CTA’s requirements against business owners who are not specifically a party to the legal case referenced above.
While many individuals have watched the progress of the case over recent months hoping for resolution, it appears unlikely that there will be resolution before the filing deadlines which means it will be necessary for individuals to proceed and comply with the CTA in order to avoid the severe penalties that will be imposed if the law is upheld.
Key Takeaway:
While the CTA is being challenged in court, it appears FinCEN will still enforce the law against anyone who is not a party to the specific lawsuit.
Who Must File Beneficial Ownership Information Reports?
The CTA requires that “reporting companies” must submit beneficial ownership information (BOI) reports to FinCEN. Reporting companies generally fall under one of two categories:
Domestic Reporting Companies: Domestic reporting companies are corporations, limited liability companies, and any other entities created by filing a document with a secretary of state or any similar office in the United States.
Foreign Reporting Companies: Foreign reporting companies are entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by filing a document with a secretary of state or any similar office.
Exemptions from Filing: The CTA does provide a list of 23 types of entities that are exempt from the CTA’s requirements. The reasoning for exempting certain entities is because they are already subject to significant reporting requirements under other laws, and therefore, have sufficient oversight that reduces the risk the entity will be used for illicit activities The following chart from the BOI Small Entity Compliance Guide details the exempt entities:
Exempt Entities:
Source: https://fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf
For each of the exempt entities, there are questions that must be answered to determine whether they qualify for the specific exemption. The BOI Small Entity Compliance Guide details these questions for individuals who are interested in learning whether their business entity qualifies for a specific exception.
Most individuals who own small businesses or have formed an LLC to hold investment property will find that they do not qualify for an exemption and will have to comply with the reporting requirements.
Key Takeaway:
While some businesses that already have significant reporting requirements may be exempt, most small businesses will have to file a BOI report.
What Information Must Be Reported?
A BOI report requires details on both the reporting company and its beneficial owners. To start, the following information will be required for the reporting entity and each beneficial owner:
Reporting Entity:
- Full legal name
- Doing business as name
- Tax identification number
- Country and state of formation
- Address
Information Required for Each Beneficial Owner:
- Full legal name
- Date of birth
- Residential address
- Identification such as a passport, driver’s license, or other government-issued ID. The BOI report requires an image of the document to be uploaded.
Key Takeaway:
While the process does require providing personal information, the information required is information the government already has.
Who Is Considered a Beneficial Owner?
A beneficial owner is defined by the CTA as:
“an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests”
While the ownership test is reasonably straightforward (except in cases of multiple parent and subsidiary companies), the substantial control test is more nuanced. Section 2.1 in the BOI Small Entity Compliance Guide addresses this question directly.
An individual is considered to exercise substantial control if they meet any of four general criteria:
- The individual is a senior officer;
- The individual has authority to appoint or remove certain officers or a majority of directors of the reporting company;
- The individual is an important decision-maker; or
- The individual has any other form of substantial control over the reporting company
To qualify as a senior officer of an entity, an individual who has the title of or performs a similar function to the President, Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, or General Counsel will automatically qualify.
The BOI Small Entity Compliance Guide goes on to provide the following chart to help individuals understand whether an individual is considered to exercise substantial control over an entity.
Substantial Control Indicators
Source: https://fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf
Since individuals may qualify as beneficial owners either through exercising substantial control or through their ownership interests, it is not uncommon for an entity to have multiple beneficial owners.
While there is no maximum number of beneficial owners per entity, FinCEN expects that all entities are owned or controlled by at least one person. Thus, all entities are expected to have at least one beneficial owner.
Key Takeaway:
A beneficial owner is someone that exercises substantial control over the entity or has at least a 25% ownership interest in the entity.
How to File BOI Reports:
Filing the required BOI reports is a fairly straightforward process for entities with only a few beneficial owners. For larger entities, the biggest challenge is typically obtaining the necessary information from each beneficial owner to include in the filing.
To start, FinCEN has created a short video that walks through the step-by-step process of filing a BOI report. That video can be accessed via the following link: Five-Minute Demo: How to File a Beneficial Ownership Information (BOI) Report
Once an individual is ready to file the report, the first step is to go to the https://fincen.gov/boi website and begin the filing process as shown in the screenshot below.
