What does the Corporate Transparency Act mean for your Small Business?

The Corporate Transparency Act (CTA) was enacted on January 1, 2021, and marks a significant expansion in U.S. anti-money laundering laws. This legislation is intended to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activities. The CTA imposes new requirements on the vast majority of new and existing businesses. If you are a small business owner, chances are the CTA will impact you.

The CTA mandates that most existing and new corporate entities in the United States must file reports on their beneficial owners with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). These requirements are set to impact millions of business entities, with the reporting regime coming into effect on January 1, 2024.

Who Needs to Report?

Reports must be filed by “reporting companies.” A reporting company is broadly defined to include any entity that is a corporation, a limited liability company, or otherwise created by the filing of a document with a secretary of state or similar office. This definition does not include sole proprietorships or general partnerships.

What Information Needs to Be Reported?

The reports filed under the CTA will include information about the reporting company, its beneficial owners, and "company applicants" who made the filings to create the entity. This information includes:

• Full legal name
• Any trade name or “doing business as” (d/b/a) name
• Current address
• Jurisdiction of formation
• Federal Tax ID number

For individual beneficial owners and company applicants, the following must be reported:

• Full legal name
• Date of birth
• Current address
• Unique identifying number and issuing jurisdiction (e.g., U.S. passport or driver license)
• Image of document with identifying number

Who Are the Beneficial Owners?

Under the CTA, a beneficial owner is any individual who, directly or indirectly, either exercises “substantial control” over the company or owns or controls at least 25% of the company’s ownership interests.

Are There Any Exceptions?

Yes, there are notable exemptions from the definition of “reporting company” under the CTA. These include:

• Regulated financial services companies
• Insurance companies
• Certain accounting firms
• Tax-exempt entities

Additionally, there are exceptions for particularly large companies. To qualify for the exemption, the company must meet all three criteria:

• Employ more than 20 full-time employees in the U.S.
• Have an operating presence at a physical office in the U.S., AND
• Demonstrate more than $5 million in gross receipts or sales on their federal income tax return.

Is this Requirement Ongoing?

Although periodic reports are not required, if there are changes to the beneficial ownership of a company those changes must be reported to FinCEN within 30 days of the change. Further, if a company qualified for an exemption, then for whatever reason becomes unqualified, the company will need an updated report within 30 days of the change.

Will the Information Be Held Confidential?

This information will be stored in a database at FinCEN that is not publicly accessible. The information will be made available to other government agencies but will not be available to members of the public.

Are There Penalties for Not Reporting?

The CTA imposes penalties for noncompliance, including a civil fine of $500 per day while the violation continues and possible criminal punishment of $10,000 and up to two years in prison.

How is this Information Filed with FinCEN?

FinCEN is not accepting reports prior to 2024. It is expected that in January 2024 FinCEN will release and make public the reporting system.

What Does This Mean for My Business?

For most existing small business owners (those fewer than 20 full-time employees and less than $5 million of gross revenue) the CTA means they will need to report beneficial ownership to FinCEN by the end of 2024.

For most new business owners, they will need to report beneficial ownership within 30 days of their organizational documents being filed with the Secretary of State.

Given the substantial penalties involved with failure to report, this added requirement is further reason why a new business owner should rely on an experienced attorney when setting up their new corporation or LLC. Many do-it-yourself websites advertise “low” prices for setting up LLCs or corporations. These websites, however, fail to advise users that “low” advertised price for LLC formation does not include all the items needed to ensure your business is legally compliant.

The corporate law attorneys at Carlson & Blakeman, LLP are here to assist and ensure your compliance with the CTA. If you are a small business owner, or thinking about establishing a small business, we strongly encourage you to contact a member of our corporate law team to discuss and ensure you stay in compliance with the CTA. Give us a call at (402) 858-0996 or fill out our online contact form. Our corporate law attorneys can discuss setting up your LLC or corporation, or ensuring your existing business is fully compliant.