The Corporate Transparency Act and What It Means for Your Small Business
Beginning January 1, 2024, millions of small business owners will be required to file a new, very personal report, as required by the federal Corporate Transparency Act, passed by Congress in 2021. The Corporate Transparency Act establishes uniform guidelines for businesses, and is intended to help the U.S. federal government crack down on money laundering, financing of terrorism, and other illegal acts. The following provides the most frequency asked questions and what every small business owner needs to know before January 1, 2024. Compliance is mandatory unless an exemption applies, and failure to comply includes large fines and possibly jail time.
Does my company have to report?
The law is far reaching; however, not every company is required to report its beneficial owners under the new law. Companies are only required to report if they fall under the definition of a “reporting company” and otherwise do not qualify for an exemption. By definition, there are two types of reporting companies: (1) a domestic reporting company, and (2) a foreign reporting company. Corporations and LLCs are specifically referred to and included in the rule, but other entities may also have to file. The rule does not define other entity types, but FinCEN experts believe the rule will also apply to LLPs, LLLPs, business trusts, and most limited partnerships. There are also 23 specific types of entities that are exempt from reporting. You’ll want to check if your company is among those included in exempt entities.
Who is a beneficial owner?
If your company is required to report, the next step is to identify its “beneficial owners.” A beneficial owner is any individual who directly or indirectly exercises substantial control over a reporting company or owns at least 25% of the ownership interest of the reporting company. Of course, a reporting company many have numerous beneficial owners. Individuals are deemed to have substantial control over a reporting company if they meet any one of the following criteria: (1) the individual is a senior officer; (2) the individual has authority to appoint or remove certain officers or a majority of the directors; (3) the individual is an important decision maker; or (4) the individual has any form of substantial control over the reporting company. Ownership interest may also come in different forms and include equity, stock, voting rights, a capital or profit interest, convertible instruments, options, or other non-binding privileges or other mechanism to establish ownership.
Importantly, there are five exemptions to a beneficial owner which may apply to you:
A minor child (although the personal information of a parent or guardian has to be reported)
A nominee, intermediary, custodian, or agent of another individual
An employee acting solely as an employee
An individual whose only interest in a reporting company is a future interest through a right of inheritance
A creditor of the reporting company.
When do I have to file a report by?
Effective January 1, 2024, FinCEN will begin accepting BOI reports electronically through its secure filing system. If your company already exists as of January 1, 2024, you must file its initial BOI report no later than January 1, 2025. If your company is registered to do business after January 1, 2024, I must file its initial BOI report within 30 days after receiving notice that its creation or registration is effective.
What happens if you are required to but fail to report?
Willful failure to report complete or update beneficial ownership information to FinCEN, or willfully providing false information may result in civil or criminal penalties, including civil penalties of up to $500 per day the violation continues, and imprisonment up to two years along with up to a $10,000 fine.
What’s next?
Existing businesses should start preparing now, and consult with their CPA and/or business attorney for assistance in understanding the new law, and in ensuring any required BOI report is filed by the appropriate deadline. If you are a business owner who would like assistance complying with The Corporate Transparency Act, please give us a call at 303-396-0270, or email christina@saunders-saunders.com to set up an appointment.