What the “F” is the Corporate Transparency Act & Why Should Businesses Care About It?
The Corporate Transparency Act (CTA)—what the F is it? The CTA is a law that went into effect on January 1, 2024. The law requires US businesses to report information about their beneficial owners to the US Department of Treasury's Financial Crimes Enforcement Network (FinCEN). The report is called a Beneficial Ownership Information Report, or BOI report. Business entities that must file a BOI report are called "Reporting Companies." And in the simplest terms, "Beneficial Owners" are the individuals who ultimately own or control a business.
Pro tip: Tens of millions of US businesses are required to file a BOI report with FinCEN. Including us! We have filed our report. We know what is required. And we can help you navigate the CTA. Contact us here and let’s talk about it.
Click here to access the FinCEN website where you can apply for a FinCEN ID (discussed below) and file your BOI report..
WHAT IS THE PURPOSE OF THE CTA?
While most business owners are unimpressed with being required to file and update a new report, the CTA's goal is admirable: to end the use of the US as a haven for "shell" (i.e., fake) companies used to commit illegal activities like money laundering, funding of terrorists, and financial and tax fraud. In short, the CTA is an anti-money laundering law.
DISCLAIMER
Because the CTA is a new law, no one knows how it will work in practice--literally, no one. (Not even lawyers who think we know everything.) Business owners should expect changes to the requirements, and you may have questions that need answers. We'll all have to be patient while this plays out.
WHAT INFORMATION DO BUSINESS OWNERS HAVE TO REPORT?
The categories of information reporting companies must disclose differ depending on when the business was formed or registered.
A company created before January 1, 2024, must provide information about (1) the company and (2) its beneficial owners.
A company created on or after January 1, 2024, must provide information about (1) the company, (2) its beneficial owners, and (3) its company applicants.
**Company Applicant(s) are (1) the individual who directly files the document that creates the reporting company and (2) the individual who is primarily responsible for directing or controlling the filing if more than one individual is involved in the filing of the document. (Example: if you hire an attorney/CPA/consultant to file your LLC documents, you and your attorney/CPA/consultant are company applicants.)
The information that must be provided for the reporting company, beneficial owner(s), and company applicant(s) is listed below.
Reporting Company Information:
Full legal name of the reporting company,
Any trade or "doing business as" names,
Current and complete street address of the reporting company's principal place of business,
State or jurisdiction of formation of the reporting company, and
Taxpayer identification number for the reporting company.
Beneficial Owner Information (must be provided for each beneficial owner):
Full legal name,
Date of birth,
Current and complete residential street address,
The unique identifying number and the issuing jurisdiction from either a current (i) US passport, (ii) state or local ID document, (iii) driver's license, or (iv) a foreign passport (if the individual has none of i, ii, or iii), and
An image of the document used in (4). Pro tip: Whichever ID document you choose to use must not be expired.
Pro tip: A beneficial owner must be an individual (i.e., not another entity).
Company Applicant information (for businesses formed after January 1, 2024):
Full legal name,
Date of birth,
Current and complete street address of the Company Applicant's business,
The unique identifying number and the issuing jurisdiction from either a current (i) US passport, (ii) state or local ID document, (iii) driver's license, or (iv) a foreign passport (if the individual has none of i, ii, or iii), and
An image of the document used in (4). Pro tip: Whichever ID document you choose to use must not be expired.
HOW DO I KNOW IF I HAVE TO REPORT BENEFICIAL OWNERSHIP INFORMATION FOR MY BUSINESS?
Every corporation, partnership, LLC, business trust, or other entity created by filing formation (i.e., registration) documents with a Secretary of State (or similar office) must file a BOI report unless the business qualifies for an exemption.
Pro tip: Tens of millions of US businesses do not qualify for an exemption and must file a BOI report. (How do we know? We had to file one too!)
