Business Law, Tax Requirements

• Failure to file can result in up to $500 a day in penalties

• Many businesses are exempt from filing, however, you want to make sure you property determine if you are or are not exempt.

• The stated purpose is to uncover criminal organizations and hidden ownership, however, I wouldn’t be surprised if the net result is a greater burden for tax payer business owners with little additional law enforcement help.

• When you’re required to report, if at all, depends on when you started your business.

Business owners have yet another government regulatory requirement placed on them. At least many do, and here we’ll discuss what you need to know in order to determine if you’re required, and if so, what you need to do. Keep in mind that the penalties are no joke with DAILY penalties for failure to file.

The Corporate Transparency Act (CTA), effective from January 1, 2024, introduces a significant regulatory requirement for businesses in the United States. This legislation mandates reporting companies to disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN).

The act aims to enhance transparency and combat financial crimes like money laundering and terrorism financing. 

Understanding the Corporate Transparency Act

The CTA is a response to what is believed to be an increasing need for transparency in business ownership to deter illicit activities. It requires small businesses to report key information about their beneficial owners—those who own or control 25% or more of the company, or have substantial control over the company’s operations, regardless of their ownership percentage.

This information includes legal names, birth dates, residential addresses, and an identification number (e.g., driver’s license or passport number).

There are specific deadlines for compliance based on when a company was established:

• Companies formed before January 1, 2024, have until January 1, 2025, to file their initial reports.
• Companies formed on or after January 1, 2024, must file within 30 days of their establishment.
• Amendments or updates to the ownership information must be reported within 30 days of any change.

Who Must File

The CTA primarily targets smaller, privately-owned entities, requiring them to disclose beneficial ownership information to FinCEN. The criteria for entities required to file are as follows:

Reporting Companies:

• • Corporations, LLCs, and Other Similar Entities: If your entity is a corporation, limited liability company, or other entity created by filing a document with a state office or formed under the laws of a foreign country but registered to do business in the U.S., you are likely required to file.

  • Newly Established Entities: Entities formed on or after January 1, 2024, must file within 30 days of creation. This prompt reporting ensures timely compliance from the inception of the business.

  • Existing Entities: Entities formed before January 1, 2024, have a longer grace period but must comply by submitting their initial report by January 1, 2025.

Beneficial Owners:

1. • Individuals who directly or indirectly own or control 25% or more of the ownership interests in a reporting company.

   • Individuals with significant responsibility to control, manage, or direct a reporting company, including but not limited to an executive officer or senior manager, or any other individual who regularly performs similar functions.

   • Company Applicants (For New Entities Post-2024):

     • The individuals who file the application to form the entity or who direct or control the filing of such documents are also required to be reported.

Exemptions from Filing

The CTA provides specific exemptions to mitigate the reporting burden on entities already subject to federal regulation or oversight, and those unlikely to be used for illicit activities. As you can easily determine, this rule is targeted at smaller entities, and is a true small business burden for sure.

A quick look at what entities qualifying for any of the following exemptions are not required to file proves that:

1. Publicly Traded Companies: Entities with securities listed on a U.S. stock exchange are exempt due to existing disclosure requirements.
2. Large Operating Companies: Entities employing more than 20 people full-time in the U.S., filing tax returns demonstrating more than $5 million in gross receipts or sales, and having an operating presence at a physical office within the U.S.
3. Certain Regulated Entities: Includes banks, credit unions, insurance companies, registered investment companies, and brokers or dealers in securities, among others. These entities are already subject to stringent regulatory requirements and oversight.
4. Tax-Exempt Entities: Organizations recognized as tax-exempt by the IRS, including charities, are exempt from filing.
5. Subsidiaries: Entities that are owned (at least 51%) by an exempt entity are also exempt, provided the parent entity’s information is reported.
6. Trusts: Most trusts are exempt unless they are created by filing a document with a state office, which is uncommon for most trust structures.

Additional Considerations

• State-specific Entities: Some entities unique to specific states may or may not fall under the definition of a reporting company. It’s essential to consult legal guidance to understand how state-specific regulations intersect with CTA requirements.
• Foreign Entities: Foreign entities registered to do business in the U.S. are required to file unless they meet one of the exemption criteria.
• Penalties for Non-compliance: Failure to report or intentionally providing false information can result in civil penalties of up to $500 per day and criminal penalties, including fines up to $10,000 and imprisonment for up to two years.

