The United States Corporate Transparency Act (CTA) will become effective on January 1, 2024. The CTA was enacted under the National Defense Authorization Act adopted in 2021. The legislation is intended to target money laundering and financing of terrorism and was the result of international pressure based upon the US not satisfying the international standards regarding transparency. The CTA will apply to any entity that is currently in existence or formed after the effective date. An entity for purposes of the CTA will include corporations, limited liability companies, limited partnerships, and similar entities or business structures that are formed or registered to do business in the United States. The CTA does not apply to trusts, sole proprietorships, or nonprofit organizations.
Certain entities that are currently subject to regulatory reporting requirements such as banks, credit unions, securities brokers, registered investment companies, and insurance companies will be exempt from reporting under the CTA. An existing entity may also be exempt if it qualifies as an “inactive entity” which (a) was in existence before January 1, 2020, (b) is not engaged in active business, (c) is not owned by a foreign person, (d) hasn’t changed owners in the last 12 months, (e) hasn’t sent or received funds in an amount greater than $1,000 in the last 12 months, and (f) doesn’t hold any assets.
The CTA will require the reporting company to disclose beneficial ownership information (BOI) and company applicants to the Financial Crimes Enforcement Network (FinCEN), a bureau within the US Department of Treasury. For an entity formed before January 1, 2024, the first report will be due on January 1, 2025. For an entity formed on or after January 1, 2024, the first report is due thirty (30) days from the date of formation. In addition, any changes in beneficial ownership must be submitted within thirty (30) days from the date of the ownership change. Failure to comply with the CTA can result in a civil penalty of $500 per day the violation continues and criminal penalties of up to $10,000 and two (2) years in prison.
A beneficial owner is any individual who substantially controls the company and/or owns or controls twenty-five percent (25%) of the ownership interests. In addition, information on a “Company Applicant” must also be disclosed. A Company Applicant is the individual who actually files the document to create the entity and/or an individual who is primarily responsible for directing or controlling the filing by another even if there is no beneficial ownership. Disclosure of information on the Company Applicant will only apply to those entities formed on or after January 1, 2024. FinCEN intends for reports to be electronically filed and is working on the Beneficial Ownership Secure System (BOSS) to handle secure filings. More information can be found at www.fincen.gov/boi-faqs.
STEPS TO TAKE FOR AN EXISTING BUSINESS:
1. Determine if your business is the type of entity that may be required to file a BOI report.
2. Determine if your business qualifies for an exemption.
3. If your existing business must file a BOI report, consider the following:
a. Determine who the beneficial owners are.
b. Contact each beneficial owner to advise them that the CTA requires the entity to report personal information about them to FinCEN.
c. Each beneficial owner has the option to provide the required information to the company or to apply directly to FinCEN for a FinCEN identifier.
d. Obtain the information that must be reported for each beneficial owner.
e. Request that each beneficial owner provide you with updated information or to advise of any changes to the information that is submitted.
f. Store all personal information in a secure manner.
g. Consider amending the governing documents or agreements of the entity to require beneficial owners to provide the personal information required for the company to submit the BOI report.
4. Develop a procedure to make sure the reported information remains current.
5. Determine when you want to file the initial BOI report.
Before December 31, 2023, consider dissolving any entities that are inactive or no longer needed. If you are considering forming a new entity, determine if you want to do so before January 1, 2023, so there will be a longer period before the first BOI report is due on January 1, 2025.
This article is not intended to replace legal advice applicable to your situation and should be used only for informational purposes. Consult with your legal or tax advisors to review any information contained herein.