The Corporate Transparency Act is designed to make it more difficult for individuals or entities to engage in illegal financial activities while hiding behind anonymous or shell companies.
It is part of a broader effort to strengthen anti-money laundering and counter-terrorism financing measures in the United States.
What Is the Corporate Transparency Act?
The Corporate Transparency Act (CTA) is a piece of legislation passed in the United States as part of the National Defense Authorization Act for Fiscal Year 2021. It goes into effect in 2024.
The CTA was enacted to address concerns related to money laundering, terrorist financing, and other illicit activities through the use of anonymous or shell companies. It aims to increase transparency and accountability in corporate ownership interests and management.
Under the CTA, certain entities, including corporations, limited liability companies (LLCs), and similar legal structures, are required to submit a BOI report with information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN).
According to Investopedia, a beneficial owner is someone who enjoys the benefits of ownership interests even though the title to some form of property is in another name.
The FinCEN expands on this a little by defining a beneficial owner as an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests.
This is a bureau of the U.S. Treasury Department. Beneficial owners are individuals who own or have substantial control over the company.
The information to be reported includes the full legal name, date of birth, current address, and unique identification number (such as a driver’s license or passport number) of each beneficial owner.
FinCEN will issue to individuals who have provided FinCEN with their BOI, and to reporting companies that have filed initial BOI reports, a unique identifying number called a FinCEN identifier.
Entities that fall under the CTA’s BOI reporting requirements must also report any changes in beneficial ownership.
Law enforcement agencies and certain government entities will have access to the beneficial ownership information in order to investigate and combat financial crimes. This information is not public and is intended to be used for national security and law enforcement purposes.
What Changes Will Small Business Owners Have to Make in 2024?
To understand the changes small company owners may need to make in 2024 or any subsequent year, you should stay updated on the evolving regulations and guidance related to the CTA.
Some considerations for 2024 include identifying beneficial owners and reporting necessary information related to them. This includes full legal names, dates of birth, addresses, and identification numbers.
Maintaining accurate records of beneficial ownership information and being prepared to provide this information when necessary for law enforcement or regulatory purposes may also be a change for some companies.
Most company owners will need to seek guidance from legal and financial professionals to ensure CTA compliance and to understand the specific requirements that may apply to their entity.
Basically, steps will need to be taken by small business owners to stay informed and prepared for any changes or requirements that may be imposed by the Corporate Transparency Act or related legislation.
This is because specific requirements and regulations may evolve over time. So, it’s important for a company subject to these requirements to stay informed about the latest compliance guidelines and reporting procedures.
What Companies Are Exempt from the Corporate Transparency Act?
The Corporate Transparency Act (CTA) includes exemptions for certain types of entities. While the goal is to increase transparency in corporate ownership, it does not apply to all entities. What type of company qualifies as an exempt entity?
For example, the CTA generally does not apply to publicly traded companies. That’s because they are already subject to comprehensive reporting and disclosure requirements under the securities laws and regulations.
Also, entities that are already subject to regulation and oversight by various financial regulatory agencies are generally exempt. This includes financial institutions such as banks, credit unions, broker-dealers, and registered investment companies.
Tax-exempt organizations under Section 501(c) of the Internal Revenue Code, including 501(c)(3) charitable organizations, are also typically exempt from the CTA.
Entities owned or controlled by federal, state, tribal, or local governments are not subject to the CTA either.
Lastly, a small business entity that has 20 or fewer full-time employees and gross receipts or sales of less than $5 million, may be exempt from certain CTA reporting requirements.
It’s important to note that while these exemptions exist, the specific BOI reporting rules and criteria for exemption may be subject to regulatory interpretations and changes.
To determine whether a particular entity is exempt from the CTA, it’s advisable to consult with legal and financial professionals to stay updated on any guidance.
Does the Corporate Transparency Act apply to nonprofits?
The short answer is, it depends. Designation as a nonprofit entity in and of itself does not make a business an exempt entity as it relates to the Corporate Transparency Act. However, many nonprofits will qualify for exempt status.
For example, tax-exempt organizations under Section 501(c) of the Internal Revenue Code, including 501(c)(3) charitable organizations, are usually exempt from the CTA.
Also, entities that federal, state, tribal, or local governments own or have substantial control over are not subject to the CTA either.
A nonprofit entity will not be subject to the CTA due to meeting one of these exemptions.
Who is affected by the Corporate Transparency Act?
Essentially, any company that does not fall under an exemption to the Corporate Transparency Act is affected by it. That is, any entity designated as a limited liability company (LLC), or similar legal entity.
As of right now, unless a company meets a specific exemption, it is an entity subject to the CTA. As a result, its company owners are affected and subject to its regulations.
Beneficial owners of an entity specifically will be required to ensure the required personal information is submitted and kept up to date.
What is the penalty for violating the Corporate Transparency Act?
Failure to comply with the reporting requirements can result in civil and criminal penalties, including fines and imprisonment.
The exact amount of civil penalties may be substantial, but the law does not specify a fixed amount. They are generally assessed based on the severity of the violation, with fines having the potential to range from thousands to millions of dollars.
Criminal penalties for willful violations are to be imposed upon those who knowingly and willfully provide false or fraudulent beneficial ownership information to FinCEN. They can be subject to criminal prosecution with penalties that may include fines and imprisonment.
