Running a business today is no small feat. Between navigating complex regulations and staying on top of compliance requirements, owners and officers have plenty on their plate. But as of January 1, 2024, this plate has become more full. The reason? The Corporate Transparency Act (CTA).
This new law requires many U.S. business owners to disclose details about their so-called “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN), a bureau within the U.S. Department of Treasury.
But this rule wasn’t introduced just to add another compliance hassle.
Instead, the CTA is part of a broader effort to curb tax fraud, money laundering, and other illegal activities. How? By adding transparency to company ownership structures. Thanks to this law, bad actors will no longer be able to exploit loopholes to hide behind complex business structures.
So, the CTA will ultimately support a safer economic environment in the U.S. But what does this law mean for your business specifically? And how can you comply with it smoothly? This guide has all the answers.
Beneficial Ownership Defined
Let’s start by breaking down the basic concepts behind beneficial ownership.
Who Is Considered a Beneficial Owner?
Under the Corporate Transparency Act, a beneficial owner is any individual who either directly or indirectly exercises substantial control over a reporting company or holds at least 25% of its ownership interests.
But what does “substantial control” mean in this context? It means a beneficial owner can influence significant company decisions, such as appointing or removing officers.
A company can have multiple beneficial owners, as there’s no limit on how many must be reported to the FinCEN. But be careful. Only individuals (i.e., natural persons) can be designated as beneficial owners. In other words, legal entities like trusts or corporations don’t qualify.
What Is the Difference Between a Beneficial Owner and a Controlling Person?
After reading the explanation of beneficial owners, another term might come to your mind – “controlling person.” However, this term can’t be used interchangeably with “beneficial owner.”
Why? Because there is a major difference between the two.
This difference lies in their roles within the company. A controlling person is any individual with significant managerial responsibilities within the company. Think Chief Executive Officer (CEO), Chief Financial Officer (CFO), or Treasurer.
This means that every controlling person qualifies as a beneficial owner. However, not every beneficial owner is a controlling person.
Reporting Requirements
Now that you know who should be reported, let’s dive into the specifics of the reporting requirements under the CTA.
Which Businesses Are Required to File Beneficial Ownership Reports?
Under the CTA, two types of companies must submit Beneficial Ownership Information (BOI) reports.
The first is domestic reporting companies. This category includes corporations, limited liability companies (LLCs), and any other entities created by filing a document with a secretary of state or a similar office in the United States.
The second is foreign reporting companies. These are entities formed under the laws of a foreign country that have registered to do business in the U.S.
Together, these companies are referred to as “reporting companies,” and they have a legal obligation to provide beneficial ownership information to ensure compliance with the CTA.
Now, based on the description, you might assume that all companies fall under this requirement. But that’s not the case. There are actually 23 types of entities that are exempt from the beneficial ownership reporting requirements.
Insurance companies, accounting firms, tax-exempt entities, and investment companies are just a few examples of these exemptions. For a full list, consult FinCEN’s Small Entity Compliance Guide. Here, you’ll find a handy flowchart to help you identify if your company is, in fact, a reporting company.
When Is the Deadline for Filing Reports?
If your company is a reporting company, you’ll need to be aware of the deadlines for filing your initial BOI report:
- For companies established before January 1, 2024: You have until January 1, 2025, to file your initial BOI report.
- For companies created between January 1, 2024, and January 1, 2025: You’ll have 90 days from receiving notice of your company’s formation or public announcement – whichever comes first – to submit your report.
- For businesses established on or after January 1, 2025: You must file within 30 days of notification or public announcement of your company’s formation.
How Are Reports Filed?
Through FinCEN’s online secure filing system, that’s how. Simply click on the “File BOIR” button to access the form.
There’s no fee for submission, and you don’t need to hire an attorney or accountant to file your report. In fact, most companies can do it independently.
However, you can also authorize virtually anyone – such as an employee or third-party service provider – to file on your behalf.
What Information Is Included in a Beneficial Ownership Report?
The information in question refers to relevant details about your company.
