What the Corporate Transparency Act Means for Small Businesses

6/10/2023, Updated 1/15/2024, Updated again 3/9/2024

TL;DR: Another reporting requirement that targets small businesses. Still a moving target.

3/9/2024 update: On March 1, 2024, the US District Court for the District of Alabama declared the CTA unconstitutional in a decision that’s actually a pretty entertaining read, especially for armchair constitutional scholars. It’s clear that the members of the National Small Business Association (different from the federal agency SBA) aren’t required to comply, and it’s possible that businesses organized in that District are also free to ignore the CTA, but the rest of us should probably comply. The question is: when?

We somewhat foresaw an issue with the CTA and sent out a communication to our clients back in January that we would be waiting until at least the summer to begin collecting BOI for these filings. We fully expect the US government to appeal the decision to the US Supreme Court which will hopefully hear the case, given the deadlines are imminent. Because businesses formed prior to 1/1/2024 don’t have to file anything until 1/1/2025, we are kicking the can as far down the road as possible. For businesses that were formed this year, we will comply with the 90-day filing deadline but plan to wait until day 88 or 89 at the earliest.

Stay tuned for more updates!

And now, the original article:

Way back in July 2006, an international body called the Financial Action Task Force on Money Laundering (FATF, for short) called the US on the carpet for its failure to comply with a FATF mandate to enact legislation to collect information about the beneficial owners of legal entities as other members of the FATF had already done. It gave us until 2008 to do so. We didn’t. In 2016, the US was chastised again for its failure which represented a “fundamental gap in United States efforts to combat money laundering and terrorist finance.” Ouch.

The Corporate Transparency Act of 2019 (CTA, for short) was finally enacted by Congress in 2019 in reaction to this criticism. It requires every corporation and limited liability company to report identifying information about its beneficial owners to FinCEN, the Financial Crimes Enforcement Network of the Department of the Treasury. We’ll call this “Beneficial Owner Information” or BOI, for short.

Entities created after January 1, 2024 will have to submit their BOI report within ninety days of formation. Entities that existed before January 1, 2024 will have until January 1, 2025 to submit their report. Entities that are formed after January 1, 2025 have thirty days to report.

In the event your BOI changes, you’ll have 30 days from the date of the change to submit a new BOI form.

What information is required of each Beneficial Owner?
1.Full legal name
2.Date of birth
3.Full residential or business street address
4.A unique identifying number from a current government-issued ID such as a passport or driver’s license
5.An image of the ID described in #4

How often must the information be submitted?
Once and within thirty days of any change in BOI.

Who qualifies as a “beneficial owner”?
THANKFULLY, the feds did one thing right and significantly walked back the definition of a “beneficial owner.” Originally, they wanted to include anyone who “receives substantial economic benefit from the assets” which could extend to spouses and even pets of business owners, if taken to a somewhat illogical extreme.

The final rules state that, “any of the following may be an ownership interest: equity, stock, or voting rights; a capital or profit interest; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership. A reporting company may have multiple types of ownership interests.”

In addition to owners, non-owners who exert “substantial control” over the company must also be reported. “An individual exercises substantial control over a reporting company if the individual meets any of four general criteria: (1) the individual is a senior officer; (2) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company; (3) the individual is an important decision-maker; or (4) the individual has any other form of substantial control over the reporting company.” See the chart below for details about these criteria.”

Does every entity have to file a report?
It’s pretty safe to err on the side of caution and assume your entity must file a report. If you had to register with a Secretary of State, you have to report. The only entities exempt from filing are already “on the grid” elsewhere with other governmental agencies. These entities include:

  • Those that are registered with the SEC;
  • Government entities;
  • Banks, credit unions, and bank holding companies (already registered with the FDIC);
  • A broker dealer or investment company which is already registered with the SEC and FINRA;
  • Insurance companies (more specifically defined in Section 2 of the Investment Company Act of 1940 (15 U.S.C. 80a–2));
  • A commodity exchange;
  • A public accounting firm already registered pursuant to Sarbanes-Oxley;
  • A public utility;
  • And, of interest to a number of our clients:
  • Nonprofit entities that have been granted tax-exempt status by the IRS and whose tax-exempt status is still in effect; and
  • Any business that has 20 or more employees, files tax returns reflecting more than $5m in gross receipts, AND has a physical operating presence within the US.

Who has access to the information?
The way the legislation is written (trust me, I’ve read it) suggests the goal is not to make public any of this BOI. Instead, the BOI is supposed to only be accessible by request, by law enforcement agencies and, with customer consent, financial institutions, to hinder criminal activity previously shielded by corporations and limited liability companies.

There do appear to be some decent measures to keep the BOI safeguarded from public access. Any agency requesting BOI has to demonstrate its investigatory basis for the request, the access to the BOI must be limited to that agency’s authorized users, the agency must maintain an audit trail, every agency that receives BOI must conduct an annual audit to confirm the BOI has been accessed and used appropriately, and FinCEN must conduct an annual audit of EVERY law enforcement agency that has received BOI. FinCEN must also report to Congress the agencies that requested and accessed BOI and the number of times the BOI was accessed. I’d hazard a guess that most law enforcement agencies are strapped for resources, so will only subject themselves to these administrative burdens when they have a compelling reason to request the BOI. Once they’re on the radar as an agency that’s accessed this information, it creates this whole host of reporting requirements they must follow.

How long is the information retained?
As of now, the legislation contemplates that BOI will be retained by FinCEN until the 5th anniversary of the entity’s dissolution. That timeline probably comfortably covers all statutes of limitations on prosecution of the types of criminal activity this legislation is trying to hinder.

What happens if I don’t register?
If you’ve seen some of those DUMBASS TikToks claiming that your LLC will “cost you $500 per day in 2024,” take a deep breath. They are using a scare tactic that refers to the FinCEN penalties for failure to report or for reporting false information, which can include both civil and criminal penalties – $500 for each day the violation continues, criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000.00.

Add this to your ever-growing list of administrative tasks you must remember. “Be a business owner” they said. “It’ll be fun” they said.