Enacted in 2021, the Corporate Transparency Act (CTA) became effective on January 1 of this year. While the primary goal of this new legislation is to prevent bad actors from exploiting the US financial system, its reporting requirements will impact the majority of small-business owners throughout the country. Let’s delve into this new legislation and unpack its purpose, requirements, and potential impact on you.
What is the CTA?
In simple terms, the CTA was designed to increase transparency regarding who owns and controls entities established in or registered to do business in the United States. The law created a national database, which is to be managed by the Financial Crimes Enforcement Network (FinCEN), to which businesses that meet certain criteria must submit a beneficial ownership information (BOI) report specifically identifying the entity’s “beneficial owners.”
These individuals have either significant ownership of or significant control over the reporting company. FinCEN expects that every reporting company will be able to identify and report at least one beneficial owner, meaning that FinCEN will be able to trace every entity to the person or persons who really own and control it.
Why was it put into effect?
The CTA is the most significant piece of anti-
money laundering legislation to be enacted i the United States since the Patriot Act, bringing US laws in line with established global standards on transparency in corporate ownership. For years, the creation of anonymous shell companies has been used to facilitate crimina activities like money laundering, tax evasion, and terrorist financing.
By shrouding the identity of their true owners, these companies have made it difficult for law enforcement to track illicit activity. The CTA aims to dismantle this veil of secrecy by creating a record of beneficial ownership, enabling authorities to identify potential wrongdoing.
What are the reporting requirements?
While there are specific types of businesses that are not subject to the reporting requirements under the CTA, we expect that most small-business owners will have to file a BOI report with FinCEN. For any entity that was in existence prior to January 1, 2024, the deadline for filing this report is December 31, 2024.
However, any entities that are established during calendar year 2024 will only have 90 days to file a BOI report with FinCEN.
Here is an overview of the required information:
• Reporting Company Information: Basic details like legal name (as well as any d/b/a names), address, tax identification number, jurisdiction of formation, and formation date.
• Beneficial Owner Information: Legal name, date of birth, residential address, and details of a form of identification will be required for each beneficial owner. Each beneficial owner will also be required to upload a copy of that ID. A beneficial owner is defined as someone who owns or controls at least 25% of the company’s shares or voting power or anyone who exerts significant influence over its management, such as a senior officer.
• Company Applicant Information: For companies that were formed on or after January 1, 2024, the report must also include details about the individuals who initially filed the formation paperwork. The applicant will be required to submit the same information as a beneficial owner.
Isn’t the CTA being challenged in court?
On March 1, 2024, a federal judge in Alabama declared the CTA unconstitutional. On March 11, FinCEN filed an appeal. Shortly thereafter, FinCEN released a statement in which they explicitly stated that they will “continue to implement the Corporate Transparency Act as required by Congress” and that the BOI reporting requirements still apply to everyone “other than the particular individuals and entities subject to the court’s injunction.”
Given FinCEN’s position, entities that were created on or after January 1, 2024, should plan to file the required BOI report within the 90-day period regardless of the pending litigation.
How does it affect me?
Invariably, the CTA will have an impact on business owners and those who use LLCs o other entities as part of their financial plans.
Here are a few items that you should know:
• If you own or control a business, you will likely be responsible for filing the BOI report with FinCEN (pending the above- referenced court action).
• Those who have multiple entities can obtain a FinCEN ID, which will streamline the BOI reporting process.
• A new BOI report must be filed within 30 days if there is a change to the BOI or any of the beneficial owners. These subsequent reports can be triggered by seemingly simple items like name or address changes.
• The penalties for noncompliance with the CTA are stiff—up to $500 per day per entity. The act does offer a safe harbor from liability for those who voluntarily and promptly correct any inaccurate information within 90 days of initial submission.
• Accounting firms have stated that they will not handle CTA filing for their clients, as this filing is deemed to be the practice of law in many states.
So what do I do now, and how can Rockwood help?
Our advisory teams are familiar with both the CTA and the pending litigation. During the first quarter of 2024, we have bee reviewing the structure of our clients’ various business entities and when those entities were created. We will be continuing that work this quarter. Over the course of the third and fourth quarters, we will endeavor to support you in fulfilling your obligations under the CTA.
If you have any questions about the CTA and how it may apply to your specific situation—or if you recently created a new entity—please reach out to your Rockwood advisory team.
