Because business owners don’t have enough on their plates already, the Corporate Transparency Act (CTA) will add another reporting requirement to keep you all busy. The CTA, which goes into effect on January 1, 2024, will require a wide range of businesses to file a report providing information on their beneficial owners. The requirement is intended to improve transparency in entities and combat money laundering, tax fraud and other illicit activities.
Who Must File?
The CTA applies to a wide range of businesses, including:
- Limited liability companies (LLCs)
- Limited partnerships (LPs)
- Limited liability partnerships (LLPs)
- Business trusts
- Certain foreign entities that do business in the United States
Information regarding each beneficial owner of the business is required to be filed with the Financial Crimes Enforcement Network (FinCEN). A beneficial owner is an individual who, directly or indirectly, either exercises “substantial control” over a business or owns or controls at least 25% of the ownership interests of a business. An individual exercises “substantial control” if they satisfy any of the following conditions:
- They serve as a senior officer of the business
- They have authority over the senior officers or a majority of the board of directors of the business
- They have the ability to direct the business’s financial transactions
- They have the ability to exercise veto power over important business decisions
For each beneficial owner, the following information will be required:
- Full name
- Date of birth
- Current address
- Unique ID number, such as drivers license or passport ID, as well as a photo of that document
When Is the Report Due?
If the business is established before the CTA goes into effect in 2024, the first report will be due within a year. If a business is formed once the act is in place, the first report will be required within 30 days.
After the initial report, there’s no annual reporting requirement. However, any changes to the beneficial ownership of a business will require the filing of an updated report with FinCEN within 30 days. That includes a change of address of any owner.
If no report is filed, the CTA establishes criminal and civil penalties. The failure to file penalty is currently set at $500 a day (up to $10,000). These costly penalties make this an item not to ignore!
The CTA will have an impact on many businesses. Being aware of the required reporting will help your business comply with the law while avoiding costly penalties. You also still have time before the end of the year to clean up and close any existing unused LLCs that may have been formed for a potential business endeavor, thereby removing any filing requirement and preventing an unexpected penalty.