What you need to know about the Corporate Transparency Act

Starting earlier this yr, many U.S.-based firms must report information to the Financial Crimes Enforcement Network (FinCEN) about who owns or exercises control over the company – the requirement specified in section Corporate Transparency Act (CTA) enacted by Congress in 2021 to prevent illegal activities by anonymously owned entities.

This represents a fundamental change in the way U.S.-based firms operate. Report submission deadlines vary depending on the company’s establishment date, and failure to comply will result in high financial penalties.

How can business owners prepare for this seismic change? They will need to understand who the helpful owner is; what forms of firms are required to report; what to report; how to prepare for a report; and penalties for non-compliance.

Who is the helpful owner?

A helpful owner is a natural one that exercises significant control over the reporting company, one or more intermediary entities, or owns or controls at least 25% of the ownership interest in the reporting company.

An individual in any of the following categories exercises significant control:

• These are senior officers at management level; or function the company’s president or general counsel;
• Have the power to appoint or remove senior management or a majority of the directors of the reporting company;
• They are necessary decision makers for the company producing the report;
• Have any other form of great control exercised in a latest or unique way, for example through flexible corporate structures that provide control methods aside from those listed above.

Who must report and who does not

Next, it is necessary to understand what forms of firms are required to report their helpful owners:

Alternatively, there are 23 forms of entities exempt from reporting obligations; these include publicly traded firms, not-for-profit organizations and some large operating firms. There is also an exemption for inactive firms.

Preparation for the report

Once a business owner understands that he or she must report helpful ownership information to FinCEN, he or she must organize some information.

Business evaluation

First, they need to start analyzing the cap table, management structure and contractual obligations. Because FinCEN defines “beneficial owners” as individuals who own or control at least 25% of the ownership interest in an entity and individuals who have “substantial control” over the entity, determining who the helpful owners are is not an easy and straightforward evaluation. Therefore, in addition to the capitalization table, it is necessary to look at the company’s management structure and contractual obligations to see who has ultimate control over the company.

Then collect the names, addresses and passport/driver’s license information of each helpful owner or obtain their FinCEN IDs for reporting purposes.

Enter processes

Make sure everyone is aware that any changes in helpful ownership should be reported to FinCEN inside 30 days. So, if a company adds a major shareholder; appoints a latest senior official; has a latest director; or enters into a voting agreement, management should be advised that an update to the entity’s BOI report should be made to FinCEN inside 30 days.

Since this is not a part of the company’s standard operating procedure, there is a learning curve to do not forget that it needs to be done.

What should I report?

Two sets of knowledge are crucial in the reporting process.

First, the reporting company must report:

• Its legal name;
• Trade names, d/b/a or t/a names;
• Headquarters address;
• Its jurisdiction to create or register; AND
• Taxpayer identification number

The second set of knowledge focuses on helpful owners. The application must contain the following elements:

• Person’s name and surname;
• Date of birth;
• Address; AND
• An identification number from an acceptable type of identification, corresponding to a passport or US driver’s license.

Reporting deadlines and penalties

Applications are accepted from January 1, 2024. If the company was established or registered before January 1, 2024, it has until January 1, 2025 to submit information about the company and helpful owners.

If the company was incorporated or incorporated on or after January 1, 2024, it must report helpful ownership information – including itself, its helpful owners and the company’s applicants (i.e., the applicant or those in control of the filing of the initial registration) – inside 90 calendar days from the date of effective registration.

Finally, any updates or corrections to helpful ownership information previously filed with FinCEN should be submitted inside 30 days. Updates should be made for each reporting company and each reportable helpful owner following any change, corresponding to a change of address or a latest passport or driver’s license number, previously reported to FinCEN.

Failure to file may result in civil penalties of up to $500 per day, criminal penalties of up to two years in prison and fines of up to $10,000.

The most significant thing

The Corporate Transparency Act takes some getting used to by business owners. However, it is an necessary task for them to understand this laws so that they’ll comply with the requirements by submitting the appropriate information in a timely manner.