The Corporate Transparency Act (“CTA”) was a significant piece of U.S. legislation signed into law in January 2021. The CTA was created to address issues related to money laundering, fraud, and other financial crimes, including those committed by anonymous shell companies. Shell companies are set up without revealing their true owners and can be exploited for illegal activities due to a lack of transparency.

Effective January 1, 2024, many entities are required to submit a report showing certain company and beneficial owner information (“BOI”) to the Financial Crimes Enforcement Network (FinCEN), which is a division of the U.S. Treasury. 

The reporting requirements apply to most businesses formed or registered in the United States, such as LLCs, corporations, and similar entities. As described below, some businesses are exempt from the CTA’s reporting requirements.

There are a number of professional organizations and legislators calling for a one-year delay in implementation to ensure adequate time for entities to understand reporting requirements. However, as of today, an extension of the January 1, 2024, effective date has yet to be passed.  

Definition of Beneficial Owner

In general, beneficial owners are individuals who:

1. directly or indirectly exercise “substantial control” over the reporting company, or
2. directly or indirectly own or control 25% or more of the “ownership interests” of the reporting company.

Examples of those exercising substantial control would be CFOs, CEOs, COOs, and general counsel. You could have someone who is not an officer or owner but has substantial influence over important decisions. FinCEN has stated they expect most entities will have at least one beneficial owner who does not have ownership yet fits the definition.  

Reporting Exemptions 

The reporting rule exempts twenty-three (23) specific types of entities from the reporting requirements, including banks, broker dealers in securities, insurance companies, tax-exempt entities, and large operating companies. To qualify for the large company exemption, a company must meet three (3) main tests – more than 20 employees, operating physical presence in the United States, and more than $5 million of revenue reporting on the previous year federal income tax return. 

Most Single Member LLCs Subject to Reporting 

The single-member LLC has become a very popular choice of entity. While it’s disregarded for federal and state purposes, it will be subject to reporting beneficial owners like other entities – unless it’s inactive or meets one of the other exemptions.  

Timeline for Reporting 

If your entity already exists as of January 1, 2024, an initial beneficial information report (BOI) must be filed by January 1, 2025. If the entity is created or registered to do business after January 1, 2024, the initial report is due within 90 days. The 90-day window starts after receiving notice from the secretary of state that the creation or registration is effective. 

After the initial filing, you must file an updated report within 30 days to report changes such as:

• Correction of a prior report 
• Updating a prior report for changes such as address changes, new CEO, and death of a beneficial owner.
• Entities that lose exempt status or entities that become exempt

As such, it is not a “one and done” filing requirement. After the initial filing, there is no annual or quarterly filing requirement; however, as reportable changes occur, you’ll need to ensure timely updates are filed. 

Penalties 

Reporting entities who fail to comply with reporting requirements can face substantial penalties. Any company failing to file a beneficial ownership report or required amendments is subject to a fine of $500 per day up to a maximum of $10,000. 

Conclusion 

If your existing or newly formed entity is affected by the CTA, you should consult with legal counsel to be certain you are in compliance with the BOI reporting requirements.