To file the report, follow the steps outlined in the five-minute video. Individuals who are beneficial owners of multiple entities or who prefer not to provide their personal information to entities who are filing BOI reports on their behalf, can choose to create a FinCEN ID.
Creating a FinCEN ID requires the same personal information that is necessary for filing the BOI report; however, once the FinCEN ID is created, the individual can simply use their unique FinCEN ID to identify themselves on the BOI reports rather than providing all their personal information each time a report is filed.
Key Takeaway:
The BOI can be submitted on the FinCEN website, and individuals who must file multiple BOI reports may find that applying for a FinCEN ID helps streamline the process.
Filing Deadlines for Initial Reports
Filing deadlines for BOI reports are dependent on the date of the entity’s formation.
- Reporting companies created or registered to do business prior to January 1, 2024, will have until January 1, 2025, to file their initial beneficial ownership information report.
- Reporting companies created or registered to do business on or after January 1, 2024, but prior to January 1, 2025, will have 90 days from their formation to file their initial beneficial ownership information report.
- Reporting companies created on or after January 1, 2025, will have 30 days to file their initial beneficial ownership information report.
With the January 1, 2025 deadline fast approaching for businesses that were in existence prior to 2024, individuals will need to prepare and file their BOI reports before the end of the year.
Key Takeaway:
For entities that were in existence prior to January 1, 2024, the deadline for filing the initial BOI report is January 1, 2025.
Are BOI Reports Required to Be Updated If Information Changes?
Reporting companies are required to update their BOI reports whenever there is a change in any of the information required to be reported on the BOI report. The updated report is required to be filed within 30 days of the date the change occurred.
Examples of changes that would necessitate an updated report include (FinCEN FAQ H.2):
- Any change to the reporting entity including registering a new business name;
- Any change to the beneficial owners such as changes in who meets the 25% ownership threshold or changes in executive officers that meet the definition of substantial control;
- Any change to a beneficial owner’s name, address, or unique identifying number previously provided to FinCEN. If a beneficial owner obtained a new driver’s license or other identifying document that includes a changed name, address, or identifying number, the reporting company would have to file an updated beneficial ownership information report with FinCEN including an image of the new identifying document.
Given BOI reports must be updated as information changes, individuals need to continuously monitor whether information has changed which would require an updated report to be filed. When necessary, the updated report must be filed within the allotted 30-day time frame.
Key Takeaway:
The BOI report is required to be updated within 30 days of any changes to the information provided on the previous report.
Penalties for Non-Compliance
The CTA provides both civil and criminal penalties for those who do not comply with the law’s requirements.
An individual who willfully violates the CTA’s reporting requirements may be subject to civil penalties of up to $500 per day the violation continues. This penalty is adjusted annually for inflation and currently sits at $591 per day. Given the penalty is determined daily, this penalty can be substantial for those who fail to file.
Additionally, an individual can be subject to criminal penalties for willfully failing to file BOI reports, willfully filing a false report, or willfully failing to correct or update a previously filed report. The criminal penalties can result in up to 2 years imprisonment and a fine of up to $10,000.
Key Takeaway:
Failing to comply with the CTA’s reporting requirements can result in civil penalties of up to $591 per day and criminal penalties of up to 2 years imprisonment and a $10,000 fine.
Conclusion:
While the CTA intends to increase transparency to deter financial crimes and increase the ability of law enforcement to hold perpetrators accountable, many believe the law’s requirements are an unconstitutional, governmental overreach.
Although the CTA is currently being challenged in court, the final resolution may not be determined before the filing deadlines arrive, and given FinCEN plans to enforce the law against all individuals who are not parties to the specific court case, most reporting companies will have to comply or risk substantial penalties.
For entities that were in existence prior to January 1, 2024, the deadline for filing the initial BOI report is January 1, 2025 which means that individuals who have not filed their BOI reports already should begin compiling the necessary information so that they can file their BOI reports on time.
While filing BOI reports imposes another requirement on small business owners, most will find the process simple and straightforward. While the process does require providing personal information, the information required is information the government typically already has.
The CTA simply helps clarify which individuals are benefiting from specific legal entities to reduce the chances that individuals can hide behind complex entity structures to shield their illegal activities from justice – something that in theory is good for all law-abiding citizens.
For small business owners, their business is an important part of their personal financial situation. If you have a small business and are interested in learning how to integrate your small business into your personal financial planning, our Family CFOs would love learn more and see if what we do is right for you.
