Who should care? Small businesses. What’s at risk? Steep penalties for non-compliance.
In recent years, U.S. authorities have stepped up their efforts to combat illegal financial activities, with an emphasis on financial transparency. A significant development in this area is the Corporate Transparency Act (CTA). This legislation is set to introduce new reporting obligations for many businesses, starting from January 2024. This blog post will explore the details of this law, its purpose, and its implications for existing and newly formed entities.
Understanding the Corporate Transparency Act
The CTA (P.L. 116-283; CTA §6401 et seq.; 31 U.S.C. §5336) is a part of the broader Anti-Money Laundering Act of 2020, aimed at preventing money laundering and illicit finance activities. Starting from January 1, 2024, corporations, limited liability companies, limited partnerships, and other entities that file formation documents with a state’s Secretary of State office or similar government agencies will be mandated to file a report with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). In some states, this requirement might extend to a sole proprietorship with a DBA.
The central objective of this report is to gather data on the entity’s “beneficial owners” — those who directly or indirectly own more than 25% of the entity’s ownership interests or exercise substantial control over the reporting company.
Who Will This Law Affect?
This legislation will impact a vast majority of small and medium-sized businesses, including those that are formed with the Secretary of State’s office. FinCEN estimates that over 32 million existing entities will need to comply, and nearly five million new entities will be required to file reports each year.
While this law represents a broad measure, there are exceptions. For instance, general partnerships, most trusts, tax-exempt entities, and businesses already under stringent regulation, such as public accounting firms, securities dealers, insurance companies, among others, are not currently subject to these rules. Large operating companies, defined as businesses with 20 or more full-time U.S. employees and at least $5 million in gross receipts reported on their prior-year federal income tax return, are also exempt. In total, the governing regulations contain 23 exemptions (Treas. Regs. §1010.380(c)).
What Needs to Be Reported?
Entities must provide a comprehensive set of data about their beneficial owners. The information includes the owner’s legal name, residential address, date of birth, and unique identifier number from a non-expired passport, driver’s license, or state identification card. Additionally, entities must provide an image of any of these forms of documentation to FinCEN and offer updated copies when a passport or driver’s license is renewed.
Any changes to this data, such as a change in address due to marriage or divorce, or a change in beneficial ownership due to a sale or transfer, must be reported within 30 days or face potential penalties (Treas. Regs. §1010.380(b)).
Timeline and Reporting Method
For domestic entities formed or foreign entities registered after 2023, they will be required to file the report within 30 calendar days of the earlier of the date on which:
They receive actual notice that they are registered to do business; or
The Secretary of State (or similar office) provides public notice that the reporting company is registered to do business.
For entities in existence before January 1, 2024, the initial report is not required until January 1, 2025. The report will be filed electronically via a secure system accessible through FinCEN’s website, similar to the FBAR system.
Penalties for Non-Compliance
The law stipulates severe penalties for failure to adhere to the reporting requirements. The willful failure to report information and timely update any changed information could result in fines of up to $500 per day. If criminal charges are brought, the penalties can increase to fines of up to $10,000 and/or imprisonment (31 U.S.C. §5336(h)). Both the beneficial owner and the entity could face these penalties.
Final Thoughts
The introduction of the Corporate Transparency Act marks a significant shift in the U.S. regulatory landscape. The implications of this legislation are far-reaching, affecting a broad range of businesses and entities. As the deadline approaches, businesses must work proactively to understand their obligations under the new law and ensure their compliance.
Navigating these changes may seem daunting, but help is available. As your trusted CPA, we are committed to guiding you through these changes and ensuring your business remains compliant. Please reach out if you have any questions or concerns about how the Corporate Transparency Act may impact your business.
Remember, transparency isn’t just about compliance; it’s about demonstrating your business’s integrity and commitment to lawful conduct—a quality that customers, investors, and partners greatly appreciate. By embracing the requirements of the Corporate Transparency Act, you’re not just abiding by the law; you’re also enhancing the reputation of your business.
Stay informed, stay compliant, and stay ahead!
