Three professionals are gathered around a table. Text reads "Comprehensive Guide of the Corporate Transparency Act for Small Businesses.

Comprehensive Guide of Corporate Transparency Act for Small Businesses

Government passes many laws every year to protect the integrity and ethics of businesses across the country. Most of which do not have filing requirements.  

The Corporate Transparency Act, however, is one of the exceptions.  

The Act came into effect on January 1, 2024. It requires small businesses to submit Beneficial Ownership Information or BOI report with the Financial Crimes Enforcement Network or FinCEN department. It aims to fight unlawful business practices by gathering information on beneficial owners.  

 

As a small business owner, steep penalties will make a hole in your pocket if you fail to comply with this law. 

Hence, understanding the CTA regulations and their influence on your business is essential. 

To help you get started, we present a comprehensive Corporate Transparency Act guide for small businesses, covering all the nitty-gritty of the law.  

So, read on! 

Understanding the Corporation Transparency Act  

The Corporate Transparency Act for small businesses took effect on January 1, 2024, requiring certain companies to file a Beneficial Ownership Information or BOI report with the FinCEN department in the U.S.  

But who are beneficial owners? 

Beneficial owners are individuals who exercise notable control over your company, directly or indirectly. To qualify as a beneficial owner, an individual should control or own at least 25% of a company’s interest.  

A Beneficial Ownership Information (BOI) report, on the other hand, lists information about the individuals who meet the beneficial ownership criteria.  

Besides that, the report consists of information about the business, the taxpayers, and company founders or applicants. 

As the Beneficial Ownership Information changes, applicants are responsible for updating the report whenever necessary.  

 

Deadlines to remember 

Another noteworthy point is that the Transparency Act has set deadlines for organizations to file the reports. 

For instance, if your company started before January 1, 2024, you have until the end of the year to file the report. New businesses that began after January 1, 2024, have 90 days to comply with the law’s requirements. However, if you start a business after January 1, 2025, you will have only 30 days to file the report.  

 

Impact On Small Businesses 

At its core, the Corporate Transparency Act aims to expose illicit corporate behavior. While obliging to it may seem like a burden, it can help your organization eliminate the risk of money laundering, tax invading, corruption, financing of terrorism, and similar offenses.  

Furthermore, it can assist small businesses with identifying individuals who conceal their intentions, actions, and identities behind limited liability companies or corporations. 

However, the Act does not apply to all businesses.  

So, before committing to the filing procedure, let’s discover whether the law is applicable to your company. 

 

Which businesses does the Corporate Transparency Act impact? 

According to the Corporate Transparency Act summary, every small business, family office, corporation, LLC, or other entity created with a secretary of state or a similar office by the filing of a document shall file a BOI report. The law applies to organizations under the law of a state as well as Indian tribes.  

Besides organizations created in the United States (domestic reporting companies), foreign organizations registered to operate in the U.S. (foreign reporting companies) may also submit the BOI report. 

 

Which businesses the Corporate Transparency Act doesn’t impact? 

The majority of small businesses in the U.S. now come under the CTA regulations. Still, the law has exempted 23 types of organizations that meet only a few criteria of the law. These are mainly large corporations and organizations that operate in highly regulated industries. Some of the organizations included in the list are: 

  • Public companies 
  • Large operating companies 
  • Inactive entities 
  • Vulture capital fund advisors 
  • Federally registered advisors and investment companies 
  • Certain pooled investment vehicles 
  • Public accounting firms 
  • Insurance products and companies 
  • Governmental authorities 
  • Tax-exempt entities and entities that assist tax-exempt entities 
  • Banks and other financial companies 
  • Credit unions 
  • Money transmitting and services businesses 
  • Securities brokers and dealers 
  • Securities exchange and clearance agencies 
  • Financial market utilities 
  • Regulated public utilities 

 

What are the requirements to follow? 

If your business meets the criteria of the CTA, then you must report the beneficial owner information to the FinCEN website within the previously mentioned deadlines.  

The deadline may change if your business goes through ownership alterations. A minor child reaching adulthood or sales often triggers these changes in small corporations. In such events, you will have 30 days from the day of the change to file the report. 

Also, remember, the CTA exempts 23 types of businesses, including large and strictly regulated companies. 

So, if you are a business owner, be sure to familiarize yourself with the Corporate Transparency Act requirements and consult a professional to know whether the law affects your organization.  

 

Compliance Guidelines For Small Businesses 

The CTA attempts to identify and close the loophole that allows individuals to hide their identities and use small companies as shields. However, to achieve this, the law will impact nearly all small organizations operating in the U.S. 

Thankfully, the CTA requirements are pretty straightforward to follow. Keeping in mind the deadlines, you will only have to submit the required information and update it as necessary. 

Let’s take a look at the information you must report and how to submit it to comply with the regulation. 

 

What kind of information do you have to report as per the CTA? 

As a domestic reporting company created prior to January 1, 2024, you must provide data on the organization and its beneficial owners. However, if your company was created after January 2024, you shall provide information about the organization, beneficial owners as well as company applicants. 

 

What information do you have to report about the company? 

