The Corporate Transparency Act (CTA) became effective January 1, 2024. It enhances anti-money laundering and anti-terrorism financing by requiring “reporting companies” to report information about their “beneficial owners.” But many company and trust overseers report confusion about its requirements — and exactly how to comply.
The filing requirements of the Corporate Transparency Act impact millions of individuals. For many, it clearly applies or doesn’t; for others, it’s murkier. Prudence suggests when in doubt, file (even though it might feel like an invasion of your privacy).
Put another way, if you’re a small-business owner or leader, burying your head in the sand isn’t an option — it could lead to civil and even criminal penalties.
Follow three key steps to ensure you’re doing an effective CTA CYA:
1. Determine if you are a 'reporting company.'
Reporting companies are entities created by a filing with a secretary of state or similar office. The most common forms are corporations, limited partnerships and limited liability companies. They don’t have to be operating companies (for example, an LLC that holds title to your beach house). Yes, there are numerous exceptions (23, in fact). To learn more:
- Study the FinCEN website, especially the reporting company FAQs
- Check your state’s website to see if the company is registered
- Talk to your attorney — and do so quickly (see deadlines below)
2. Clarify who are the 'beneficial owners.'
A beneficial owner of a company is an individual who either exercises substantial control or owns or controls at least 25% of the company. There are definitions (such as substantial control) and exclusions (such as a minor whose parent or legal guardian is otherwise reported).
For trusts, beneficial owners are the individuals owing the interest through the trust. This means one or more of the trustee, beneficiary, settlor or other people (e.g., trust protector), depending on the terms of your trust.
These concepts can be confusing. Again, visit the FinCEN website and talk with your attorney — and again, sooner rather than later. If you are still unsure, consider the prudence in reporting everyone who is or might be a beneficial owner.
3. Identify your 'company applicant.'
Reporting companies formed in 2024 (or later) must report the “company applicant.” This is the person who filed the document creating the company. For example, the attorney who files on behalf of a client but includes those who file as a favor for a friend. If applicable, you’ll need the applicant’s information, and that could take time to get (and you have only 90 days).
What you need to report effectively
Reporting companies must submit a Beneficial Ownership Information Report (BOIR) on the FinCEN website, providing for each beneficial owner and company applicant:
- Full legal name
- Date of birth
- Current street address
- Identifying number from an acceptable ID (e.g., a passport or driver's license)
- A picture of the ID
Alternatively, you can provide your FinCEN identifier number (obtained by filing the same information). The identifier is convenient if you need to file multiple times.
Two major challenges: beneficial owners who don’t have a currently valid ID and those who won’t cooperate promptly — or at all. Pro tip: Task someone with getting the information and filing the reports and all updates.
Deadlines you should know
Filing deadlines are based on when the company was created:
Beware: Non-compliance penalties
Why are many clients so worried? The CTA’s harsh penalties:
Non-compliance can result in civil penalties of up to $500 per day and criminal penalties of up to $10,000 in fines and/or up to two years in prison.
Disclosure and use violations can result in civil penalties of up to $500 per day and criminal penalties of up to $250,000 in fines and/or up to five years in prison. Doing so while violating another U.S. law or as part of a pattern of illegal activity involving more than $100,000 in a 12-month period can incur a fine of up to $500,000 and/or up to 10 years in prison.
People may “face penalties” for willfully causing a reporting company to fail to file complete or updated information (FinCEN FAQ K.5). A smart practice when creating an entity is to gather the information up front.
The bottom line: CTA CYA
The Corporate Transparency Act nobly strives to enhance combating money laundering and terrorism financing. But it is sweeping, and the definitions are tricky.
You likely aren’t involved in illicit financial activity, and you may be hesitant to share your information, but if you know you should file, file. And if you’re unsure, it’s safer to file when not needed than not file when needed.
