What it is and what you need to do about it.
A few years ago, Congress passed a law that was to come into effect at the beginning of 2024. Well, now it’s the home stretch of 2023 and the Corporate Transparency Act will be going into effect in the next six months.
Nearly all businesses in America are affected, so now’s a good time to learn all about the CTA.
The basics
- The Corporate Transparency Act is a big-time reporting requirement for most businesses in America
- It’s intended to catch financial crimes by mandating all business ownership be disclosed to the federal government
- There are some pretty steep penalties for not reporting your ownership
- It’s a new law, and the government hasn’t fully explained how it’s all going to work yet, so stay tuned
What is the Corporate Transparency Act?
The Corporate Transparency Act (CTA) is a statute approved by Congress in 2019 as part of the Anti-Money Laundering Act, itself part of the National Defense Authorization Act (a bill passed every year to fund the military, which often contains legislation only loosely related to national security).
The CTA requires most businesses to disclose their “ultimate” owners: the investors behind the scenes. It’s intended to clamp down on, in Congress’ words, “bad actors” in the shadows who may be using businesses as fronts for money laundering, tax fraud, or even financing terrorism.
These disclosures are known as “Beneficial Ownership Information” or BOI reports, and the reporting mechanism is handled by FinCEN over at the Treasury Department.
What is FinCEN?
FinCEN is short for the Financial Crimes Enforcement Network, a part of the Treasury Department. This government bureau was created in 1990 to analyze information reported under the Bank Secrecy Act and has since then worked in combination with other law enforcement bureaus to combat money laundering and other financial crimes.
Is this required?
There is no way around it: unless your business is exempted from this law, you are required to file the reports or face some fairly serious consequences. This is being approached by the federal government as an issue of national security as much as financial regulation, and they’re not messing around.
Who does the CTA effect?
Every corporation, LLC, or other entity created by filing with a Secretary of State (or the equivalent) must file a BOI report. These entities will often be referred to as “reporting companies” in discussions about the CTA.
Though there is a long list of exceptions, the CTA affects millions of small businesses.
Who are the exceptions?
There are 23 categories of exemptions, mostly for entities that already have to report the information demanded by the CTA anyway.
Examples include publicly traded companies, banks, securities brokers, accounting firms, insurance companies, tax-exempt entities, and public utilities.
What is a beneficial owner?
The “beneficial owners” part of the BOI Report name refers to anyone either directly or indirectly owning at least 25 percent of a company’s ownership interests or exercising significant control over the business itself.
To be absolutely clear: indirect ownership means owning or controlling an entity that owns or controls the business. If you own an LLC which has a 25% ownership interest in a certain business, you are a beneficial owner, even if you don’t personally own any stake in the company yourself. Trusts, holding companies, you name it, indirect ownership can work through any of these intermediate entities.
So what constitutes “significant control?” It can mean anyone with substantial decision-making authority over the business, or any senior level officer of the business.
- Service as a senior officer, such as president, general counsel, CEO, other C-suite executive, or the manager or managers of an LLC
- Authority over appointment or removal of senior officers or board members
- Control of or substantial influence over “important business decisions”
One area FinCEN hasn’t been clear on is how ownership via trusts will be evaluated. Many businesses owners utilize revocable or irrevocable trusts within their ownership structure. Who would a beneficial owner be in these cases? We aren’t exactly sure, but for now our assumption would be the trustee or trustees. We’ll drop an update when we hear more from FinCEN.
What about investing in multiple businesses?
Each business or other entity that is required to report under the Corporate Transparency Act must report all beneficial owners.
If you count as a beneficial owner of multiple business entities, you will show up in multiple different BOI reports. However, you are not required to take any special action yourself. The individual reports from the individual entities will cover your reporting requirements.
Examples
It’s been a little abstract so far, so here’s four examples to help you understand how this works. Each one gets a little more complex, so make sure to follow along from the beginning!
Example 1
First up, The ABC Company LLC.
The business is owned by three individuals and is managed by a fourth individual who holds no ownership interest in the business.
Who should be included on the BOI report?
- Albert must be reported because he directly owns 50%.
- Betty must be reported because she directly owns 30%.
- Chris does not need to be reported because he directly owns 20%.
- Daniel must be reported because he has significant control over the business (as manager).
Example 2
Next, we’re looking at The ABC Company LLC (totally different company from Example 1, by the way).
The business is owned by four individuals, with one of the owners also serving as the manager.
Who should be included on the BOI report?
- Albert must be reported because he directly owns 50%.
- Betty must be reported because she directly owns 30%.
- Chris does not need to be reported because he directly owns 10%.
