The Corporate Transparency Act (CTA) was enacted on January 1, 2021, as part of the National Defense Authorization Act. The Corporate Transparency Act requires certain entities (primarily small and medium-sized businesses) to report “beneficial ownership” information (BOI) to the Financial Crimes Enforcement Network (FinCEN). FinCEN implemented these new reporting requirements for Limited Liability Corporations (LLCs) under the Corporate Transparency Act (CTA) on January 1, 2024.
Here is a breakdown of some essential things business owners need to know about The Corporate Transparency Act and Beneficial Ownership reporting requirements.
What is the Corporate Transparency Act (CTA)?
The CTA was enacted in 2021 as part of the National Defense Authorization Act as part of a broader effort to help fight illegal financial activities such as tax fraud, money laundering, and financing for terrorism. The CTA requires businesses to report details about their beneficial owners—individuals who own or control the company—to FinCEN.
What Does “Beneficial Ownership” Information (BOI) Mean?
Under the CTA, beneficial ownership refers to people who meet any of these requirements:
own or control a company, either directly or indirectly
own 25% or more of the company’s ownership interests
exercises “substantial control” of the company
Since beneficial owners include individuals who exercise control directly or indirectly, beneficial owners may consist of board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control.
What Does “Substantial Control“ Mean?
CTA regulations provide a much more expansive definition of “substantial control” than in the traditional tax sense. An individual exercises “substantial control” if the individual:
serves as a senior officer of the company
has authority over the appointment or removal of any senior officer or a majority of the board
directs, determines, or has substantial influence over important decisions made by the Reporting Company
This means beneficial owners can be senior officers, board members, or other key individuals, even if they are not listed in the official record or have no equity interest in the company.
What Businesses Need to Know
Who Needs to File
Most LLCs, corporations, and similar business structures created by a filing with a Secretary of State (SOS) or equivalent official must file a beneficial ownership report to FinCEN. It is also important to note that the CTA applies to non-U.S. companies that register to do business in the U.S. through a filing with an SOS or equivalent official. Since the definition of a domestic entity under the CTA is extremely broad, additional entity types could be subject to CTA reporting requirements based on individual state law formation practices.
Some businesses, such as publicly traded companies or certain highly regulated businesses, are exempt from FinCEN's requirements. Large operating companies can also avoid these requirements if they meet all of these conditions:
They employ over 20 full-time employees in the U.S.
Based on the previous year's tax return, they earned over $5 million in gross revenue or sales.
They operate from a physical office in the U.S.
What Needs to Be Reported
The report needs to include details about the beneficial owners, such as:
Full legal name
Date of birth
Address
Social Security number (if applicable)
Driver’s license number (or other identification)
Nature and percentage of ownership interest
When to File
The deadline for filing the initial report depends on when your LLC was formed:
For LLCs formed before January 1, 2024: You have until have until January 1, 2025, to file your initial report.
For LLCs formed between January 1, 2024, and January 1, 2025, you must file within 90 days of formation.
For LLCs formed on or after January 1, 2025: The filing deadline is 30 days after formation.
Corrections: Any changes to the beneficial ownership information must be reported to FinCEN within 30 days.
What Happens If You Don’t File
Failing to file a report or filing inaccurate information could result in penalties, including fines of up to $591 per day, up to $10,000 per filing, or even imprisonment for up to two years.
How to Prepare for Compliance with CTA
1. Determine Whether Your Business Is Required to Comply
Check if your business needs to file a beneficial ownership information report based on FinCEN’s rules. Consulting with legal and business advisors to understand your reporting obligations may be helpful.
2. Determine Beneficial Owners
If your company is not exempt, identify individuals who meet FinCEN’s definition of beneficial owners. To determine who your beneficial owners are:
Calculate percentages of “ownership interests”: In many companies with simple capital structures, the answer will be obvious: who meets the 25% threshold? However, suppose your company has as complicated capital structures (given the expansive definition of “ownership interest”), or you have companies in which some ownership interests are held indirectly—for example, through upper-tier investment entities, holding companies, or trusts. In that case, the answer may be less clear and require legal and business guidance.
Identify those who exercise “substantial control” over the company: Given the expansiveness (and vagueness) of the “substantial control” definition, multiple people may well qualify. To identify these individuals, we recommend consulting legal and business advisors.
3. Review Your Operating Agreement
You may need to update your company’s operating agreement to meet FinCEN’s requirements. Consider adding representations, covenants, indemnifications, and consent clauses. For example, the operating agreement may require:
A representation by each shareholder, member, or partner, as applicable, that it will comply with or exempt from the CTA;
A covenant by each shareholder, member, or partner, as applicable, requiring continued compliance with and disclosure under the CTA or to provide evidence of exemption from its requirements;
An indemnification by each shareholder, member, or partner, as applicable, to the company and its other shareholders, members, or partners, as appropriate, for its failure to comply with the CTA or for providing false information; and
Each disclosing party consents for the company to disclose identifying information to FinCEN, to the extent required by law.
The agreement should also hold beneficial owners liable for not complying.
What’s Next
FinCEN’s beneficial ownership requirements are active, with the first significant reporting deadline for January 1, 2025. Work with your legal and business advisory professional to understand how these new requirements affect you to ensure that you are in compliance and avoid any potential penalties.
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