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What is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) is a federal law that takes effect on January 1, 2024 and requires small businesses to file a Beneficial Ownership Information Report (see below) with FinCEN. The law was passed in 2021 as part of the National Defense Authorization Act. In short, the purpose of the act is to prevent and fight tax fraud, money laundering, financing of terrorism, and corruption. The law requires small to midsize businesses that qualify to report specific information about their business’s ownership interests and update that information as it changes.

Businesses that started before January 1, 2024 that are required to comply with the law have until the end of the year in 2024 to comply and file their report. New businesses that start up after January 1, 2024, have 90 days to file their report. Businesses that start up after January 1, 2025, have 30 days to file their report.

Which businesses does the Corporate Transparency Act Impact?

Millions of businesses are impacted by the Corporate Transparency Act requirements. Any domestic business that is registered with a state and doesn’t meet the narrow exemptions must file a report with FinCEN. Foreign business entities registered in any state are also required to file a report with FinCEN. Effectively, this means that an LLC, or corporation, or any other entity type that requires a filing with a state, may be required to file a report under the new law.

Fortunately, there is no filing fee and filing the report promises to be a simple task that can be completed online without revealing any trade secrets or complicated corporate finance details. Qualifying businesses are only asked to identify their basic information as well as the identities of those with significant ownership interests. The CTA calls these individuals beneficial owners, and explains that this includes anyone who has substantial control over the business, or has a 25% or higher ownership interest. 

Companies that are required to file a report under the CTA are referred to as “reporting companies.” The list of exempt companies that are not required to report includes mainly financial businesses and mid-to-large size businesses. The following are the exempt business types: 

  • Large operating company.
  • Inactive entity.
  • Tax-exempt entity.
  • Investment company or investment adviser.
  • Venture capital fund adviser.
  • Securities reporting issuer.
  • Governmental authority.
  • Bank.
  • Credit union.
  • Depository institution holding company.
  • Money services business.
  • Broker or dealer in securities.
  • Securities exchange or clearing agency.
  • Other Exchange Act registered entity.
  • Insurance company.
  • State-licensed insurance producer.
  • Commodity Exchange Act registered entity.
  • Accounting firm.
  • Public utility.
  • Financial market utility.
  • Pooled investment vehicle.
  • Entity assisting a tax-exempt entity.
  • Subsidiary of certain exempt entities.

The first exemption type for “large operating company” requires a business to maintain 20 or more full time employees and annual gross receipts of $5 million or more. Given these narrow exemptions, millions of small businesses are now required to file a report with FinCEN and keep that information current.

What is a Beneficial Ownership Information Report?

A Beneficial Ownership Information Report, called a BOI, contains the information required by the CTA about the ownership interests of a business. The report is completed online at FinCEN’s website. The Beneficial Ownership Information Report includes the names of individuals that exercise substantial control over a separate business entity, or individuals who own 25% or more of a business entity. Owners may opt to obtain an individual identification number that can be submitted instead of their names and other identifying information.

This means that the owners of LLCs and corporations, or any other form of business that requires registering or filing with a state, are required to file a BOI. For businesses that start after January 1, 2025, a report must be filed within 30 days. Businesses that start between January 1, 2024 and the end of 2024, have 90 days to file their report. For businesses that have been in operation prior to 2024, they have until the end of the year in 2024 to file their report with FinCEN.

What changes does my business have to make because of the Corporate Transparency Act?

Changes to your business are unlikely, however, many small business owners are now required to file a Beneficial Ownership Information Report, and keep that report updated, with FinCEN. The information collected is not publicly searchable. It is only available to federal agencies and state and local law enforcement. 

Businesses that started before January 1, 2024 are required to file their report with FinCEN by the end of 2024. Businesses that start anytime in 2024 have 90 days to file their report with FinCEN. Businesses that start after January 1, 2025, have 30 days to file their report.

It is important for business owners to meet this reporting requirement as there are financial and potential criminal penalties for failing to do so. Also, when the information contained in the report changes, business owners are required to update their reports within 30 days.

What are the penalties for not complying with the Corporate Transparency Act?

Legal compliance is an important part of every business, and the CTA has penalties to make sure business owners comply. Qualifying businesses that fail to report within the initial reporting period of January 1, 2024 to January 1, 2025, or within 90 days after registering their business for new businesses that start in 2024, can face financial penalties of up to $500 per day. Officers and owners of the company may also be held criminally liable and could face up to a 2 year prison sentence and a $10,000 fine.

If you have more questions about whether your business is required to comply with the Corporate Transparency Act or other laws, reach out to a Rocket Lawyer network attorney for affordable legal advice.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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