Corporate Transparency Act: Reporting Requirements for Small LLCs and Corporations
As the owner of a limited liability company (LLC) or a corporation with few or no employees, you may want to zone out when you hear news about the Corporate Transparency Act (CTA). The name of the legislation makes it sound like it should apply to big corporations, not small businesses. Furthermore, the CTA is intended to help stop money laundering and other fraud. And the rule to implement the legislation came from the Financial Crimes Enforcement Network. So the law shouldn’t concern your small business. Right?
Wrong.
In fact, LLCs and corporations with fewer than 20 employees are specifically targeted by the Corporate Transparency Act. Here’s what you need to know:
What is the Corporate Transparency Act?
The Corporate Transparency Act is a law that’ll require millions of the nation’s smallest business entities to report beneficial owner information (BOI) to the Financial Crimes Enforcement Network (FinCEN) starting in 2024. (FinCEN is a bureau of the U.S. Department of the Treasury.)
What is a beneficial owner?
According to FinCEN, the term, beneficial owner, includes any individual who, directly or indirectly, either
exercises substantial control over a reporting company (i.e., can make important decisions for the company)
or
owns or controls at least 25 percent of the ownership interests
Which businesses will need to file BOI reports?
Small businesses that match these criteria will be required to file BOI reports:
Have 20 or fewer full-time employees and less than $5 million in sales
and
Are LLCs, limited liability partnerships, corporations, business trusts, or other entities created by filing with a secretary of state, tribal jurisdiction, or similar office
Foreign LLCs and corporations that are registered to do business in any state or tribal jurisdiction
Organizations with more than 20 full-time employees and over $5 million in annual gross receipts are excluded from reporting requirements.
It’s estimated that about 30 million existing businesses and about 2 million new businesses each year will be required to report beneficial ownership information.
What’s the purpose of the CTA?
The law was enacted because “illicit actors” often set up small LLCs and corporations as shell companies or fronts to hide the identities of owners who are engaged in money-laundering, financing terrorism, and other illegal activities.
According to a notice published in the Federal Register, collecting beneficial ownership information at the time of company formation will significantly reduce the amount of time currently required to research who is behind anonymous shell companies. (Existing companies will have to file ownership reports, too.)
Most state and tribal-level jurisdictions don’t require a business to disclose beneficial owner information at the time the business is formed or afterward. Additionally, most states don’t require much, if any, contact or other information about an entity’s officers or other people who control the entity.
That can make it difficult and costly for the government to obtain information about those owners when necessary. Collecting owner information in a centralized federal database is a step to help alleviate that problem.
What information about the owners has to be reported?
Companies will have to identify themselves and report these four pieces of information about each of the beneficial owners:
Name
Birthdate
Address
Unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of such document). An example might be a driver’s license number and an image of the license.
If an individual provides their four pieces of information to FinCEN directly, the individual may obtain a “FinCEN identifier,” which can then be provided to FinCEN on a BOI report in lieu of the required information about the individual.
FinCEN identifiers
If an individual provides their four pieces of information to FinCEN directly, the individual may obtain a “FinCEN identifier.” This is a unique number that can then be provided to FinCEN on a BOI report in lieu of the required information about the individual.
Company Applicant Reporting Requirement
In addition to reporting company ownership information, companies created after January 1, 2024, will need to submit the same four pieces of information for the “company applicants.” The term company applicant is defined as:
An individual who directly files the document that creates the entity, or in the case of a foreign reporting company, the document that first registers the entity to do business in the United States.
An individual who’s primarily responsible for directing or controlling the filing of the relevant document by another.
Companies that were already in existence or registered before January 1, 2024, won’t have to file reports for company applicants.
What will it cost?
The primary costs a company will have to bear to file a BOI report are dependent on the amount of time it needs to identify and gather the required information on the beneficial owners and applicants. FinCEN estimates that for most companies with simple management and ownership structures, it’ll cost about $85 to prepare and submit the report.
Who will have access to the data?
FinCEN is developing a secure, non-public database called the Beneficial Ownership Secure System (BOSS) to receive and store BOI data. To maintain security and confidentiality, there’ll be limitations on who can obtain the data and for what purposes. As an example, the Federal Register notes, “Federal agencies…may only obtain access to BOI when it will be used in furtherance of a national security, intelligence, or law enforcement activity.”
When do companies have to submit BOI reports?
The regulations go into effect on January 1, 2024. Companies that were created or registered before January 1, 2024, will have one year (until January 1, 2025) to file their initial reports. Companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports.
If there’s a change in beneficial owner information after the initial report is filed, a company will have to file an update within 30 days of the change.
Information on the specific procedures to submit BOI reports will be issued before the effective date of the legislation.
For further information contact:
The FinCEN Regulatory Support Section at 1-800-767-2825 or electronically at frc@fincen.gov.
Dan Zeiler
dan@zeiler.com
877-597-5900 x134