The CTA identifies 23 entity types exempt from the BOI reporting requirement. Most CTA exemptions are for highly regulated businesses, like publicly traded companies, insurance companies, banks, tax-exempt entities (e.g., 501(c) organizations), inactive entities, and accounting firms. You can find the complete list of exempt entities here.
Some of our clients fall under the exemption for what the CTA calls "Large Operating Companies" (and I like to call "big-ish businesses"). If your LLC, corporation, limited partnership, business trust, etc. meets the CTA requirements of a large operating company, you do not have to file a BOI report.
To qualify as a "Large Operating Company," your business must:
Employ at least 21 full-time employees in the US (full-time means at least 30 hours/week)
Pro tip: “In the US” means just that. If you have 19 US-based full-time employees and 2 full-time employees in Venezuela (or another non-US country), you do not qualify as a large operating company.
Have an operational presence at a physical office in the US. Pro tip: If you have 21 employees in the US who operate remotely and no physical office, you do not qualify.
Have filed, in the previous year, a US federal income tax return reporting more than $5 million in gross receipts. Pro tip: If you exclude gross receipts from foreign sources, your US-sourced gross receipts must be at least $5 million, or you do not qualify.
HOLDING COMPANIES ARE NOT INACTIVE ENTITIES
Careful readers might have caught that inactive entities are exempt from filing a BOI report. Holding companies, however, are not inactive entities under the CTA. To be considered "inactive," an entity must satisfy 6 requirements:
In existence on or before January 1, 2020,
Not engaged in active business,
Not owned by a non-US citizen or resident,
No change in ownership within the prior 12 months,
In the previous 12 months, has not received more than $1,000 through any account (e.g., Venmo, Zelle, bank account), and
Does not have any other assets (of any kind) in the US or any foreign country
"Any other assets" includes any interest in another company. That means that intellectual property (IP) or real estate holding companies that "hold" IP/real estate assets do not qualify as inactive. Even though no funds flow through or are exchanged by a holding company, the CTA considers it an active entity. Said another way, holding companies are reporting companies under the CTA and must identify their beneficial owners.
Pro tip: To avoid potential problems, we recommend dissolving non-operational or failed businesses.
TAX STATUS DOES NOT MATTER
We want to nip in the bud a common misconception: the tax status of your business (e.g., S Corp) does not matter for BOI reporting purposes. In other words, if your LLC is taxed as an S Corp, you must file a BOI report (unless you satisfy one of the 23 exemptions).
HOW THE "H" DO I FIGURE OUT WHO IS A BENEFICIAL OWNER OF MY COMPANY?
OK, so you know you have to file a BOI report. Now what? What does "beneficial owner" even mean? And how are you supposed to determine who beneficially owns your business?
The CTA defines a beneficial owner as any individual who directly or indirectly:
Exercises substantial control over a reporting company or
Owns or controls at least 25 percent of the ownership interests of a reporting company.
Pro tip: Reporting companies do not have to report the reason (i.e., substantial control or ownership interests) that an individual is a beneficial owner. The law requires you to report the WHO, not the WHY.
Determining who has substantial control over a reporting company could be tricky, depending on your entity type and ownership / organizational structure. Whether an individual has substantial control for purposes of beneficial ownership depends on things like:
Whether the individual has appointment or removal authority (e.g., board of directors, C-suite, managers)
Whether the individual is a senior officer (C-suite or any person who directs, determines, or has substantial influence over important decisions)
Whether the individual is an important decision-maker for the company
Whether the individual is a trustee (e.g., business trusts)
Whether the individual has power of attorney for the reporting company
An individual does not have to have a fancy title (e.g., CEO, CFO, COO) to have substantial control. If an individual makes important business decisions for your company, they are a beneficial owner under the CTA, and you must disclose them.