The new LLC law 2024 requires you to report all the fundamental information about your business, including: 

  • The company’s full legal name 
  • Potential trade or “doing business as” names 
  • The current address of the principal place of the business 
  • Taxpayer identification information 
  • Jurisdiction of Formation 

 

What information do you have to report about the beneficial owner and applicant? 

Besides the basic information about your company, the law requires you to report on beneficial owners. The report must set forth the individual’s 

  • Full legal name 
  • Date of birth 
  • Complete current residential address 
  • Unique identification number and the issuing jurisdiction from a current U.S. passport, driver’s license, or state, or local I.D. document. 

You can also submit a foreign passport in case the individual is not a U.S. citizen.  

 

How to file the BOI report? 

You may file the Beneficiary Ownership Report online through the FinCEN’s website. Updates and corrections to the report can be made through the same point. Plus, there are no charges for filing the report. 

 

What if your BOI report contains an error? 

The Transparency Act gives reporting companies 30 calendar days from the day of realizing the error to update the report. So, if you make any mistakes in the report, simply revisit the point of submission to rectify them.  

 

Strategies For Achieving Compliance 

Violating the Corporate Transparency Act can lead to hefty civil and criminal penalties. Not only that, you might even face two years of prison time.  

Therefore, it’s essential to take your steps mindfully and ensure you have strategized the compliance process as thoroughly as possible. 

To help you out, we present a step-by-step plan to achieve compliance with the CTA regulations. 

 

Step 1: Determine if the Act applies to your organization 

  • Find out the entity structure of your organization. Determine whether it’s a corporation, LLC, limited partnership, business trust, limited liability partnership, sole proprietorship, or general partnership. 
  • If your company is a corporation or LLC, then it’s likely you will have to submit the BOI report. To eliminate doubts, check the exemption list. 
  • If your company is not an LLC or corporation but doesn’t belong to the exemption list either, check FinCEN’s guidelines regarding “reporting company” to determine if you have to file the report.  

 

Step 2: Determine if your company qualifies for an exemption 

  • The Corporate Transparency Act 2024 has a long list of exempted companies. Most of these companies are medium to large in size, operate in highly regulated sectors, or are inactive.  
  • “Large operating companies” typically refer to organizations with over 20 full-time employees in the U.S. These companies shall have an operating physical presence in the country and have filed tax returns the previous year demonstrating over $5 million in gross sales or receipts generated from U.S. sources. 
  • Inactive entities are the organizations that existed before January 1, 2020. These organizations are not engaged in active business, don’t have foreign owners, haven’t received or sent funds over $1,000 in the last year, didn’t have the transfer of ownership in the last 12 months, and don’t hold any assets. 

Step 3: Prepare for the report 

  • By now, you should know if the CTA regulations apply to your company. If it does, your first step towards compliance should be figuring out the beneficial owners. These are the individuals with at least 25% of ownership or control over your organization or its ownership interest.  
  • Once you have identified the beneficial owners, communicate with them about the new small business reporting requirements and gather the necessary information. Let your beneficiary owners know their options to provide the required information or apply to FinCEN for a FinCEN identifier. 
  • Make sure your beneficiary owners let you know about potential changes before filing the report. 
  • Gather the required information about your company and keep them up-to-date. 

 

Step 4: Implement a procedure to ensure the relevancy of the reported information 

  • Execute a step-by-step procedure to ensure you are filing the correct information. The same procedure should also help you make timely updates to the report when changes occur. 
  • Make sure your collected information is secure and organized with I.T. security and entity management systems. 

 

Step 5: When and how you want to file the initial BOI report 

  • Decide when you want to file the report beneficial ownership information report. If your organization started before January 1, 2024, you have to file the report until January 1, 2025. 
  • Once you determine the date, you can either file the report yourself with FinCEN or get assistance from professional consultants. 

 

Step 6: Enjoy a seamless process 

  • If you have any inactive or unnecessary entities, consider dissolving them to reduce the hassle of filing the BOI report. 
  • Additionally, amend your governing documents, such as the shareholder agreement, to include the obligations of the beneficial owners regarding the new law for small business 2024. 

 

Risks Of Non-Compliance 

If your organization willfully fails to report or update the beneficial ownership information to FinCEN, you may face a civil penalty of up to $500 per day. In addition to that, non-compliance can result in criminal penalties, including up to two years of imprisonment or a fine of $10,000.  

Similar penalties and charges also apply to organizations submitting false, fraudulent, or incomplete information in the report. Furthermore, if a senior officer of your company or anyone else fails to file the Beneficial Information Report or willfully prevents the company from submitting the report, the authorities will hold them responsible. The personnel will be subject to civil as well as criminal penalties. 

 

Looking Ahead: Future Implications and Considerations 

Although the Corporate Transparency Act small business was implemented months ago, uncertainties still remain. Some small companies are stressed about the burden of compliance, while others are discussing the unconstitutional ruling of the Act.  

With so many nuances, it’s natural to wonder about the future implications of the Act and what challenges you may face in the way of your compliance. 

To help you get more clarity on the situation, here’s a list of considerations to keep in mind. 

