Shedding Light on the Corporate Transparency Act

This year ushers in a new set of reporting requirements for closely held corporations, limited liability companies, and partnerships under the Corporate Transparency Act (CTA). Beginning in 2024, business owners will need to determine whether these new compliance obligations apply and, if so, take the appropriate action to avoid potential criminal and civil penalties.

What is the Corporate Transparency Act?

The CTA, enacted under the National Defense Authorization Act for Fiscal Year 2021, establishes a comprehensive national database identifying individuals with significant stakes or control in various domestic and foreign companies. Crafted to thwart the misuse of corporations, LLCs, and other entities, the new legislation affects smaller companies disproportionately, as they are typically subject to less regulation than larger companies. LLCs and partnerships formed for investment (e.g., real estate holding entities) or estate planning purposes will also be subject to the scrutiny of these new reporting requirements.

With the CTA taking effect as of January 1, 2024, it is crucial that business owners grasp the implications and requirements of this federal law. The CTA mandates that reporting companies provide specific information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of the Treasury.

Who is subject to the reporting requirement?

Under the CTA, a “reporting company,” as defined by the act, is subject to the reporting requirements. The act defines a reporting company as a domestic or foreign entity registered with the state’s secretary of state or other governmental authority unless an exemption applies. This definition includes corporations, LLCs, and other entities. It excludes 23 different types of entities that are already subject to significant federal or state regulation. The exemption for large operating companies—defined by a physical presence in the US, 20 or more full-time employees, and gross receipts of $5 million or more in the preceding year—places the focus on small businesses.

What information must be disclosed?

The CTA requires reporting companies to submit detailed information about the company, its “beneficial owners,” and the “company applicant” to FinCEN. The various parties are defined following the information requirements.

Reporting Company Information:

• The full legal name of the reporting company, as well as any other trade names or DBA used by the reporting company;
• The street address of the reporting company’s principal place of business (if located in the US)—a post office box or the address of a third party (such as a formation agent) does not satisfy this requirement;
• The state, territory, possession, or tribal jurisdiction of a domestic reporting company’s formation or a foreign reporting company’s first US registration;
• The taxpayer identification number (TIN) or employer identification number (EIN) for all domestic-reporting companies and foreign-reporting companies possessing a TIN or EIN, otherwise a foreign-reporting company’s taxpayer identification number issued by a foreign jurisdiction and the name of that jurisdiction.

Beneficial Owner and Company Applicant Information:

• Full legal name
• Date of birth
• Current residential or business street address
• A unique identifying number from an acceptable, nonexpired identification document (e.g., US passport number, state-issued driver’s license, or identification card issued by a state or local government of an Indian tribe). A nonexpired foreign passport may be used only if none of the preceding documentation is available.
• An image of the government-issued photo ID from which the unique identifying number came is required.

Definitions:

Beneficial Owner: As defined by the CTA, a beneficial owner is anyone who owns or controls (directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise) at least 25% of the entity’s ownership interests or has substantial control over its operational decisions.

Ownership Interest: Ownership is not as simple or straightforward as it may sound. Ownership includes equity, stock, voting rights, capital or profit interest, convertible instruments, options to buy or sell, and any other instrument establishing ownership.

Substantial Control: Individuals with substantial control include senior officers, those with authority to appoint or remove senior officers or a majority of the board, decision-makers regarding structure, finances, or business nature, and those exerting control through flexible corporate structures.

There are five exemptions from the definition of beneficial owners:

• Minor children (however, the company must instead provide the CTA-required information of a parent or legal guardian)
• Individuals acting as nominees on behalf of another individual
• Employees who are strictly employees and not senior officers
• Individuals whose only interest in a reporting company is a future inheritance right
• Creditors of a reporting company
• Individuals who provide ordinary, arms-length advisory or other third-party professional services to a reporting company

Company Applicant: The CTA defines a company applicant as the person who files the document to create the company with the secretary of state or other governmental authority, first registers a foreign reporting company with a governmental authority, or directs/controls the filing of such a document by another. A reporting company is not required to provide FinCEN with updates on the company applicant after the initial report. The reporting requirement for company applicants only applies to entities formed on January 1, 2024, or later.

How do these new reporting requirements apply to Trusts or Similar Arrangements?

Revocable and irrevocable trusts are not included in the definition of reporting entities under the CTA. Charitable entities, including private foundations, are specifically exempt from the reporting requirements. However, trusts that own or control at least 25% of a reporting entity or trustees who exercise substantial control over a reporting entity will cause the trustee, potentially other trust power holders (e.g., trust protector, individuals with a currently exercisable power of appointment, etc.), and some beneficiaries to fall under the definition of beneficial owners. We recommend that qualified legal counsel be engaged to help navigate the complexity of the reporting requirements for irrevocable trusts under the CTA.

When do reports need to be filed?

The CTA officially took effect on January 1, 2024. Existing companies have until January 1, 2025, to file their beneficial ownership information. New entities formed in 2024 must file within 90 days of creation or registration. New entities formed on or after January 1, 2025, must file within 30 days of creation.

Once the initial filing is made, there are no annual reporting requirements. However, companies must update the report if there are changes concerning the reporting company or its beneficial owners. The reporting company must file an updated report within 30 days of the change.

What are the penalties for non-compliance?

The CTA imposes severe penalties for willful non-compliance or reporting false or fraudulent information. These include civil penalties of up to $500 per day and criminal penalties of imprisonment for up to two years and/or a fine of up to $10,000.

Who can access the information?

Given concerns about privacy, knowing who can access the information submitted under the CTA is essential. FinCEN has implemented security measures to protect sensitive data, and individuals won’t be required to provide their social security numbers. Access to this information is restricted to federal, state, local, and tribal officials for matters of national security, intelligence, or law enforcement. Financial institutions can also access this information in specific circumstances, with the entity’s consent.

Can I keep my personal information confidential from the reporting company?

Beneficial owners, as defined by the CTA, may apply for a FinCEN ID. This unique identifier streamlines the reporting process and enhances transparency by providing a standardized means of tracking beneficial ownership across different reporting companies. By utilizing a FinCEN ID, the beneficial owner avoids disclosing personal information to the reporting company. We recommend that clients complete the simple FinCEN ID application.

How do I file?

The Beneficial Ownership Information (BOI) website published by FinCEN includes a link to file a report using the BOI e-filing system. Reporting companies will find the link, FAQs, and more at fincen.gov/boi.

What should I do next?

• Contact your CPA or attorney, who may have already reached out to you about the new reporting requirements. They offer essential guidance for compliance. Entities formed before 2024 have until 2025 to submit.
• Beneficial owners should register separately with FinCEN to ensure privacy. Visit fincen.gov/boi to obtain a FinCEN ID and protect personal information.
• Explore options with legal and tax advisors to simplify company ownership structures. Consider reducing active entities, especially those held as “shelf” entities for future use.
• Work with your attorney to review and update company documentation. Ensure clarity in company records regarding beneficial owners and non-beneficial owners.
• For optimal compliance, plan ownership strategically. For example, passive investors may choose ownership figures below 25% to avoid classification as beneficial owners. Caution is needed to navigate indirect ownership or control rules.

Final Thoughts

Our advisors at Bragg Financial regularly work with clients who own business interests, many of which require reporting under the CTA. Particularly for clients with complex business ownership structures, the new reporting requirements can be complicated. In many instances, it will be prudent to seek professional help to ensure timely and accurate reporting. While we do not advise clients on CTA compliance, we can and often do assist clients in identifying the appropriate professional counsel.

This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.