THE CORPORATE TRANSPARENCY ACT’S IMPACT ON SMALL BUSINESS

Stephanie Melnick

News,
Legal Updates

The Corporate Transparency Act (CTA), effective January 1, 2024, imposes reporting requirements on small businesses, their owners, and those involved in creating LLCs, corporations, and other small businesses. Details about the CTA’s purpose, requirements, and deadlines are below. If you’d like assistance understanding how the CTA will affect you or your business, please schedule an exploratory call with our team.

 

What is the Corporate Transparency Act?

The CTA creates a Beneficial Ownership Information (BOI) reporting requirement for the purpose of detecting, preventing, and punishing terrorism, money laundering, and other illicit activity using business entities.
 

What is Beneficial Ownership Information

BOI refers to identifying information about individuals who directly or indirectly own or control a Reporting Company.
 

Which entities will be required to report Beneficial Ownership Information to FinCEN?

Entities required to file BOI reports include corporations, LLCs, and any other entities created by filing with the Wisconsin DFI or similar office in another state and certain foreign entities which are registered to do business in the U.S.


 
Who is a Beneficial Owner of a Reporting Company?

A Beneficial Owner is a person who directly or indirectly:

  • Exercises substantial control over the Reporting Company or
  • Owns or controls at least 25% of the Reporting Company’s ownership interests.

An individual exercises substantial control if they are or do any of the following:

  • Is a Senior officer (e.g., president, CEO, general counsel, CFO, COO, or any other officer performing a similar function).
  • Has authority to appoint or remove certain officers or a majority of directors of the Reporting Company.
  • Is an important decision maker concerning the Reporting Company’s business, finances, or structure.
  • Exercises any other form of substantial control over the Reporting Company.

See Chapter 2 of FinCEN’s Small Entity Compliance Guide for information about substantial control indicators (chapter 2.1), types of ownership interests (chapter 2.2),  checklists to help determine whether an individual is a Beneficial Owner (chapter 2.3), and exemptions from Beneficial Owner definition e.g., minor children, certain employees, inheritors, and creditors (chapter 2.4).


Who is a Company Applicant of a Reporting Company?

A Company Applicant is either or both of the following:

  • The individual who actually files the document that creates or registers the corporation, LLC, or other entity and
  • If more than one person is involved in the filing, the person who is primarily responsible for directing or controlling the filing.

Only Reporting Companies created on or after January 1, 2024, will need to report their Company Applicants.

Additional examples of Company Applicants are listed in Chapter 3.2 of FinCEN’s Small Entity Compliance Guide.

 


What information will Reporting Companies need to disclose about themselves?

Reporting Companies will need to disclose the following information about themselves:

  • Legal name
  • Trade names (d/b/a)
  • Street address of its principal place of business if in the U.S. or address from which company conducts business in the U.S.
  • Jurisdiction of the entity’s formation
  • Taxpayer identification number

 


What information will Reporting Companies be required to disclose about their Company Applicants?

Reporting Companies will need to report the following information each Company Applicant:

  • Individual’s name;
  • Date of birth;
  • Residential address; and
  • Identifying number from an acceptable document such as a passport or a U.S. driver’s license or identification document.

Reporting Companies will need to upload an image of the identification document used.

 


What information will Reporting Companies
be required to disclose about their Beneficial Owners?

Reporting Companies will have to report the following information each Beneficial Owner:

  • Individual’s name;
  • Date of birth;
  • Residential address; and
  • Identifying number from an acceptable document such as a passport or a U.S. driver’s license or identification document.

Reporting Companies will need to upload an image of the identification document used.

 


What are the filing deadlines under the CTA?

  • Entities created or registered before January 1, 2024, will have until January 1, 2025, to file their initial BOI reports.
  • Entities created in 2024 will have 90 days to file their initial BOI reports.
  • Entities created on or after January 1, 2025 will have 30 days to file their BOI reports.

 


Are any entities exempt from the CTA’s reporting requirements?

Yes, publicly traded companies meeting certain requirements, many nonprofits, and certain large operating companies are exempt. The list of exemption categories is available in chapter 1.2 of the Small Entity Compliance Guide.

 


Are Company Applicants required to keep the information they file with FinCEN updated?

Yes, if any required information related to the Reporting Company or its Beneficial Owners changes, the Reporting Company must file an updated report within 30 days. In addition, if the Reporting Company learns of inaccuracy in its report, it must correct same within 30 days of the date it learned about or had reason to know about the error.

 


Are inactive entities required to file Beneficial Ownership Information?

No, if an inactive entity does not have to file with FinCEN. A detailed checklist listing requirements for the inactive entity exemption is available in chapter 1.2 (Exemption #23 at page 14) of the Small Entity Compliance Guide.

 


What are the penalties if a Company Applicant fails to comply with the CTA’s reporting requirements?

If an inaccuracy is corrected within 90 days of the filing deadline for the original report, the CTA creates a safe harbor, and no penalty will be imposed. However, if a person willfully fails to complete or update BOI information or files false or fraudulent BOI, civil penalties of up to $500 per day and criminal penalties including imprisonment for up to 2 years and/or a $10,000 fine may apply. Senior officers of an entity that fails to file a BOI report may be held accountable. In addition, a person could be subject to civil and/or criminal penalties if they cause a Reporting Company not to file or to file false information. For example, if a Beneficial Owner refuses to provide information or provides false information knowing that the information is needed for or will be reported to FinCEN.

 


Under the CTA, who can access Beneficial Ownership Information?

Financial Crimes Enforcement Network (FinCEN) will permit federal, state, local, and tribal officials to obtain BOI for “authorized activities related to national security, intelligence, and law enforcement.” Foreign officials who request access through a U.S. federal government agency may also obtain access to BOI. Financial institutions will also have access to BOI under certain circumstances and with the reporting company’s consent. FinCEN is developing rules that will govern access to and handling of BOI.

 


How will Beneficial Owner Information reports be filed?

BOI information will be reported to FinCEN electronically via a secure filing system accessible through FinCEN’s website. The system is still being developed. No filing fee will be required.

 


How do I stay informed about FinCEN’s development of the BOI filing system and other information?

Once the form for filing BOI is available it will be posted on FinCEN’s beneficial ownership information webpage. You can also sign up to FinCEN updates by email here.

 


Resources

 

 

Stephanie Attorney

Stephanie, owner of Melnick & Melnick, S.C. and self-described law nerd has been practicing law for over 25 years. Stephanie loves taking a deep dive into clients’ businesses to learn what makes them tick. She also relishes a well-written (short and simple) contract and is pleased to draft and negotiate all kinds, including leases, operating agreements, and terms of service.

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