Corporate Transparency Act: A New Requirement for Small Business Owners
Introduction
Effective January 1, 2024, the Corporate Transparency Act (“CTA”) created a new regulatory requirement for small business owners to file reports that name each of their “beneficial owners” and upload a photo or scan of a driver’s license or passport for each beneficial owner. Although there are many nuances and exceptions, the basic requirements are straightforward for most small business owners.
Congress passed the CTA to create a database to be used by the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury, to combat money laundring. The CTA was enacted by Congress in 2021 and, while we had hoped that Congress would have taken action to modify or eliminate some of the requirements of the CTA, the final administrative rule to establish the requirements and deadlines was issued the week before this past Christmas.
This new federal reporting requirement requires millions of companies to report, for the first time, information about their “Beneficial Owners” to FinCEN through an online e-filing portal.
The first step is to determine whether your organization is one that must file this report (a “Reporting Company”):
Virtually all corporations, limited liability companies, and registered partnerships will qualify as a Reporting Company – basically, any organization that was created by filing a document with the Secretary of State of Ohio. There are twenty-three specific exemptions that include publicly traded companies, insurance and investment companies, non-profits, and large operating companies (most of these organizations already disclose relevant information pursuant to other regulations).
The most likely reason that an entity would have an exemption under the CTA is that of a “Large Operating Company.” A Large Operating Company must satisfy three separate criteria:
It must employ “more than 20 full-time employees in the United States.” This would normally apply to each employee providing at least thirty hours per week of services to the entity.
It must have an “operating presence at a physical office within the United States.”
It must have filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales (net of returns and allowances) on the entity’s IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065 or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under U.S. Federal income tax principles
So, if you have heard that you can avoid the CTA just because you have more than 20 full-time employees, you will need to ensure that you meet the gross receipts test as well.
The next step is to determine who are “Beneficial Owners” for your company:
The regulations require the identification of any individual who “directly or indirectly” exercises “substantial control” over the Reporting Company or owns or controls at least twenty-five percent of the ownership interests of the Reporting Company.
Thus, any owner with at least a 25% ownership interest must be disclosed as well as any senior officers (President, CEO, CFO, COO, etc.) or important decision makers (such as board members, VPs, division managers, etc.).
There are a number of complex rules about the disclosure of other individuals, such as those with stock options, convertible instruments, or profit interests, but those will not apply to the majority of small businesses. If you believe your Reporting Company may be subject to one of these scenarios (or another similar situation), please contact our firm to discuss the specifics.
The final step is to collect and provide FinCEN with the requirement information:
The disclosures are completed on an online form and require the following for the Reporting Company:
Legal name and any other trade name or “dba”
TIN or EIN
Current business address
The following is required for each Beneficial Owner:
Name
Date of birth
Residential address
Driver’s License or passport number
Copy/Image of the “identifying document” (driver’s license or passport)
Deadlines and the future obligations of a Reporting Company
A Reporting Company faces different deadlines, depending on when it was created:
If the Reporting Company existed before January 1, 2024: you do not need to file a BOI report until 11:59PM December 31, 2024.
If the Reporting Company was created on or after January 1, 2024 but before January 1, 2025 – you must file your BOI report within 90 days of the creation of the entity.
If the Reporting Company was created on or after January 1, 2025 – you must file your BOI report within 30 days of the creation of the entity.
Reporting Companies that are created after January 1, 2024 also must provide certain information about the “Company Applicant." A Company Applicant is a person who filed, or directed to be filed, the filing that created your entity with the Secretary of State. For example, this could include the attorney or paralegal who actually filled out the online form on the Secretary of State’s website as well as one or more of the shareholders, members, or partners who provided the information to the law firm for the entity’s creation.
If any information about a Beneficial Owner changes (or is later found to be inaccurate), the Reporting Company must file an updated or amended report within thirty days of becoming aware of the need.
The future of the CTA itself (Updated March 2, 2024)
While the CTA has faced much criticism, it is seemingly here to stay. There are pending lawsuits challenging the constitutionality of the CTA, but there has been no decision that has served as an injunction to excuse the requirements of compliance.
If you have any questions about your entity’s requirements under the CTA, please contact Will Harrelson at 937-552-9400 or will@harrelsonllp.com
[Updated March 2, 2024]
On March 1, 2024, a federal district court in Alabama ruled that the Corporate Transparency Act is unconstitutional. In short, the ruling enjoins enforcement of the CTA only as to the parties to the case, and FinCEN has made clear that it expects all other small businesses to continue to comply with the CTA.
In light of the narrow scope of the judgment in the case and FinCEN’s recent announcment, Harrelson & Harrelson LLP recommends that non-parties to that litigation should, at this time, assume that FinCEN continues to view them as subject to the CTA. While the individual circumstances of a Reporting Company may vary, generally speaking, companies should be prepared to meet the stated deadlines for filings under the CTA.