The Corporate Transparency Act (CTA), a significant piece of legislation affecting U.S.-based businesses, went into effect earlier this year. This new requirement mandates the reporting of beneficial ownership information to combat unlawful activities like money laundering and tax evasion. Small businesses, in particular, need to understand how this regulation impacts them and how to comply to avoid penalties. Here’s what you need to know about the Corporate Transparency Act and its implications for small businesses.
Understanding Beneficial Ownership
A beneficial owner is any individual who directly or indirectly exercises substantial control over a company or owns or controls at least 25% of the company’s ownership interests. This includes individuals who have the power to make significant decisions regarding the company’s operations, finances, or policies. Examples include a company president, a senior officer within the C-suite, someone authorized to appoint or remove senior officers or directors, and otherwise important decision-makers within the reporting company.
Which Businesses Are Affected?
The CTA applies to a wide range of entities, including corporations, limited liability companies (LLCs), and other similar entities created or registered in the U.S. However, there are exemptions for certain types of organizations, such as publicly traded companies, nonprofits, large operating companies with over 20 employees and more than $5 million in gross receipts, and entities already subject to substantial federal or state regulation.
Small businesses, especially those that do not meet the exemption criteria, must comply with the new reporting requirements. This includes many startups, family-owned businesses, and other closely held entities.
What Needs to Be Reported?
Businesses subject to the CTA must report specific information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). The required information includes:
- Full legal name
- Date of birth
- Residential or business street address
- Unique identifying number from an acceptable identification document (such as a passport or driver’s license)
Additionally, companies must provide the name and address of the entity itself, along with details of the person filing the report.
How to Prepare for Reporting
Small businesses should take proactive steps to ensure compliance with the CTA:
- Identify Beneficial Owners: Conduct a thorough review of your ownership structure to identify all individuals who meet the beneficial ownership criteria. Because “beneficial owners” are classified as individuals possessing at least 25% ownership in an entity or exercising significant control over it, identifying these owners can be complex and nuanced. Therefore, it’s important to assess the company’s management structure and contractual agreements to pinpoint who holds ultimate control of the business.
- Gather Required Information: Collect and verify the necessary information for each beneficial owner, ensuring accuracy and completeness.
- Establish Record-Keeping Practices: Maintain organized records of beneficial ownership information, as this will facilitate ongoing compliance and ease the reporting process.
- Consult with Legal and Compliance Experts: Seek guidance from legal and compliance professionals to ensure your business understands and meets all regulatory requirements.
Reporting Deadlines and Penalties
For entities created or registered before January 1, 2024, the initial report must be filed with FinCEN by January 1, 2025. Businesses formed or registered after January 1, 2024, have 90 calendar days from the date of creation or registration to file their initial report.
Any updates or corrections to beneficial ownership information previously filed with FinCEN must be submitted within 30 days. Updates must be filed for each reporting company and each reportable beneficial owner after changes such as a new address update or a new passport or driver’s license number.
Failure to comply with the CTA can result in significant penalties. Willful violations, including providing false information or failing to report, can lead to civil penalties of up to $500 per day and criminal penalties of up to $10,000 and two years in prison.
