The Corporate Transparency Act (CTA) went into effect on January 1, 2024. The new legislation has significant implications for most small businesses in the U.S., including corporations, LLCs, and any entity formed by filing documents with a state office. Here’s a comprehensive guide on what you need to know to ensure your business complies with these new regulations.
Who Needs to File?
Most small businesses, including corporations and limited liability companies (LLCs), must file reports with the Financial Crimes Enforcement Network (FinCEN). This requirement applies to any business entity formed by submitting documents to a state office.
What Information is Required?
Under the CTA, businesses must report detailed information about the individuals who own or control the company, known as beneficial owners, and those involved in the company’s formation, known as company applicants.
Beneficial Owners: These are individuals who directly or indirectly own 25% or more of the company or have substantial control over it. This includes key officers such as the president, CEO, CFO, and general counsel. The term "substantial control" includes making significant decisions affecting the company’s financial or operational policies.
Company Applicants: These are individuals who were primarily responsible for the formation or registration of your company.
The information required for reporting includes:
Full name
Physical address
Birthdate
A copy of a government ID (e.g., driver’s license, passport)
Reporting Deadlines
The CTA sets specific deadlines for reporting:
New Entities (formed or registered on/after January 1, 2024): You have 90 days from formation or registration to file the report.
Existing Entities (formed or registered before January 1, 2024): The initial report is due by January 1, 2025.
Any changes to ownership or control must be reported within 30 days.
Exemptions
Not all entities are required to file reports under the CTA. Some categories of entities are exempt, including:
Public companies
Banks and financial institutions
Government entities
Insurance companies
Large operating companies (with at least 20 full-time employees, a physical U.S. office, and $5 million in annual revenue)
These exemptions mean that if your company falls into one of these categories, you do not need to file reports under the CTA. However, the requirements for exemptions, particularly for large operating companies, are detailed and should be verified with a tax or legal professional.
Compliance Requirements
To comply with the CTA, you’ll need to gather and report personal information from your beneficial owners and company applicants. This can be done by collecti ng the necessary details directly or by using a FinCEN identifier, a unique code provided by FinCEN that individuals can use instead of sharing personal information.
It's essential to update your company’s governance documents, such as shareholder agreements and operating agreements, to obligate beneficial owners to provide the necessary information. This can help ensure compliance and prevent potential issues down the line.
Penalties for Non-Compliance
Non-compliance with the CTA can result in severe penalties, including:
Civil penalties: Up to $591 per day for ongoing violations
Criminal penalties: Fines up to $10,000 and/or up to two years in prison
These penalties underscore the importance of timely and accurate reporting.
What You Should Do
To ensure compliance with the CTA, entrepreneurs should :
Review your ownership structure: Identify who your beneficial owners are and ensure you have their up-to-date information.
Collect necessary information: Gather the required personal details from beneficial owners and company applicants, including their full name, physical address, birthdate, and a copy of a government ID.
Consult professionals: The rules can be complex and often require professional advice. Consider consulting an attorney familiar with the CTA to ensure you understand and meet all the requirements.
Update governance documents: Make sure your shareholder and operating agreements include provisions that obligate beneficial owners to provide necessary information for CTA compliance.
Educate your team: Ensure that your senior management and administrative staff are aware of the CTA requirements and the importance of compliance.
Additional Considerations
Monitoring and Updates: Regularly review and monitor the information you have on file for accuracy. Any changes in ownership or control should be reported promptly within the 30-day window.
Data Security: Ensure that the personal information you collect is securely stored and protected against unauthorized access. This is crucial for maintaining the privacy and security of your beneficial owners and company applicants.
Staying informed and proactive about these new requirements is crucial. Ensuring your business complies with the CTA will help you avoid hefty penalties and maintain smooth operations.
By following these guidelines, you can navigate the new regulatory landscape effectively and keep your business compliant with the CTA. This proactive approach not only safeguards your business from potential legal and financial repercussions but also reinforces your commitment to transparency and regulatory adherence.