Under the Corporate Transparency Act (CTA), which went into effect on January 1, 2024, many U.S. small business owners are required to file corporate transparency reports with beneficial ownership information.
For most eligible businesses, the filing deadline is January 1, 2025. Those who fail to file by this deadline — or fail to update this information if needed — could face up to two years imprisonment and fines up to $10,000, in addition to civil penalties of up to $591 per day.
[Read more: How to File a Beneficial Ownership Report]
What is the Corporate Transparency Act?
The CTA was enacted in 2021 to combat illicit activity including tax fraud, money laundering, and financing for terrorism by capturing more ownership information for specific U.S. businesses operating in or accessing the country’s market. Under the new legislation, businesses that meet certain criteria must submit a Beneficial Ownership Information (BOI) Report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). This report provides details identifying individuals who are associated with the reporting company.
The CTA was established to prevent individuals with malicious intent from hiding or benefitting from the ownership of their U.S. entities to facilitate illegal operations which, according to Congress, is a widely-used tactic that affects national security and economic integrity.
[Read more: How to Prevent Bank Fraud and Protect Your Business Account]
Who is considered a beneficial owner of a company?
According to the CTA, an individual qualifies as a beneficial owner if they directly or indirectly have a significant ownership stake in a company. This person either has a major influence on the reporting company’s decisions or operations, owns at least 25% of the company's shares, or has a similar level of control over the company's equity.
What information must be reported about a company’s beneficial owners?
All reporting companies must provide their legal name and trademarks, as well as their current U.S. address, which could be either the address of its main business site or, for foreign-based companies, their U.S. operational location. They’ll also need to provide a taxpayer identification number and specify the jurisdiction where they were formed or registered.
Businesses registered or established post-January 1, 2024, must provide information regarding the business, its beneficial owners, and its company applicants — including owners’ and applicants’ names, addresses, birthdays, and identification numbers (such as a license or passport number), and the jurisdiction of the documents. Businesses established before that date can omit information regarding company applicants, and must only submit information on the business and beneficial owners.
While the CTA does not require businesses to submit annual reports, the initial filing period may not be the only time you’ll be required to submit information.
“In addition to the required initial filing, there are requirements to update the original filing when things change,” explained Roger Harris, President of Padgett Business Services. “Some of the things that require an updated filing are not things a business owner has ever thought were important to track, and the timeline to report these changes can be as short as 30 days.”
Harris noted that business owners may be surprised by some requirements for updated filings. For instance, if a beneficial owner changes their address, legally changes their name due to marriage or divorce, or obtains a new driver's license, it may necessitate an update to a company’s BOI report. Operational changes or a new delegation of authority could also qualify.
“If you make changes in the operation and delegation of duties within your business that could be considered to give a new person substantial control of your business, you could be required to update your filings, even if the person performing those duties did not own any of the business,” said Harris.
While the CTA does not require businesses to submit annual reports, the initial filing period may not be the only time you’ll be required to submit information.
Are businesses required to file with FinCEN as well as their financial institutions?
Many financial institutions require small businesses to submit beneficial ownership information, which protects the institution from being used for illegal activity. However, these are two distinct reporting requirements, and sharing beneficial ownership information with a financial institution does not fulfill a small business’s federal requirements.
Keep in mind, however, that FinCEN can share beneficial ownership information with other entities — including government agencies, law enforcement agencies, and some financial institutions.
What is the beneficial ownership information reporting process?
Reporting companies have a limited time to file their initial BOI reports:
- For qualifying reporting companies established before the above date, the filing deadline is January 1, 2025.
- Those created between January 1, 2024, and January 1, 2025, will have 90 days from either the actual notice of formation or public announcement, whichever comes first, to file.
- Businesses established on or after January 1, 2025, will have 30 days from notification or public announcement of their formation to submit their first report to FinCEN.
- Businesses must submit any corrections or updates to previously filed information within 30 days.
Two types of reporting companies will be required to submit BOI reports: domestic reporting companies, including LLCs, corporations, and other entities formed through filing with a secretary of state or a comparable office in the U.S.; and foreign reporting companies that are registered to conduct business in the United States through filing with a secretary of state or an equivalent office.
Businesses will not incur a fee for submitting their reports, and electronic forms are available on FinCEN’s website.
[Read more: How to Choose a Legal Entity for Your Startup]
Where can business owners get help with their beneficial ownership information reports?
Though companies may opt to file their own BOI reports without legal assistance, Harris advised business owners against this.
“It may not be difficult to complete the forms, but with everything a small business owner must do to operate a successful business, I fear this is something that could be missed or not done [promptly],” Harris explained.
Instead, he recommends consulting a knowledgeable advisor, such as an attorney or an accountant, when filing the initial and/or updated reports to ensure they’re completed on time and to FinCEN’s standards.
“There are some issues in the law that could require an interpretation of certain facts to determine who is a beneficial owner that must be included in the filings,” Harris said. “If you find yourself in this situation, ... consult with an attorney to help you decide how your set of facts fits within this law.”
For those with a straightforward path, Harris believes an accountant or tax preparer may be sufficient. However, he cautioned that not all accounting and tax professionals will offer this service due to potential insurance policy limitations.
“Some in the accounting and tax profession are not going to offer this service to their clients because the errors and omission policies these firms have will not cover these services,” Harris explained. “We are already seeing companies pop up that claim to be specialists in this area. If a business wants to go in this direction, they should make sure they choose a legitimate firm with the proper expertise and reasonable fees that will stand behind their work.”
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