Corporate Transparency Act Update & Filing Obligations

The Corporate Transparency Act (CTA), enacted in 2021, is a law designed to combat financial crimes like money laundering and tax fraud. It requires many U.S. companies to report information about their owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. This creates a national database of beneficial owners to prevent the use of anonymous shell companies for illegal purposes and provide law enforcement with access to ownership information. For many business owners, this creates a new federal reporting requirement.

Determining if Your Company Must Report

The CTA’s reporting requirements apply to most corporations, limited liability companies (LLCs), and similar entities created by a state filing. This also includes foreign companies registered to do business in the U.S. If your business falls into one of these categories, it must file a Beneficial Ownership Information (BOI) report unless it qualifies for one of 23 specific exemptions.

The exemptions primarily cover entities already subject to substantial federal or state regulation, such as banks, credit unions, insurance companies, and registered securities brokers. An exemption for “large operating companies” is also available, but it requires a business to meet all three of the following criteria:

• It has more than 20 full-time employees in the United States.
• It has a physical operating presence at an office within the U.S.
• It has filed a federal income tax return for the previous year demonstrating more than $5 million in gross receipts or sales from U.S. sources.

Another exemption exists for “inactive entities,” but the criteria are very narrow. To qualify, the entity must have been in existence on or before January 1, 2020, not be engaged in active business, not be owned by a foreign person, have had no change in ownership in the preceding 12 months, and not have sent or received any funds greater than $1,000 in the past year.

Required Information for the BOI Report

A BOI report must include details about the company itself, its beneficial owners, and, for newer companies, its company applicants. The report requires the company’s full legal name, any trade or “doing business as” (DBA) names, the current U.S. street address of its principal place of business, its jurisdiction of formation, and its Taxpayer Identification Number (TIN).

The most detailed part of the report concerns “beneficial owners.” A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” over the company or owns or controls at least 25% of its ownership interests. Substantial control can be indicated by being a senior officer, having the authority to appoint or remove senior officers, or directing important company decisions. For each beneficial owner, the company must report their full legal name, date of birth, residential street address, and a unique identifying number from an acceptable document, such as a non-expired U.S. driver’s license or passport, along with an image of that document.

Companies created or registered on or after January 1, 2024, must also report information on their “company applicants.” A company applicant is the individual who directly files the document that creates the company, as well as the person who is primarily responsible for directing or controlling that filing. The required personal information for each applicant is the same as for beneficial owners. Companies formed before 2024 do not need to report company applicant information.

To simplify the process, individuals who are beneficial owners or company applicants for multiple entities can obtain a FinCEN identifier. By submitting their personal information once to FinCEN, they receive a unique number that can be used on future BOI reports in place of their personal details.

The Filing Process and Deadlines

The BOI report is filed electronically through a secure portal on the FinCEN website, and there is no fee for submission.

Filing deadlines for the initial BOI report depend on the company’s creation date. Companies created or registered before January 1, 2024, must file their first report by January 1, 2025. Entities created or registered during 2024 have 90 calendar days to file their initial report from the moment they receive notice that their creation is effective. For companies created on or after January 1, 2025, this window is shortened to 30 calendar days.

The reporting obligation is ongoing. Companies must file an updated report within 30 days of any change to previously reported information. A corrected report must also be filed within 30 days of discovering an error in a previous submission.

Recent Developments and Legal Challenges

The CTA has faced legal challenges. In March 2024, a federal district court in Alabama ruled the CTA unconstitutional in the case of National Small Business United v. Yellen, arguing that it exceeded Congress’s authority.

In response, the court issued an injunction that prohibits the government from enforcing the CTA against the plaintiffs in that specific case. This group is composed of the members of the National Small Business Association (NSBA) as of March 1, 2024. The injunction does not apply to any other business.

FinCEN confirmed that all other reporting companies are still legally required to comply with the CTA and file their BOI reports by the established deadlines. The government has appealed the district court’s decision, and the case will proceed through the appellate courts. While the ultimate outcome is pending, the law remains in effect for all other reporting companies, and those who fail to comply face penalties.