Navigating Reporting Requirements, Exemptions, and Penalties
As of January 1, 2024, the Corporate Transparency Act (CTA) will come into force, ushering in a new era of reporting obligations for businesses across the United States. Enacted as part of the Anti-Money Laundering Act of 2020, the CTA is designed to bolster national security by preventing illicit actors from exploiting U.S. entities for criminal purposes, such as money laundering through shell companies.
Reporting Requirements and Timelines
Every existing business entity and those formed on or after January 1, 2024, will be subject to the CTA unless they meet specific exemptions. The reporting requirements extend to identifying information about the entity, its beneficial owners, and individuals involved in its formation. Entities formed before January 1, 2024, must file a Beneficial Ownership Information (BOI) report with the Financial Crimes Enforcement Network (FinCEN) by January 1, 2025. In contrast, those formed on or after January 1, 2024, have a 90-day window to file their initial BOI report.
Failure to comply with the CTA may result in severe consequences, including criminal penalties of up to two years in prison and civil penalties of up to $500 per day for willful non-compliance with FinCEN’s final BOI reporting rule.
Legislative Background
The CTA’s inception in 2021 was a response to international law enforcement concerns. Despite facing a presidential veto, the U.S. Congress prioritized the CTA as part of the National Defense Authorization Act FY 2021. The primary objectives are to safeguard against money laundering activities through U.S. entities and to aid law enforcement agencies in detecting, investigating, and preventing illicit conduct.
Q&A: Businesses That Must File BOI Reports and Exemptions
Types of Reporting Companies
Reporting Companies, categorized as Domestic and Foreign, must report BOI to FinCEN. Domestic entities are those formed through state filings, while Foreign entities are those formed outside the U.S. but registered to do business within the country. Exemptions exist for sole proprietorships, general partnerships, and certain types of trusts that are not formed through state filings.
Exemptions for Reporting Companies
Various exemptions exist, including those for heavily regulated entities, large operating companies, wholly-owned subsidiaries of exempt entities, and certain inactive entities. The criteria for exemptions are detailed, and companies need to assess their eligibility carefully.
Exemptions Details:
Large Operating Companies: Criteria include employing more than 20 full-time employees, conducting business in a physically separate location, and filing a federal tax return showing $5,000,000 in gross receipts.
Subsidiaries of Exempt Entities: Must be 100% owned by certain exempt entities.
Inactive Entities: Must meet specific criteria, including not being engaged in active business and having no change in equity ownership in the past 12 months.
Q&A: Determination of Beneficial Owners and Company Applicants
Beneficial Owners
Beneficial Owners are individuals who own or control more than 25% of a Reporting Company or exercise substantial control over it. Reporting involves natural persons, and special rules apply to trusts and minors.
Company Applicants
Each Reporting Company has one or two Company Applicants responsible for filing documents with the Secretary of State. Only entities formed after January 1, 2024, are required to report information about their Company Applicants.
Q&A: Information That Must Be Reported to FinCEN
Required Information
Reporting Companies must provide identifying information about themselves, their Beneficial Owners, and Company Applicants. The details include legal names, addresses, tax identification numbers, and identification documents.
Q&A: Timelines, Updates, and How to Report BOI to FinCEN
Filing Initial BOI Reports
FinCEN is developing a web-based platform for Reporting Companies to submit required information, scheduled to go live on January 1, 2024. Deadlines for filing initial BOI reports vary based on the formation date of the Reporting Company.
Updating BOI Reports
Reporting Companies must file updated BOI reports within 30 days of any changes to the reported information. Beneficial Owners are individually responsible for updating their information with FinCEN.
Limitations on Use of Reported BOI
BOI submitted to FinCEN will be maintained securely, with limited access granted to federal agencies, law enforcement, and financial institutions for authorized purposes. Penalties for unauthorized disclosure or use of BOI are stringent, emphasizing the importance of compliance.
Conclusion
As the Corporate Transparency Act takes effect, businesses must navigate its complexities to ensure compliance. The CTA represents a crucial step in fortifying national security and preventing illicit financial activities. For detailed guidance tailored to your company’s specific circumstances, it is advisable to consult with corporate attorneys familiar with the intricacies of the CTA.
For additional information, FinCEN’s website provides ongoing updates, including a Small Entity Compliance Guide and FAQs released on September 19, 2023.
For detailed inquiries specific to your company, it is advised to contact corporate attorneys at Smith Hurst PLC.
Complying with the Corporate Transparency Act - What You Need to Know