- Daniel must be reported because he has significant control over the business (as manager), but not because he directly owns 10%.
Example 3
Now let’s check out The ABC Company LLC (no relation).
The business is owned by one LLC and three individuals, with one of the individuals serving as the manager.
Who should be included on the BOI report?
- Albert Jensen must be reported because he indirectly owns 35% (50% x 70%).
- Angel Jensen does not need to be reported, because her indirect ownership is only 15% (50% x 30%).
- Betty must be reported because she directly owns 30%.
- Chris does not need to be reported because he directly owns 10%.
- Daniel must be reported because he has significant control over the business (as manager), but not because he directly owns 10%.
In addition, Albert Holdings LLC has its own filing requirement, and it must file a BOI Report showing both Albert Jensen as a direct owner of 70% and Angel Jensen as a direct owner of 30%.
Example 4
Here’s a more complex one in case you need an example of how the reporting requirements work with holding companies.
Here, we have three LLCs – The ABC Company LLC, ABC Services LLC, and ABC Products LLC – with two different managers and four different owners. Let’s crack it open.
Who should be included on the BOI reports?
For The ABC Company LLC:
- Albert must be reported because he directly owns 50%.
- Betty must be reported because she directly owns 30%.
- Chris does not need to be reported because he directly owns 10%.
- Daniel must be reported because he has significant control over the business (as manager), but not because he directly owns 10%.
For ABC Services LLC:
- Albert must be reported both because he has significant control over the business (as manager) and because he indirectly owns 50% (50% x 100%) .
- Betty must be reported because she indirectly owns 30% (30% x 100%).
- Chris does not need to be reported because indirectly owns 10% (10% x 10%).
- Daniel must be reported because he has significant control over the business (as manager), but not because he indirectly owns 10% (10% x 10%).
For ABC Products LLC:
- Albert must be reported because he indirectly owns 50% (50% x 100%).
- Betty must be reported because she indirectly owns 30% (30% x 100%).
- Chris does not need to be reported because he indirectly owns 10% (10% x 100%).
- Daniel must be reported because he has significant control over the business (as manager), but not because of he indirectly owns 10% (10% x 100%).
If this one made your head hurt, you aren’t alone. But this ownership structure is actually pretty common!
If your business is a multi-entity structure like this, we highly recommend you map everything out on a flow chart like this. Your business structure can be much easier to understand when you can see it all laid out in front of you. Ask your CPA – there’s a good chance they’ve already made a flowchart for your business.
When do I file?
Great question.
The initial report
As expected with an update to federal regulations, currently existing businesses will have a little more time to get their ducks in a row than newly created businesses will once the law is fully implemented.
- Businesses created before January 1st, 2024 have until January 1st, 2025 to file
- Businesses created after January 1st, 2024 have until 30 days after their official formation to file
However, just because existing businesses have some extra time to file doesn’t mean there’s no sense of urgency. The CTA is a big deal, with a lot of moving parts, and there may be unexpected setbacks when filing. We recommend you get it done early so you’re not caught between a rock and a hard place later – your CPA or attorney can help you get started.
Ongoing reporting
Once you have your initial report completed, you’ll need to take care of ongoing reporting. Luckily, there are no annual reporting requirements. You simply need to file an updated BOI report within 30 days of any ownership changes, direct or indirect.
This can present a challenge when your owners might be other LLCs or some other kind of entity with confidential ownership. What do you do then?
At the very minimum, we recommend that the legal documents that govern how your business operates should include language that requires all investors/owners to report any changes. While it’s not a perfect defense, if something goes wrong it will allow you to show FinCEN you have actively been trying to comply with the law.
For larger investment vehicles like hedge funds, real estate funds, real estate syndications, and so on, we’re expecting to see them require their investors/owners to provide annual certifications if there are no changes to indirect ownership information.
This is a new law and, as such, you’ll probably be hearing more from FinCEN over the years as they refine the process.
What information do I need to file?
As mentioned above, you’ll be required to file Beneficial Owner Information or BOI reports with FinCEN detailing everyone who owns or controls the entity.
Let’s walk through the specific information that FinCEN is looking for.
What information about the business has to be filed?
- Full legal name
- All trade names or DBAs (“doing business as,” a type of semi-official nickname)
- Complete current street address of main location
- Jurisdiction of formation
- Taxpayer ID number
What information about the beneficial owners has to be filed?
- Full legal name
- Date of birth
- Complete current residential street address
- Unique ID number plus a picture from one of the following up-do-date documents: US passport, state or local ID, driver’s license, or a foreign passport (only if the individual doesn’t have any of the other options)
A lot of investors aren’t going to be happy about providing this information – it leaves them at risk of identity theft, and cybersecurity is still a developing field – but there are ways of managing their privacy, like a FinCEN identification number. We have more on privacy later in the article.
