Corporate Transparency Act FAQs Parts 1 & 2
Are you a business owner? If so, you must become familiar with the Corporate Transparency Act (“CTA”) and its reporting requirements which went into effect on January 1, 2024.
Frequently Asked Questions (FAQs)
What is the CTA?
The CTA was added to House Resolution 6395 (aka the National Defense Authorization Act) by Congress in 2020. The goal of the CTA is to prevent money laundering, terrorism financing, tax fraud, and other financially related crimes in shell or shadow entities. This will be achieved by new required filings with the federal government.
The Financial Crimes Enforcement Network (“FinCEN”) of the Department of Treasury is tasked with implementing the rules for the CTA, creating and maintaining the private database to store the information disclosed by required filings, and overseeing enforcement of the CTA. As of the date of this blog posting, FinCEN has not finished issuing guidance on implementation of its database and safeguarding reported information.
FinCEN has provided information about and resources for Beneficial Owners on their website: https://www.fincen.gov/boi
Who does the CTA affect?
The CTA affects three groups:
1. Reporting Companies;
2. Beneficial Owners; and
3. Applicants.
Reporting Companies
Most small businesses fall within the reporting requirements of the Corporate Transparency Act.
The following types of entities fall within the CTA’s definition of reporting companies:
A. Corporations;
B. LLCs; and
C. Any other entity created by the filing of a formation document with their state’s secretary of state or other commission registry.
The following types of entities are considered exempt from the CTA’s definition of reporting companies:
A. Public companies;
B. Governmental authorities;
C. Financial institutions;
D. Registered money transmitting businesses;
E. Registered investment advisors and investment companies;
F. Certain accounting firms;
G. Insurance companies;
H. Public utility companies;
I. 501(c) organizations & certain political organizations; and
J. “Bigger” small businesses that:
i. employ more than 20 full time employees in the United States;
ii. have a previous year tax return of more than $5 million of “gross receipts or sales in the aggregate”; and
iii. operate at a physical office located in the United States.
The following types of entities are not included in the CTA’s definition of reporting companies:
A. General Partnerships; and
B. Entities resulting from a statutory conversion process.
Beneficial Owners (“BOs”)
A beneficial owner under the CTA is an individual who either:
1. Directly or indirectly exercises “substantial control” over the company; or
2. Owns or controls at least 25% of the ownership interest in the company.
Who is included in the definition of “Substantial Control”?
A. Senior officers and their spouses in community property states;
B. General Counsel and their spouses in community property states;
C. Those above or having authority over senior officers (i.e., board of directors) and their spouses in community property states;
D. Those who direct, determine, or have substantial influence over important “decisions” of the company and their spouses in community property states; and
E. Those who “ha[ve] any other form of substantial control over the reporting company” and their spouses in community property states.
How does the CTA calculates ownership interest?
A. Calculated at present time;
B. Options treated as exercised;
C. Capital or profits interest: calculated as a percent of total outstanding company capital/profits interest;
D. Stock percent calculated based on the greater of:
i. owner’s total combined voting power as a percent of outstanding voting power of all classes; or
ii. owner’s total combined value of ownership interests as a percent of total outstanding value of all classes of ownership interests;
E. If unable to calculate: any individual who owns or controls at least 25% of any class of ownership interest is deemed a beneficial owner for purposes of the CTA.
i. This includes Grantors of a trust and their spouses in community property states where the trust owns or controls at least 25% of the ownership interest in the company, as long as the trust is still revocable. This also includes the Trustees of the trust and their spouses in community property states and the Beneficiaries and their spouses in community property states if the Beneficiary is the sole permissible recipient of income and principal from the trust, or if the Beneficiary has the right to demand a distribution of, or withdraw substantially all, of the assets in the trust.
Are there any exemptions from the beneficial owner definition?
The following individuals are exempt from the beneficial owner definition in the CTA:
A. Minor children (parent or guardian must report instead)[1];
B. An individual’s nominee, intermediary, custodian, or agent;
C. Employees who are solely employees (i.e., not a senior officer);
D. Future inheritors; and
E. Creditors.
Applicants[2]
The following persons/entities are considered applicants under the CTA:
A. Incorporator or Organizer of an Entity; and
B. The individual who directly files the formation document for a new or foreign company.
i. This includes the individual primarily responsible for directing or controlling the filing.
