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New Year's Day will bring compliance headaches to over 30 million legal entities doing business in the United States.1 The Corporate Transparency Act (CTA) goes into effect on January 1, 2024, adding information reporting burdens to millions of small businesses across the United States.2 Essentially, the CTA will require “reporting companies” to disclose individuals, trusts, and other entities that qualify as “beneficial owners” to the federal government.3 This reporting mechanism is part of the federal government’s goal to counter corruption practices such as money laundering.4
The CTA requires legal entities to report their ownership information to the Financial Crimes Enforcement Network (FinCEN) so that the federal government can generate a database containing that information.5 FinCEN, a database with access limited to select government entities, will enforce severe penalties for non-compliance with the reporting obligation.6 Failing to comply with the reporting requirements can result in up to $10,000 in fines and up to two years in prison.7 It is therefore of vital importance to know (1) what the CTA requires and (2) how to comply.
A reporting company includes (1) any company that is created by filing a document with a secretary of state or similar office under the law of any one of the fifty states or (2) any foreign company that is registered to do business in the United States by filing a document with a secretary of state or similar office under the law of any one of the fifty states.8 This includes millions of business entities registered to do business in any of the fifty states.9
There are twenty-three exemptions to qualifying as a reporting company, but the exemptions are narrowly crafted.10 The broadest exemption is the large operating company exemption. Despite being the most comprehensive exemption, it is still exclusive.11 To qualify for this exemption an entity must (1) employ more than 20 employees on a full-time basis in the United States, (2) have filed more than $5,000,000 in gross receipts or sales in the previous year’s federal income tax returns, and (3) have an operating presence at a physical office within the United States. This exemption automatically does not include any newly formed entities;12 newly formed entities that did not file tax returns for 2023 will likely be deemed reporting companies that must comply with the CTA.13
One other notable exemption is the inactive entity exemption, which exempts entities considered inactive before January 1, 2020, from CTA compliance.14 However, owners of inactive entities still have important steps to take to ensure this exemption applies.15 Because it will be impossible for FinCEN to know if an entity is inactive, it will still seek to enforce compliance by the end of 2024 for these entities.16 To avoid such unnecessary interaction with FinCEN, owners should dissolve these entities before the end of 2024.17
Notwithstanding these and the other exemptions, millions of entities will be required to report to FinCEN under the CTA.18 Entities existing before January 1, 2024, will have until January 1, 2025, to report to FinCEN.19 Despite this buffer, reporting should be done as soon as possible because, as with any new statute requiring compliance, there will likely be errors and delays.20
Entities created on or after January 1, 2024, will have only 90 days to report to FinCEN.21 After January 1, 2025, newly created entities will only have 30 days to report to FinCEN going forward.22
All reporting companies, as defined above, will be required to report all “beneficial owners” to FinCEN.23 Beneficial owners include (1) those entities or individuals who hold 25% or more ownership interest in a reporting company or (2) have “substantial control” of the reporting company. 24 Beneficial owners with substantial control can be individuals, trusts, or other legal entities such as LLCs or corporations. 25 Managers or officers of a reporting company and anyone who has the power to make major decisions affecting that entity are included in the “substantial control” category.26 However, individuals who have “substantial control” by virtue of their employment status within the reporting company are not required to be reported.27 The list of beneficial owners for some reporting companies can therefore be long and complicated.28
All reporting companies must report the following information for all beneficial owners: full legal name, date of birth, current residential or business street address, and a unique identifying number.29 To properly report a unique identifying number, beneficial owners must provide a passport, driver’s license, or other government-issued identification document.30 Alternatively, beneficial owners can request a FinCEN identifier upon registration, which can serve as a unique identifying number in compliance with the CTA—one that does not expire.31
As these documents expire, reporting companies will have 30 days to provide updated information to maintain compliance.32 Requesting a FinCEN identifier for each beneficial owner, therefore, is in the best interest of reporting companies because it removes the burden of updating beneficial owners’ information when driver’s licenses or passports expire.
Additionally, the CTA requires reporting to FinCEN to remain as current as possible;33 any change in the above information must be reported to FinCEN within 30 days of the change.34 Failure to update this information will result in monetary or criminal penalties.35
The CTA is comprehensive, complicated, and overwhelming. Business owners and management should be aware that compliance, even for inactive entities, requires reporting burdens, some quite complex. Continued maintenance is also essential, as the failure to comply can result in up to $10,000 in fines and up to two years in prison.
1 Global Financial Markets Podcast, UnresolvedIssues with the Corporate Transparency Act (2023), https://open.spotify.com/episode/3sN8ixryGpl6GqX5JE50N5?si=606f3f79b700429e (last visited Dec. 13, 2023).
2 FinCEN, Beneficial Ownership Information (2023), https://www.fincen.gov/boi (last visited Dec. 13, 2023); Janeen V. Isaacson, Regulatory Spotlight: What Lawyers Need to Know About New Reporting Required Under the Corporate Transparency Act, IN PRACTICE…with CNA, A Practitioner’s Perspective on Emerging Legal Trends, Issue 3 (2023).
3 31 U.S.C. § 5336(a)(11)(A).
4 Main Street Business, Corporate Transparency Act – The New Law Affecting Every Business Owner, https://open.spotify.com/episode/0FQUeSiwY4WfXJ0WfQ62N1?si=5cce88c7eab94f83 (last visited Dec. 13, 2023); see also Katherine G. Schnake, How The Corporate Transparency Act Impacts Law Firms, 1, 1 (August 2023).
5 31 U.S.C. § 5336(b)(1)(A).
6 MainStreet Business.
7 Id.
8 31 U.S.C. § 5336(a)(11)(A).
9 Global Financial Markets Podcast.
10 Main Street Business.
11 Id.
12 31 U.S.C. § 5336(a)(11)(B)(xxi).
13 Main Street Business.
14 31 U.S.C. § 5336(a)(11)(B)(xxiii)
15 Main Street Business.
16 Id.
17 Id.
18 Global Financial Markets Podcast.
19 Id.
20 Main Street Business.
21 Id.
22 Id.
23 31 U.S.C. § 5336(b)(1)(A).
24 31 U.S.C. § 5336(a)(3).
25 Main Street Business; Isaacson.
26 Global Financial Markets Podcast; Isaacson.
27 31 U.S.C. § 5336(a)(3)(B)(iii).
28 Main Street Business.
29 31U.S.C. § 5336(b)(2)(A).
30 31 U.S.C. § 5336(b)(2)(A)(iv)(I).
31 31 U.S.C.§ 5336(b)(2)(A)(iv)(II).
32 Main Street Business.
33 Id.
34 Id.
35 Id.
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