How do I file?
FinCEN has actually not made it entirely clear how the filing process will work. They are currently building and testing a database for the filing, and it looks like you’ll probably be able to file electronically on FinCEN’s website.
Most businesses and individuals that currently have FinCEN reporting requirements use a CPA or law firm to file these reports, so a CPA or law firm will probably be able to help you navigate this new system too.
What does it cost to file?
Most likely, it will be free to file with FinCEN directly.
However, if you use a CPA or attorney to file the report, you’ll have to pay their fee.
Depending on how complex your ownership structure is and how clean the ownership information you provide them with is, we anticipate CPA firms will charge somewhere between $250 and $750 per filing, and then their hourly rates for any advice, consulting, or assistance outside of the report filing (helping you gather documents, put things together, clarifying any questions you have, etc).
Law firms will probably charge their usual hourly rates, somewhere in the neighborhood of $250-$1000 per hour.
If you work with a CPA already, great, this is what they do. And if you don’t work with a CPA, now is a great time to find one.
Why have someone else file it?
There are several big reasons you’d want to have an expert, like your CPA, file these reports for you.
- They already have the necessary information ready to go and can prepare the necessary documents quickly and efficiently.
- This is their job! If you’re working with a CPA – and you should be – this kind of thing is exactly what they were hired for. Let the accountant take care of it.
- These reports can be complicated, the rules haven’t been fully clarified yet, and there can be major consequences if this doesn’t get done correctly. Working with an expert is key to mitigating your risk.
If you work with a CPA already, great, this is what they do. And if you don’t work with a CPA, now is a great time to find one.
What happens if there’s a problem?
On the one hand, this is a totally new requirement, and a few mistakes are possible.
On the other hand, FinCEN is extremely serious about needing these reports, and there are some steep penalties if you fail to correct your mistakes for long enough.
This can get complex and scary very fast, and we still don’t totally know how it’s all going to work or how it’ll enforced.
What we do know: make sure you get it reported. Make sure you keep it updated. Mistakes are one thing, but negligence is a whole different ball game.
What are the possible penalties?
If you make a mistake, just correct it within 30 days.
If 30 days pass, and you still haven’t bothered to amend your incorrect report, you’ll start incurring a $500 per day penalty.
If you’re violating the CTA and falsifying or withholding information on purpose, it becomes a much more serious problem. That’s, like, an actual crime. You may face criminal penalties including a fine of up to $250,000, up to five years imprisonment, or both.
The key is to file the report, and if you catch an error, fix it right away. We recommend that, if you made the error yourself, you find an expert – like your CPA or attorney – who can help you navigate the requirements more successfully.
What if something changes in the information we’re reporting?
If there are changes in the beneficial owners or exemption status, file an update within 30 days. And that’s calendar days, not business days – you have a month. Still, shouldn’t be too complicated if you’ve already managed to get the original report filed.
Do I get to retain any privacy at all here?
This whole Corporate Transparency Act thing is designed to shine a light on business ownership, but privacy is still important.
As far as the federal government is concerned, you need to tell them everything (remember that $250,000 criminal penalty we mentioned above?). Complete the reports thoroughly and accurately.
However, not everyone needs to know what you’re telling Uncle Sam. You can apply to FinCEN directly for a unique “FinCEN identifier” code which can then be provided to reporting companies for use on their BOI reports. That way, FinCEN knows who all the beneficial owners are, but their privacy is retained as much as possible from the businesses they’ve invested in.
As with many other details of the Corporate Transparency Act, the rules around FinCEN identifier codes are likely to change. There’s already a set of proposed amendments regarding the circumstances under which a FinCEN identifier can be used.
Can anyone access these reports after the fact?
FinCEN is authorized to disclose owner information to a small list of entities, such as federal agencies handling national security or intelligence, state law enforcement (with a court order), certain types of government regulators, etc. The authorities, basically.
But you don’t have to worry about that information being released to the public.
The bottom line
The Corporate Transparency Act is a big change, but as long as you get the reports filed properly (and on time!) you’ll be fine. Unless you are a foreign power laundering money to finance terrorism, you’re not the fish that FinCEN is looking to fry. Just complete the reports as best you can, work with a qualified professional, and follow any directions issued by FinCEN.
Speaking of qualified professionals, have you heard of DiMercurio Advisors? Our team of experts will be more than happy to help you navigate the CTA reporting requirements, as well as other business needs like tax compliance and bookkeeping. Schedule a call and let us know how we can make your life easier.