These include the company’s legal name, any trade names, current U.S. address, jurisdiction of formation, and Taxpayer Identification Number (TIN).
Of course, the part that matters the most is the beneficial owner information.
For each beneficial owner, you’ll need to include their full name, date of birth, residential address, identification number from an acceptable document (e.g., a driver’s license or passport), and an image of that document.
For companies registered after January 1, 2024, there will be an additional task.
In this case, you must also report information about company applicants. The information in question will be similar to that of the beneficial owner – their name, date of birth, address, identification number, and document image.
Benefits and Challenges
As already mentioned, the point of BOI reporting isn’t to inconvenience the company in any way. In fact, implementing this reporting under the CTA offers several advantages both for organizations and the broader financial system.
What Are the Benefits of Beneficial Ownership Reporting?
First and foremost, it enhances transparency and accountability in corporate governance. By disclosing beneficial ownership information, companies can streamline their entity management processes. This, in turn, enables stakeholders to make more informed decisions.
Then, there’s the added benefit of complicating illegal activities. Thanks to the CTA, wrongdoers can no longer exploit opaque ownership structures – such as shell companies – which often serve to disguise illegal activities.
And let’s not forget the national security and law enforcement aspect. BOI reports can assist in identifying links between illicit actors and opaque entities, thus hindering criminal activities like human trafficking, drug trafficking, and terrorist financing.
Plus, integrating beneficial ownership data with existing government information actually helps legitimate businesses immensely. How so? By leveling the field. This will especially benefit small enterprises that might struggle against criminal entities using shell companies for unfair advantages.
Now, these are undoubtedly some great benefits. However, this doesn’t mean that complying with the CTA is without challenges.
What Are the Challenges of Complying With the CTA?
One of the most significant difficulties is accurately identifying beneficial owners, especially in complex ownership structures involving multiple layers.
Then, there’s the challenge of actually gathering all the detailed information necessary for the filing. Collecting (and verifying) this data can be quite time-consuming, especially for international entities or individuals in different jurisdictions.
Maintaining the accuracy of this data is another hurdle. The CTA requires that the information provided be two things – accurate and up-to-date. Organizations relying on manual systems (e.g., spreadsheets) often find it difficult to track changes in ownership or personal details, thus risking the submission of outdated or inaccurate information. Throw a lack of a centralized entity management system into the mix, and the risk of errors spirals out of control.
The strict filing deadlines certainly don’t alleviate this pressure. Businesses face the daunting task of gathering and verifying complex data within tight timeframes – sometimes as short as 30 days – leaving little room for error. Fail to do so, and you risk severe consequences, including potential imprisonment for up to two years and fines reaching $10,000. And that’s not even all. Non-compliance could also result in civil penalties of up to $591 per day.
Of course, we mustn’t forget the concerns about data security and privacy. After all, companies are disclosing some rather sensitive information in the BOI reporting process. The solution? Robust data protection measures can safeguard this information from unauthorized access or misuse. But, of course, this solution only adds to the compliance burden.
A New Era of Transparency
There’s no doubt about it – the CTA will immensely benefit both the integrity of the U.S. financial system and the businesses operating within it. This law essentially aims to dismantle the veil of anonymity that has allowed illicit activities to flourish through opaque corporate structures. This end goal is what makes the temporary hassle of the compliance process worthwhile.
If you’re a business owner who still finds the compliance process frustrating, remember one thing. Help is within reach.
Do you want to do it on your own? No problem. Just visit the FinCEN’s website and find answers to all your unanswered questions. You can even submit questions directly to the FinCEN through its Contact page.
Feel like all of this is too much for you to handle? It’s understandable. In this case, you can always consult with knowledgeable advisors, such as attorneys or accountants, to ensure compliance. This approach can do wonders in cases where you need to interpret complex ownership structures.
Of course, there’s always the option to rely on technology. Various software solutions can help streamline the compliance process, centralize beneficial ownership data, and facilitate timely updates. In other words, there are always ways to navigate the challenges of compliance with the CTA. You just have to seek the right support.
