This year, many businesses must comply with the Corporate Transparency Act (CTA), passed into law as part of the National Defense Authorization Act for Fiscal Year 2021. The CTA requires disclosing beneficial ownership information from individuals who own or control a company.
An estimated 32.6 million businesses are expected to comply with this reporting requirement. The beneficial ownership information reporting requirement aims to assist U.S. law enforcement in combating money laundering, terrorism financing, and other illegal activities.
The CTA is not part of the tax code but part of the Bank Secrecy Act, a set of federal laws requiring record-keeping and report filing for certain types of financial transactions. Under the CTA, beneficial ownership information reports will not be filed with the IRS but with the Financial Crimes Enforcement Network (FinCEN), another agency of the Department of Treasury.
Below is some information for your consideration as you prepare to meet this new reporting requirement.
What Entities are Required to Comply With the Beneficial Ownership Information Reporting Requirement?
Entities organized both in the U.S. and outside the U.S. may be subject to the CTA’s reporting requirements. Domestic companies required to report include corporations, limited liability companies (LLCs), or any similar entity created by filing a document with a secretary of state or any similar office under the law of a state or Indian tribe.
Domestic entities not created by filing a document with a secretary of state or similar office are not required to report under the CTA.
Foreign companies required to report under the CTA include corporations, LLCs, or any similar entity formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by filing a document with a secretary of state or similar office.
Are There Any Exemptions From the Filing Requirements?
There are 23 categories of exemptions. Among the exemptions are publicly traded companies, banks and credit unions, securities brokers/dealers, public accounting firms, tax-exempt entities, and certain inactive entities. Please note that these are not blanket exemptions, and many of these entities are already heavily regulated by the government and thus have already disclosed their beneficial ownership information to a government authority.
In addition, certain “large operating entities” are exempt from filing. To qualify for this exemption, the company must:
- Employ more than 20 people in the U.S.;
- Have reported gross revenue (or sales) of over $5M on the prior year’s tax return and
- Be physically present in the U.S.
Who is a Beneficial Owner?
Any individual who, directly or indirectly, either:
- Exercises “substantial control” over a reporting company or
- Owns or controls at least 25 percent of the ownership interests of a reporting company
An individual has substantial control of a reporting company if they direct, determine, or exercise substantial influence over its important decisions. This includes any senior officers of the reporting company, regardless of their formal title or ownership interest in the reporting company.
The detailed CTA regulations define “substantial control” and “ownership interest” further.
When Must Companies File?
Different filing timeframes apply depending on when an entity is registered/formed or if the beneficial owner’s information changes.
- New entities (created/registered in 2024) — must file within 90 days
- New entities (created/registered after 12/31/2024) — must file within 30 days
- Existing entities (created/registered before 1/1/24) — must file by 1/1/25
- Reporting companies that have changes to previously reported information or discover inaccuracies in previously filed reports — must file within 30 days
What Sort of Information is Required to be Reported?
Companies must report the following information: full name of the reporting company, any trade name or doing business as (DBA) name, business address, state or Tribal jurisdiction of formation, and an IRS taxpayer identification number.
Additionally, information on the entity’s beneficial owners and, for newly created entities, the company applicants is required. This information includes the name, birthdate, address, and unique identifying number, as well as issuing jurisdiction from an acceptable identification document (e.g., a driver’s license or passport) and an image of such document.
Risk of Non-Compliance With Beneficial Ownership Information Reporting
Penalties for willfully not complying with the beneficial ownership information reporting requirement can result in criminal and civil penalties of $591 per day and up to $10,000 with up to two years of jail time.
Please get in touch with our office at 561-826-9303 to discuss how best to meet your reporting requirements.