| Update: On March 1, 2024, a federal judge in Alabama declared the Corporate Transparency Act (CTA) unconstitutional in the case of National Small Business United v. Yellen. However, this ruling only applies to the named plaintiffs in that specific case, which includes all entities that were members of the National Small Business Association (NSBA) at the time of the ruling. If a company was not a named plaintiff and qualifies under the CTA, it must still comply with reporting requirements. Please contact us if you have any questions about whether or not your company is subject to the CTA’s reporting requirements. |
The U.S. government is implementing new reporting requirements for many small businesses in an effort to address concerns around financial crimes, money laundering, and terrorism financing through the use of corporate structures. The Corporate Transparency Act (CTA), scheduled to go into effect on January 1, 2024, is a federal law enacted to combat illicit financial activities by enhancing transparency in corporate ownership. It requires specific entities to disclose their “beneficial ownership” information to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of the Treasury responsible for enforcing anti-money laundering regulations.
Scope of the CTA
The CTA predominantly focuses on what they define in the Act as “reporting companies.” These reporting companies encompass a wide range of entities, including corporations, limited liability companies (LLCs), and other legal entities existing and operating under U.S. law. Notably, large publicly traded companies, registered investment firms, non-profit organizations, and certain other highly regulated entities are excluded from the reporting requirements under the CTA. This exclusion also includes companies with (i) over 20 employees; (ii) reporting over $5,000,000.00 in revenue; and (iii) a physical presence in the U.S. As a result, many small businesses will fall under the purview of this act.
Implications for Business Owners
1. Reporting Requirements
The CTA necessitates that all small businesses meeting the criteria of a “reporting company” must submit beneficial ownership information to FinCEN. “Beneficial Owners” are individuals who exert substantial direct or indirect control over the entity or possess 25% or more of the ownership interests. To comply, companies will need to provide comprehensive data to FinCEN, such as each beneficial owner’s full legal name, date of birth, residential address, and driver’s license or other federally issued identification number.
2. Timing Requirements
| Entities in existence prior to January 1, 2024 | Filing required within 1 year (before January 1, 2025) |
| Entities formed after January 1, 2024, and before January 1, 2025 | Filing required within 90 days of entity formation (per amended rule) |
| Entities formed after January 1, 2025 | Filing required within 30 days of entity formation |
| Following a change to the beneficial ownership, (e.g., through the sale of the business, merger, acquisition, or death) | Updated filing required within 30 days of change to beneficial ownership information |
The penalties for not filing under the CTA or for willful non-compliance are serious and include a $500 per day civil penalty; criminal violations up to $10,000; and/or up to two years in prison.
3. Compliance Challenges
Small business owners may encounter various challenges when striving to comply with CTA requirements including the need to perform due diligence on existing records, update internal procedures, establish mechanisms for maintaining updated information, and meet the timing requirements. To navigate the upcoming implementation of the Corporate Transparency Act, business owners should consider taking the following actions to prepare:
- Review existing ownership structures and ensure that records are accurate and up to date.
- Develop and implement updated internal processes for identifying, verifying, and maintaining beneficial owners’ information.
- Confer with legal and accounting professionals to navigate compliance requirements efficiently.
The Corporate Transparency Act represents a significant shift in the federal government’s treatment of small-mid sized businesses and underscores the importance of accountability and integrity within a party’s business operations. FinCEN has provided a list of Frequently Asked Questions to help impacted companies prepare for these new requirements. By proactively preparing for compliance with the CTA, businesses can effectively navigate this regulatory landscape as it evolves. Please contact us if you have any questions about what you can do to prepare for the Corporate Transparency Act, or how it could impact your business.