The Corporate Transparency Act: Key Insights for Small Businesses

The Corporate Transparency Act (CTA), established to help deal with unauthorized activities, requires U.S. businesses to share information to FinCEN about their key individuals. Enacted in 2021 and effective as of 2024, this law mandates corporations and registered entities to disclose details about their beneficial owners and applicants. Its primary aim is to reduce crimes such as money laundering and tax evasion. 

Here’s an overview of what this law means, why it came into place, and who it impacts.

What is the Corporate Transparency Act (CTA)?

The Corporate Transparency Act was introduced under the Anti-Money Laundering Act of 2020, included within the National Defense Authorization Act (NDAA). Although initially vetoed by then-President Donald Trump, Congress overturned the veto on January 1, 2021, officially enacting the legislation.

Starting January 1, 2024, the CTA requires all businesses registered in the U.S., including corporations, LLCs, and similar entities, to submit information on their beneficial owners and certain other individuals to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).

The CTA aims to restrict various illegal activities, such as money laundering, terrorist funding, corruption, tax evasion, human trafficking, drug trade, and securities fraud. According to FinCEN, the law is designed to impose minimal compliance burdens on U.S. businesses while enhancing transparency.

Learn about FinCEN’s Role in the Corporate Transparency Act with our guide.

What are the Objectives of the Corporate Transparency Act?

The Corporate Transparency Act aims to achieve several key objectives, including:

1)- Identifying True Owners:

The Corporate Transparency Act requires specific companies to disclose their “beneficial owners” — Individuals who own or have control over the business.

This helps FinCEN to accurately identify the actual people behind a company, making it harder for owners to hide behind complex ownership structures.

2)- Preventing financial crimes: 

By promoting transparency in company ownership, the CTA helps to combat activities like money laundering, tax evasion, terrorist financing, and other financial crimes. Increasing ownership transparency restricts criminals and corrupt officials from exploiting shell companies for illegal activities.

3)- Strengthening national security: 

The CTA supports U.S. government efforts to counter threats to national security by tracking entities with hidden ownership structures. By enforcing disclosure, it reduces opportunities for terrorist financing and other security risks.

Purpose of the Corporate Transparency Act

The purpose of the CTA is to deter criminals from using legitimate companies as a cover for money laundering, drug trafficking, weapons sales, and terrorism financing within the U.S. financial system. While legitimate companies are essential to economic growth, they can also be misused to conceal illicit activities.

To address this issue, the CTA enforces increased transparency in corporate ownership. This transparency makes it much more difficult for criminals to hide their actions behind corporate structures, ensuring a safer financial environment.

Reporting Under the Corporate Transparency Act

With the new law in effect as of 2024, companies have until January 1, 2025, to submit their initial report to FinCEN. For companies created after January, 2025, the first BOI report must be submitted within 30 days of their formation.

In late November 2023, FinCEN provided an extension for companies registered in 2024, allowing them 90 days from receiving notice of their registration to submit their initial reports.

As outlined by Harvard Law School’s Forum on Corporate Governance, a reporting company may include: 

(1) any U.S.-based corporation, LLC, or similar entity created through state or tribal registration and
(2) foreign entities registered to conduct business in the U.S.

The law requires businesses to report details about the entity and the personal information of each beneficial owner. Entities registered on or after January 1, 2024, must also identify up to two company applicants. The table below outlines the required information for companies, beneficial owners, and company applicants.

The law outlines exemptions for 23 types of businesses, such as banks, credit unions, insurance companies, and what it defines as “large operating companies.” For a business to be classified as a large operating company, it must meet certain criteria: it needs to employ over 20 full-time workers in the U.S., operate a physical office within the country, and have reported over $5 million in gross receipts or sales on its previous year’s tax return.

Beneficial Owners and Company Applicants

This section provides definitions of beneficial owners and company applicants based on the guidelines set by the CTA.

Beneficial Owner

According to FinCEN, a beneficial owner is an individual who either:

• Has significant control over the reporting company or
• Holds at least a 25% ownership stake in the company.

FinCEN specifies that someone exercises “substantial control” if they:

• Serve as a senior officer (e.g., president, CFO, general counsel, CEO, COO, or similar position)
• Have the authority to appoint or remove key officers or most of the board members.
• Play a critical role in making decisions for the company
• Or otherwise, meet the criteria outlined in FinCEN’s Small Entity Compliance Guide

The CTA represents a major shift in how beneficial ownership is managed in the U.S., moving from state and tribal regulations to federal oversight, as highlighted by the American Bar Association.

Company Applicant

A company applicant is the person who files the necessary documents to create or register a business. When multiple individuals are involved, company applicants are typically directors or those with primary control over the entity. Businesses can list up to two company applicants, but if formed or registered on or after January 1, 2024, they are not required to list any company applicants.

Role of Company Applicant in CTA

If multiple individuals are involved in the filing process, the ‘company applicant’ is the person responsible for overseeing and directing the creation or registration document filing, ensuring that all necessary information is accurately provided.

Identifying Company Applicants

For most companies, identifying the ‘company applicant’ is straightforward. However, in some cases, it can be more complex. FinCEN offers a flowchart and guidance in Chapter 3.2 of its Small Entity Compliance Guide to assist in accurately identifying company applicants for reporting purposes.

