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Effective January 1, 2024 small businesses will be required to 'open the books' to the Federal Government. The Corporate Transparency Act ("CTA") is going to require most private companies within the U.S. to report the names of their 'beneficial owners' to the Financial Crimes Enforcement Network ("FinCEN"). Possible penalties for non-compliance include fines and jail time.
What is the CTA?
Congress approved the September 29, 2022 Final Rule which adds beneficial ownership information reporting under the CTA. The goal of the CTA? Well, as part of the Anti Money-Laundering Act of 2020, it serves to decrease money laundering through small and privately held businesses. The method to achieving this end is to disclose the name, birthday, address and some sort of government-issued identification (e.g. driver's license) for a business's beneficial owners.
Who has to comply with the CTA?
The CTA defines a 'Reporting Company' as "a corporation, limited liability company, or ther similar entity that is either (1) created by the filing of a document with a secretary of state or similar office under the law of a State or Indian Tribe; or (2) formed under the law of a foreign country and registered to do business in the United States.
This, in essence, means most, if not all, small businesses will be required to report under the CTA, short of sole proprietorships or general partnerships, since these business structures are not created by filing any document with a secretary of state.
Exempt from compliance with the CTA are a number of companies, including "large operating companies", which are companies that meet all of the following requirements:
The company employs more than 20 employees on a full-time basis in the U.S.
Had more than $5 million in gross receipts or aggregate sales as reported on its previous year Federal income tax returns in the U.S.
Has an operating presence at a physical office within the United States.
The broad definition of those companies who are exempt from CTA compliance tells us that small businesses within the U.S. will bear the brunt of this new legislation.
Who is a 'Beneficial Owner'?
A beneficial owner is an individual who either (1) exercises 'substantial control' over the reporting company; or (2) owns or controls at least 25% of the ownership interest in the reporting company.
Substantial control can be exercised in a number of ways, but multiple individuals, therefore leaving
The CTA does not expressly define 'substantial control' but does implement a "Control Test" to assist in determining who has substantial control of the business. The Control Test states that those with substantial control include:
Senior officers;
individuals with authority over the appointment or removal of a senior officer or a dominant majority of the company's board of directors; or
an individual empowered to direct, determine, decide or exercise substantial influence over important matters for the company.
Certainly there are other ways someone can exercise substantial control over the business and therefore the CTA is clear to make mention of the fact that this test is non-exhaustive, but instead eludes to what FinCEN considers substantial control.
The CTA also does not define 'own or control' or 'ownership interest' and accordingly implements an "Ownership Test" providing certain examples:
an individual's interest in equity, profit, or convertible interests;
an individual's indirect ownership through joint ownerships, or ownership via a trust;
an individual's interest through any other contract, arrangement, understanding or relationship; or
debt interests that provide a creditor the right or ability to convert the right to payment into a pre-determined sum to any form of ownership interest (e.g. convertible debt).
There are certain exemptions or exclusions to the reporting requirements for beneficial owners. Minors, employees, creditors, inheritors of an interest, or an intermediary acting on behalf of another individual are excluded from the definition and thus the reporting requirements under the CTA.
One of the important things to remember here is that there can be multiple individuals deemed 'beneficial owners', therefore triggering a requirement to report on more than one person.
What data must be reported under the CTA?
The CTA mandates that each reporting company provide each beneficial owner's name, date of birth, their residential or business address, and some form of government-issued identification (e.g. driver's license).
Beyond information pertaining to beneficial owners, the reporting company must provide information for the reporting company's 'Applicant'. An 'Applicant' is defined as the person or persons who who prepare and/or file the forms with the secretary of state for the reporting company), and therefore can mean your company's attorney. The reporting company must provide the Applicant's name, date of birth, business address and some form of government-issued identification.
Lastly, information pertaining to the company itself is to be reported under the CTA. Companies must provide their legal name, including their DBA if applicable, business address, the state they were formed and tax identification number ("TIN").
When do private companies have to report under the CTA?
Filing under the CTA starts January 1, 2024. Those businesses which were already formed prior to January 1, 2024 will have 1 year (i.e. until January 1, 2025) to comply with the CTA.
Entities formed on or after January 1, 2024 will have 30 days to file their first report under the CTA.
What happens if my company doesn't report, or reports something that is false?
Anyone who intentionally fails to file their CTA report, or in their report they intentionally report false information under the CTA can expect to bear the brunt of pretty steep penalties, including fines from between $500 to $10,000 and/or jail time of up to 2 years.
What can small businesses do now to prepare for the CTA?
The first thing a small business can do now is determine whether they, or any of their beneficial owners, are within any of the reporting exemptions under the CTA.
Following this, businesses should begin to identify and gather the information necessary for accurate reporting under the CTA. This information should be housed along with the corporate records of the business so that it may be easily referenced when it comes time to file.
Small businesses should enlist the services of a business attorney within their state of formation to review their business structure, identify the key information that will be needed for reporting, and to stay up to date on the CTA.
The Reel Law Firm PLLC is poised to assist companies in Florida and Ohio with their compliance requirements under the CTA. If you have any questions related to your business and its requirements under the CTA, you can schedule a strategy session here.