Have you heard of the Corporate Transparency Act? Do you know how it affects YOU as a small business owner? If you haven’t heard by now, the Corporate Transparency Act (CTA) is a federal law that creates a new reporting requirement for small businesses. The CTA requires that all “reporting entities” file a Beneficial Owner report with FinCEN (the Financial Crimes Enforcement Network.) This new law is effective on January 1, 2024. And it affects the vast majority of my readers!
But Why?
The CTA is designed to curb the use of small business entities as shell companies for criminal activity. More specifically, money laundering, drug trafficking, and terrorism financing. By requiring businesses to submit beneficial ownership information, real owners can’t hide behind a cloak of anonymity. You file the report via a FinCEN secure site. And FinCEN will only share the information with law enforcement agencies.
Is My Business a “Reporting Entity”?
A reporting entity is any business that formed by filing a document with the Secretary of State or similar agency. That means all corporations and LLCs may be reporting entities.
A sole proprietor or partnership not operating under a registered business entity is NOT a reporting entity. Typically these business owners use their social security number and report business activity via a Schedule C.
There are 23 exemptions to reporting entities. Exemptions include most financial institutions (banks, credit unions, investment companies, securities exchange, accounting firms, insurance companies, etc.), tax-exempt entities (such as 501(c)(3) charities), and large companies. “Large” companies are those with: more than 20 full time employees in the United States, a physical office in the United States, AND more than $5M gross revenue reported on a tax return.
If your business is an LLC or Corporation that doesn’t fit any of the exemptions, it is a reporting entity. Under the CTA, reporting entities must disclose their “Beneficial Owners.”
Who is a Beneficial Owner?
A beneficial owner is anyone who directly or indirectly:
- Exercises substantial control over the business – this includes senior officers (CEO, CFO, General Counsel, etc.) and anyone who has the authority to remove senior officers or the board of directors or anyone in a position to make major decisions on behalf of the business; OR
- Owns 25% or more of the business (stock, member interests, etc.)
A business may have one or many beneficial owners depending on its structure and organization.
When Do I have to file?
Your LLC existed prior to January 1, 2024: you must submit your report by January 1, 2025. So you have a FULL YEAR to figure this out! Despite the extra time, I advise you to file while it is top of mind so you don’t inadvertently forget.
You create an LLC during calendar year 2024: you have 90 days after the LLC is registered to submit your report.
You register a new business entity on or after January 1, 2025: you have 30 days after the LLC is registered to submit your report.
If anything changes once you submit a report: you must file an update with FinCEN within 30 days. So if you sell the business, bring on a new partner with a more than 25% share, have a change in senior officers – all of these events would require filing an updated report.
What Information Do I Have to Provide?
For your reporting company, you need to provide the legal name, any dbas, the address, the state of formation, and the tax id number (EIN)
For each beneficial owner, you need to provide the name, date of birth, address, and # from a drivers license or passport, along with an image of the drivers license or passport.
What Happens if I Don’t Submit the Report?
Willful failure to report or update your beneficial owner information can result in civil penalties up to $500 per day for as long as the violation continues and criminal penalties up to $10,000 fine and/or up to 2 years in prison.
A few more things:
While it is always nice to have help, you are NOT required to have an attorney or CPA fill out the form for you. You can fill this out on your own.
For additional information about the reporting requirements under the Corporate Transparency Act, visit https://www.fincen.gov/boi. This page will link you to FAQs, an informational brochure, and a video about the Corporate Transparency Act.