What are Substantial Controllers, Beneficial Owners, and Applicants Required to Report to FinCEN?
Initial Reporting Information:
A. General information about the reporting company and its beneficial owners and applicants:
a. Reporting company information:
i. Full legal names and trade names (including non- registered DBAs);
ii. Current address;
iii. Jurisdiction of Formation; and
iv. IRS TIN & EIN.
b. Beneficial Owners and Applicants:
Applicants (after January 1, 2024):
1. Personal Identification Information (PII) for the applicant who formed the business (max of 2 company applicants):
a. Full legal name;
b. Date of birth;
c. Current address (applicants such as lawyers and paralegals to use business address, not personal); and
d. Government ID with a photo.
2. *Existing businesses won’t be required to report on applicant information, only on company and beneficial owner information.
3. New businesses will be required to report applicant information, but not update it.
Beneficial Owners:
1. Personal Identification Information (PII) for the beneficial owner (BOs must be individuals not entities)
a. Full legal name;
b. Date of birth;
c. Current address; and
d. Government ID with a photo
2. Beneficial owners won’t report “how” they are a beneficial owner, meaning BOs won’t specify how much interest they own or whether or not they are in substantial control of the reporting company, just that they are a beneficial owner.
FinCEN Identifier for reporting:
A. Individuals & reporting companies obtain unique numbers from FinCEN;
B. Reporting companies can provide an individual’s information, or an individual can themselves and obtain an identifier to give to the company to submit in lieu of the individual’s information.
When Are the Reporting Deadlines?
For new businesses formed after January 1, 2024: reports must be filed within 90 days of formation.
For new businesses formed after January 1, 2024: reports must be filed within 30 days of formation.
Existing businesses have one year from January 1, 2024, to file reports.
Ongoing duty to update:
A. Updated reports must be filed within 30 days of changes to information previously reported;
B. If a previously exempt entity becomes a “reporting company” or, vice versa, a “reporting company” becomes exempt, new or updated (as applicable) reports must be filed within 30 days;
C. Updates include when a beneficial owner who is a minor reaches legal age (must file within 30 days of 18th birthday);
D. Updates are not required when an entity is terminated or dissolved; however, administrative dissolution does not fall under this exclusion.
What Are the Potential Penalties for Not Complying with the CTA’s Reporting Requirements Within the Deadlines Described?
If you (includes individual liability) willfully fail to report/update information or willfully provide or attempt to provide false information, you may receive the following penalties:
A. A civil penalty of up to $500/day the violation continues or has not been remedied;
B. A criminal fine of up to $10,000; and/or
C. Up to 2 years in prison.
At this time, there is no “reasonable cause” exception to reporting incorrectly or not complying timely with the CTA.
Final Note on the CTA
We understand this a vast amount of complex information to take in. As a reminder, the CTA is new and FinCEN is still working out all of the details. The 928 Law Firm can provide initial guidance regarding the CTA requirements per FinCEN’s current guidelines. This blog post is the first in an ongoing CTA series. Be sure to stay tuned for future CTA content.
Here are some additional resources you can look to as well:
1. The Corporate Transparency Act: https://www.congress.gov/bill/116th-congress/house-bill/2513/text
2. FinCEN: https://www.fincen.gov/boi
3. Final Rule on BOI Reporting Requirements of the CTA:
4. Proposed Rule for Collection of BOI Reports (proposed reporting questions): https://www.federalregister.gov/documents/2023/01/17/2023-00703/agency-information-collection-activities-proposed-collection-comment-request-beneficial-ownership
[1] Once that minor child turns 18, they are no longer exempted from the CTA and must make the required filings with FinCEN within 30 days of their 18th birthday.
[2] This only includes Applicants after January 1, 2024. If you fall within the definition of Applicant but incorporated, organized, or formed the entity before January 1, 2024, you do not need to comply with reporting requirements5