Understanding the Corporate Transparency Act

A deadline to file is fast approaching

By Steven Friedman
Features

In early 2021, the United States Congress enacted the Corporate Transparency Act (CTA) to help federal agencies combat money laundering and other financial crimes. The law went into effect on Jan. 1, 2024, and requires about 33 million small businesses—including real estate organizations of all kinds—to report beneficial owner information (BOI) to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Whether you know it or not, you might be one of them.

Who Needs to File
Two categories of companies need to report BOI to FinCEN:
  1. Domestic Reporting Companies: A corporation, limited liability company (LLC) or any other entity created by the filing of a document with a secretary of state or similar office.
  2. Foreign Reporting Companies: A corporation, LLC or other entity formed under the law of a foreign country that is registered to do business in the United States.
    Companies that don’t need to report to FinCEN include those not created by filing with a secretary of state, like sole proprietorships or certain trusts. Additionally, FinCEN has classified 23 types of companies as exempt, including tax-exempt entities, public utilities and certain large companies. Still, in cases like this, subsidiaries of those companies may have to file.

Information Required
If you are with one of the millions of businesses required to file a report, you must include three main categories of information:
  1. Reporting Company/Entity Information: Full legal name, all trade or “doing business as” names, U.S. address, state of formation and IRS taxpayer identification number or employer identification number.
  2. Beneficial Owner Information:
    1. The full legal name, date of birth, residential address and a unique identifying number on a current form of identification (passport, driver’s license, etc.) for any/all beneficial owners; or
    2. Those individuals’ FinCEN Identifier (a personalized ID number), if they have one. A beneficial owner is anyone who exercises “substantial control” over the company or owns/controls at least 25% of its ownership interests. These people could be senior officers, someone with the authority to appoint or remove senior officers or a majority of directors, an important corporate decision-maker and/or someone with any other form of substantial control identified by FinCEN’s Small Entity Compliance Guide.

  3. Company Applicant Information: For entities created after Jan. 1, 2024, a report must include either information or a FinCEN Identifier relating to the individual(s) who filed the paperwork establishing the company (the direct filer), or who directed or controlled the filing action (an attorney, paralegal or third-party service company).
Deadlines & Penalties
Initial reports from all reporting companies formed before the end of 2023 must be filed by Jan. 1, 2025. Companies that are formed during 2024 will have 90 days to file those initial reports, and companies created in 2025 or later will have 30 days to file.

Whenever there are changes to any of the above information, the reporting company must file an updated report within 30 days. This also applies to newly exempt companies; they need to file an updated report saying so. Additionally, if a reporting company discovers that any of the information it submitted is inaccurate, it must file a corrected report within 30 days.

Beneficial owners of any entity that fails to report by the deadline could face civil penalties of up to $591 per entity per day that the violation continues and criminal penalties of up to $10,000 and/or two years in prison.

The Burden of CTA Compliance
Compliance with CTA is essential—but that doesn’t mean it hasn’t already created a burden for entities and their leaders. It all starts with awareness. Many entities may not have the systems in place and/or the proper advisors to flag their obligations under CTA. As a result, they may not hear about CTA or their responsibilities under the law until it’s too late.

Second, it can take significant time and effort to file proper reports. Some entities with simpler ownership structures could complete the form in under one hour or have someone do it for them for a minimal fee. Other entities may be much more complex, and senior officers and/or their outside counsel may be responsible for hundreds of filings with several variables and dozens of permutations. Collecting and inputting all the right information correctly, and managing/storing it properly, would be a massive project that could take weeks or months to complete.

Additionally, if/when any of that information changes, and updated/corrected reports need to be filed, the process would have to start all over again. Ongoing compliance will be a much bigger issue for reporting companies than the initial filing process.

All told, the time and effort to comply with CTA could add up fast. In some organizations, it could easily require an employee’s or an entire team’s full-time attention just on filings, updates, corrections and data management. To minimize costs and human errors related to filing, some organizations have decided to invest in tools that automate and standardize CTA processes—like an easy-to-use, software-as-a-service platform.

You must determine whether your organization needs to file a BOI report under the CTA, and then properly do so (if needed) in a timely fashion. It’s important that you fully understand your obligations under the law, and budget or find the resources to ensure ongoing compliance. Of course, the more efficiently you can do all of this, the less distracted you will be from business-critical activities.

If you have any questions regarding CTA or need help navigating or understanding the law, contact us; we stand ready and willing to help.

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