The Corporate Transparency Act (CTA) is federal legislation that will require LLCs and corporations with fewer than 20 employees to start reporting ownership information to the federal government in 2024. Here are details that may apply to your small business.
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 the following information for the entity:
Full legal business name
Any trade names
Principal business address
State, tribal, or foreign jurisdiction of formation
Taxpayer Identification Number (TIN) – This can be an Employer Identification Number (EIN), Individual Taxpayer Identification Number (ITIN), or Social Security number (SSN)
They would then report these four pieces of information about each of the beneficial owners:
Full legal name
Any “doing business as” (DBA) name
Birthdate
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
A “FinCEN identifier” is a unique identifying number that FinCEN will issue to an individual or reporting company upon request after the individual or reporting company provides certain information to FinCEN. An individual or reporting company may only receive one FinCEN identifier.
When an individual who is a beneficial owner or company applicant has obtained a FinCEN identifier, reporting companies may report the FinCEN identifier of that individual in the place of that individual’s otherwise required personal information on a beneficial ownership information report.
An individual or reporting company is not required to obtain a FinCEN identifier.
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.
This means a ZenBusiness employee who completes your filing is the Company Applicant. ZenBusiness will be providing that employee’s FIN to you so you can complete your report.
What will it cost?
There are no costs associated with filing directly with FinCEN. If you opt to use a third party service to filing your report, that third party will indicate the cost of its service.
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 90 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.
Where can I find the form to report?
The form to report beneficial ownership information is not yet available. Once available, information about the form will be posted on FinCEN’s beneficial ownership information webpage.
Additional Resources
FinCEN BOI homepage: https://www.fincen.gov/boi
BOI Compliance Guide: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf
FinCEN FAQ: https://www.fincen.gov/boi-faqs#M_3
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.