Removal of Company Applicants

Once a company applicant is identified and reported to FinCEN, their information remains permanently on the BOI report, even if they are no longer connected to the reporting company. This is because the company applicant’s role in legally establishing the business is essential for maintaining transparency.

For any company formed on or after January 1, 2024, the Corporate Transparency Act requires that company applicant details be included in the BOI report. However, updates to this information are not necessary if their details change over time, as the original information remains valuable for transparency purposes.

Which Companies are Required to File Corporate Transparency Act?

Companies required to file under the Corporate Transparency Act include:

• Corporations and LLCs – The CTA applies to U.S. corporations and foreign corporations registered in the U.S. by filing documents with the state’s secretary of state or a similar office.
• Foreign Entities – Non-U.S. companies registered to do business in the U.S. are also required to file.
• Other Entities – Similar business structures, such as limited partnerships and other entities created by filing paperwork with state or tribal authorities, also fall under the CTA requirements.

What are the Penalties for Non-Compliance?

There are severe civil and criminal penalties for willful non-compliance with CTA reporting obligations. If found guilty, parties might face civil penalties of up to $591 for each day they willfully failed to disclose, with a $10,000 maximum sentence overall. Additionally, criminal penalties may include sentences of up to two years in prison for individuals.

Who Needs to Report the Corporate Transparency Act?

Under the Corporate Transparency Act, any individual or entity that qualifies as a beneficial owner or company applicant within a U.S.-based or registered company must report. This includes individuals who have significant control or own at least 25% of the company. Beneficial owners, directors, and applicants involved in the formation or registration of the company are all responsible for providing required details to FinCEN. In short, it’s the individuals behind the company—those with real ownership or control—who must disclose their information under the CTA.

FinCEN’s Alert on Fraudulent Messages

With the new reporting rules under the CTA, scammers are attempting to exploit unsuspecting businesses. FinCEN has issued a warning on its website, stating that there have been fake attempts to gather information from those who may fall under the CTA’s reporting requirements.

These scam messages and emails may contain “Important Compliance Notice” encouraging recipients to click a link or scan QR code. FinCEN warns that these emails or letters are not legitimate, as the FinCEN never sends unsolicited requests for information.

Implementation and Compliance Guidelines

Reporting companies are generally given until January 1, 2025, to submit their initial report to FinCEN. For those established after this date, the first report is due within 30 days of formation. Companies created or registered in 2024 have a 90-day window to file.

Businesses needing to report beneficial ownership information will find an online form on the FinCEN BOI webpage, available through a secure electronic filing system currently in development.

Non-compliance can result in serious consequences for businesses that “willfully” fail to report, update, or provide accurate ownership information. Penalties include daily fines of $590 (capping at $10,000) and up to two years of imprisonment. 

Notably, there are no penalties for accidental or negligent errors, as highlighted by the Harvard Law School Forum on Corporate Governance.

Recent Updates to the Corporate Transparency Act

Along with the deadline extension for businesses registered in 2024, FinCEN updated its BOI reporting guidelines in November 2023. These changes clarify that businesses can use FinCEN-issued identifiers in place of disclosing information on individual beneficial owners.

FinCEN identifiers are unique numbers provided by the agency after individuals or companies submit the standard information required for BOI reporting. These identifiers aim to streamline the reporting process, making compliance easier for businesses.

ComplyCTA: Your Partner in CTA Compliance

ComplyCTA is a secure, user-friendly and cost-effective CTA solution that makes your filing process quick and easy. It guides you through each step of the filing process and directly integrates with FinCEN for accurate and compliant filings. 

The platform helps you reduce errors through automated data entry and validation. It keeps your information safe with built-in security checks and complies with SOC2 and GDPR standards.

You can track progress in real time with customizable dashboards and get alerts about filing deadlines, helping you stay on track.

Conclusion

The Corporate Transparency Act represents a significant shift for small businesses, bringing new transparency requirements aimed at preventing illegal activities. However, for many small businesses, understanding and meeting these reporting standards can be challenging.

Knowing the requirements, staying on top of deadlines, and keeping up with updates from FinCEN are essential steps to ensure compliance. While the law may add an administrative burden, small business owners must take the time to understand and fulfill their obligations under the CTA, helping foster a more transparent business environment in the U.S.

Frequently Asked Questions

1. What is the Corporate Transparency Act?

The CTA is a law requiring U.S. businesses to disclose beneficial ownership information to the government, aimed at increasing transparency and preventing financial crime.

2. Who needs to file a BOI in 2024?

All U.S. entities, except for those meeting specific exemptions, need to submit a BOI report starting in 2024.

3. What is the new rule for LLCs in 2024?

Starting in 2024, all LLCs must submit beneficial ownership information to meet CTA requirements, including details of primary owners and controlling parties.

4. How much does it cost to file a BOI report?

While there may be minimal administrative fees, the actual costs depend on whether businesses handle the filing internally or through a third-party service.

5. What is the penalty for violating the Corporate Transparency Act?

Non-compliance can lead to substantial fines and even potential legal action, underscoring the importance of understanding and adhering to CTA requirements.

6. What are the Challenges for Small Businesses in Meeting Corporate Transparency Act Requirements?

A major hurdle for many small businesses is simply knowing about the CTA and its deadlines. FinCEN provides a 50-page guide on its website, but awareness and understanding of these requirements can be limited for small business owners.