1. Legal challenges 

Many expected legal challenges in the way of CTA implementation, but the shoe finally dropped on March 1, 2024. A federal district court in the Northern District of Alabama concluded that Congress lacked the power and resources to enact CTA.  

The officials added that the Act infringed on traditional states’ rights.  

The Financial Crimes Enforcement Network has committed to comply with the court’s order and has put a pause on enforcing CTA against the plaintiffs in that action.  

This outcome has created a dilemma for many small organizations, leaving them to wonder whether they should prepare for the BOI report.  

Key takeaway: While for reporting organizations, it’s essential to stay apprised of the court updates, preparing for the BOI report is still paramount. Since the future is uncertain, it’s best to stay compliant and avoid penalties. 

What you can expect: Considering FinCEN’s response, there’s a great possibility they will appeal the court’s decision. At the same time, the state of New York has executed its own transparency law, the New York LLC Transparency Act.  

If the CTA becomes unconstitutional, you can expect more states to legislate individual transparency laws and requirements. 

2. Certifications to the CTA 

As more and more organizations are reviewing and applying the small business reporting requirements, the gaps in the Act are becoming more apparent. For instance, some organizations are still wondering what paperwork they shall fill out or modify if they convert from one entity to another, such as from a corporation to an LLC. 

Key takeaway: FinCEN has clarified some confusion by releasing several FAQs.  

Hence, if you have any doubt regarding the law, it’s essential to stay up-to-date with the department’s publishing. Also, it will be wise to take your time before filing the BOI report for further news if the deadline allows. 

What you can expect: While you can expect FinCEN to continue providing updates and guidance regarding the Act’s ambiguous terms, it will still be wise to hire attorneys or consultants to navigate the law.   

3. Access to beneficial ownership information 

Another matter related to CTA that’s worrying many is the security of the reported information. Although the general public will not have access to your private data, some authorities and businesses will.  

To address this concern, FinCEN has recently released a guide highlighting the requirements financial institutions have to fulfill in order to access the BOI information. 

Key takeaways: According to FinCEN’s guide, financial institutions can only access your BOI information for customer due diligence and other obligations as per the Bank Secrecy Act. They cannot access your information for commercial and general business activities.  

Furthermore, institutions are responsible for developing robust protective measures to safeguard the collected BOI details. Any flaws can cause FinCEN to reject an institution’s request to access BOI. 

Also, accessing or using the BOI reports without permission can lead to criminal penalties. 

What you can expect: Financial institutions will have to wait until law enforcement has completed their “access” rules and regulations regarding BOI to get your information.  

Additionally, you can expect some harmonization between the Corporate Transparency Act requirements and customer due diligence regulations for data protection. Financial institutions may also release policies and procedures for securely collecting Benefit Ownership Information.  

4. Revising organizational documents and policies 

Most entities that qualify for the CTA regulations have already started to execute protective languages into their agreements and policies to offset the CTA compliance risk.  

Organizations are also creating internal reporting compliance policies to maintain compliance with the CTA. 

Key takeaways: If you have not strategized to comply with CTA yet, you shall have an internal discussion about what actions you can take to offset risks where appropriate. 

What you can expect: The complexities and terms of CTA will likely become the norm, just like the countless laws released before the CTA. 

Hence, instead of perceiving it as an additional task, you can establish an integrated management system to help you stay compliant with CTA along with other applicable laws. 

 

Streamline Your CTA Compliance With FinCEN Advisors 

For most businesses, adhering to CTA regulations is now a standard part of doing business in the U.S. Hopefully, our Corporate Transparency Act guide for small businesses has helped you comprehend this critical regulation and simplify its requirements. 

Still, we understand that spending hours navigating the requirements of the law and creating the reports can feel like a burden. Thus, at FinCEN Advisors, we always welcome you to freely share your queries and doubts. With our comprehensive guidance, real-time regulatory updates, and filing solutions, you will never miss a deadline or face non-compliance consequences ever again. 

 

Frequently Asked Questions 

1. What Entities Are Exempt From The Corporate Transparency Act? 

The CTA regulations exempt 23 different categories of companies from the Act. It includes large organizations, inactive businesses, and entities that are already subjected to rigorous state and federal regulations.  

2. Does The Corporate Transparency Act Apply To Single Member LLCs? 

Yes, it does. The CTA applies to most small businesses, including single-member and other limited liability companies. However, it doesn’t apply to organizations that offer estate planning or tax-exempt services or companies that assist organizations providing estate planning services. 

3. What Is The Penalty For Violating The Corporate Transparency Act? 

Violating the Corporate Transparency Act can lead to civil penalties of $500 for each day of violation. The person violating the law can also face criminal penalties, including fines of up to $10,000 and two years of imprisonment. 

4. Is The Corporate Transparency Act Constitutional? 

On March 1, 2024, One of Alabama’s federal district courts concluded that the Corporate Transparency Act is unconstitutional. However, it’s an ongoing legal matter. So, if your company is not a plaintiff in the case or related to the members of the NSBA, it will continue to be subject to the regulations of CTA.  

This ruling, delivered by the Northern District of Alabama on March 1, 2024,
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