Understanding who must file under the Corporate Transparency Act and who is exempt is crucial for ensuring compliance and avoiding penalties. Entities should carefully review their status and consult with legal or compliance professionals to determine their filing obligations.

This proactive approach will not only align with federal requirements but also contribute to the broader goal of enhancing transparency and combating financial crimes.

Step-by-Step Guide to Filing the Beneficial Ownership Information Report

Preparing for Filing

Before initiating the filing process, businesses need to gather necessary documents and information. This preparation ensures a smooth and efficient filing process.

Collect Essential Information:

• • Legal name of the business and any Doing Business As (DBA) names.

  • Employer Identification Number (EIN) or other applicable tax identification numbers.

  • Physical address of the business’s principal place of business.

  • Full legal names, dates of birth, residential addresses, and identification numbers (e.g., driver’s license or passport numbers) of all beneficial owners and company applicants.

• Determine Your Reporting Obligation:

  • Review the criteria to confirm if your business is required to file or if it falls under any of the exemptions listed by FinCEN.
• Obtain a FinCEN ID (Optional but Recommended):
  • For ease of future filings and updates, obtaining a FinCEN ID for the business and each beneficial owner can streamline the process.

Accessing the FinCEN Reporting Portal

• Navigate to FinCEN’s Website:
• • Go to the official FinCEN website (www.fincen.gov) and locate the section dedicated to the Corporate Transparency Act.
• Select the Reporting Option:
  • Click on the “File a Report” button, which directs you to the beneficial ownership information reporting system.

Filing the Report Online

1. Start a New Report:
   • Choose the option to file a new report. First-time filers should select “Initial Report” to begin the process.
2. Enter Business Information:
   • Fill in the business details, including legal and DBA names, EIN, and the physical address of the principal place of business.
3. Request a FinCEN ID for the Business (Optional):
   • If not already obtained, you can request a FinCEN ID for the business during this step. This ID facilitates easier reporting in the future.
4. Identify Beneficial Owners:
   • Enter the required details for each beneficial owner. If a beneficial owner already has a FinCEN ID, you can use this instead of re-entering all their information.
5. Identify Company Applicants (For Businesses Formed on or After January 1, 2024):
   • Provide details about the individuals who filed the formation documents for the business or who directed the filing.
6. Review and Confirm Information:
   • Carefully review all entered information for accuracy. Errors or omissions can lead to compliance issues and potential penalties.
7. Submit the Report:
   • Once all information is verified, submit the report. You will receive a confirmation and a tracking number for your records.

After Submission

1. Download and Save the Confirmation:
   • Save a copy of the submission confirmation and tracking number for your records. This document is crucial for future reference and compliance verification.
2. Set Reminders for Updates:
   • If any changes occur in the future, such as changes in beneficial ownership or business details, remember that you have 30 days to file an updated report.
3. Regularly Review Compliance Requirements:
   • Stay informed about any changes in reporting requirements or deadlines by regularly checking FinCEN’s website or subscribing to updates.

Troubleshooting and Tips

• Common Issues: Some common issues filers encounter include technical glitches, missing information, or uncertainty about how to classify ownership interests. Double-check all entries and ensure internet connectivity is stable before submitting.
• Technical Support: If technical issues arise, use the support options provided on FinCEN’s website. There are FAQs, user guides, and contact information for technical support.
• Legal and Professional Advice: Consider consulting with a legal advisor, such as Robert W Law, or a professional experienced in financial compliance to ensure that your filing meets all requirements and accurately reflects the ownership structure of your business.

(as of 2/3/24)

Laws

Corporate Transparency Act

31 U.S.C. 5336 (Beneficial ownership information reporting requirements)

Regulations

31 CFR 1010.380 (excerpt from Beneficial Ownership information Reporting Requirements Final Rule)

Final Rules

Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024
Use of FinCEN Identifiers for Reporting Beneficial Ownership Information of Entities
Beneficial Ownership Information Reporting Requirements Final Rule

• Fact Sheet

Beneficial Ownership Information Access and Safeguards Final Rule

• Fact Sheet

Proposed Rules

Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024
Beneficial Ownership Information Reporting Requirements Advance Notice of Proposed Rulemaking (ANPRM)

• ANPRM comments

Beneficial Ownership Information Reporting Requirements Notice of Proposed Rulemaking (NPRM)

• NPRM comments

Beneficial Ownership Information Access and Safeguards and Use of FinCEN Identifiers for Entities NPRM

• NPRM comments
• Fact Sheet