Let's move on to what qualifies as 25% ownership interest for beneficial ownership. The CTA's view of ownership is broad and includes:
LLC membership
Interest in a partnership
Interest in (or right to share in) the profits (even if an individual doesn't have ownership)
Stock or equity interest in a non-public corporation (regardless of whether it confers voting rights)
Options to purchase or sell ownership interests
Any other instrument, contract, arrangement, understanding, or relationship to establish ownership
As with most rules, there are exceptions. The following individuals are not beneficial owners of a reporting company under the CTA:
A minor child (but the parent of the child must be identified as a beneficial owner on the report)
An individual merely acting on behalf of a beneficial owner (i.e., an agent or advisor)
An employee acting solely as an employee (not a senior officer, no control/decision-making power for the company)
An individual holding only a future interest in the reporting company through a right of inheritance
Creditors of a reporting company (unless they exert substantial control over, or have a 25% or greater ownership interest, in the company)
HOW DO I FILE A BOI REPORT?
Businesses should file their initial BOI report and all updates and corrections electronically with FinCEN through the reporting system on FinCEN’s website. Click here to access the site. There is no filing fee for the initial BOI or updated/corrected reports.
WHEN DO I FILE MY INITIAL BOI REPORT?
Businesses formed before January 1, 2024, have until January 1, 2025, to file their initial BOI report. Businesses formed on or after January 1, 2024, must file their initial BOI report within 90 days of the acceptance of the company's formation/registration filing. Businesses formed on or after January 1, 2025, must file their initial BOI report within 30 days of the acceptance of the company's formation or registration filing.
Pro tip: The BOI report is not a periodic report. Once you file your initial BOI report, you are done. Unless, of course, the information you reported on your initial BOI report changes or requires correction and then you will file a report update or corrected report.
PRO FILING TIP: OBTAIN A FINCEN IDENTIFIER
Before filing our BOI report, we applied for a unique number identifier called a FinCEN ID. Using a FinCEN ID simplified the BOI report process for us. We also recommend that our clients obtain a FinCEN ID. The FinCEN ID allows beneficial owners/company applicants to report their personal information directly to the Treasury. Each beneficial owner (and company applicant, where applicable) can obtain a FinCEN ID that the reporting company can use on the BOI report.
You can apply for a FinCEN ID on FinCEN's website. To obtain one, beneficial owners (or company applicants) will have to provide the same personal information (e.g., full legal name, birth date, current residential address) required by the BOI report, including the necessary ID document (e.g., driver's license, passport).
WHAT IF I NEED TO UPDATE OR CORRECT MY BOI REPORT?
What happens if one of the beneficial owners of your company changes their residential address after you file your initial report? If that happens (and for any other post-initial filing changes to the required information in your BOI report), you must file an updated report within 30 calendar days of the date the change occurred. Similarly, if you discover a BOI report was inaccurate when filed, you must file a corrected report within 30 calendar days after discovering the error/inaccuracy.
Pro tip: there is no requirement for a reporting company to update information about the company applicant.
CIVIL AND CRIMINAL FINES AND PENALTIES FOR FAILURE TO REPORT
Failure to file an initial BOI report and timely update or correct a previously filed report carries harsh consequences. The CTA provides for civil fines and criminal fines and penalties for violations as follows:
Civil fine of up to $591/day for each day the violation continues
Criminal fine of up to $10,000 per violation, or up to 2 years imprisonment, or both
Pro tip: the legal fees to fight criminal fines/penalties will be at least, and likely more than, $10,000.
CTA fines and penalties are per violation and can add up quickly. We recommend that our clients take their CTA reporting, correction, and update obligations seriously. Contact us with any questions you may have. We are here to help!
BEWARE OF SCAMMERS
Scammers are leveraging the uncertainty and confusion created by the CTA and the fear of significant fines and criminal penalties to scam business owners. These scammers are incredibly skilled at impersonating government agencies and creating official-looking communications. One rule of thumb is that any communication you receive that requires you to take action immediately (e.g., pay money) or within a tight timeframe on the threat of government fines/penalties is likely a scam. We encourage you to reach out if you receive any such communications (and never give out your personal information to anyone you do not trust). Contact us.