The Corporate Transparency Act (CTA), enacted by Congress in 2021 and effective January 1, 2024, was passed to enhance transparency in entity structures and ownership to combat money laundering, tax fraud, and other illicit activities. It is designed to capture more information about the ownership of specific entities operating in or accessing the U.S. market.
Reporting companies are identified as either domestic or foreign:
- Domestic reporting companies are corporations, LLPs, or any other entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.
- Foreign reporting companies are a corporation, LLCs, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office. Sole-proprietorships that do not use a single-member LLC are not considered a reporting company.
A beneficial owner can fall into one of two categories defined as any individual who, directly or indirectly, either:
- Exercises substantial control over a reporting company, or
- Owns or controls at least 25% of the ownership interests of a reporting company.
Having two categories is designed to close any loopholes and ensure all owners are identified. The key difference is that beneficial ownership is categorized as those with ownership interests reflected through capital and profit interests in the company.
The beneficial owners must report to the U.S. Financial Crimes Enforcement Network (“FinCEN”)their name, date of birth, address, and unique identifier number from a recognized issuing jurisdiction and a photo of that document. If an individual decides to file their information to FinCEN directly, they may be issued a “FinCEN identifier” which can be provided on a Beneficial Ownership Information report (“BOI”) report instead of the required information.
The Corporate Transparency Act came into effect on January 1, 2024. Reporting companies that are in existence on the effective date must file their initial reports within one year.
Reporting companies created after the effective date have 30 days after receiving notice of their creation or registration. However, FinCEN has proposed to extend the initial filing deadline for BOI reports from 30 to 90 days for entities created or registered in 2024.
Reports must be updated within 30 days of a change to the beneficial ownership, e.g., through the sale of a business, merger, acquisition, or death, or 30 days upon becoming aware of or having reason to know of inaccurate information previously filed.
Non-compliance can result in high penalties and possible imprisonment. The escalating fines range from $500 to $10,000 per violation and jail time of up to two years.