The Corporate Transparency Act (“Act”) takes effect on January 1, 2024. The federal Act was passed to provide more transparency into the ownership and control structure of small and medium-sized businesses in order to prevent money laundering, tax fraud and other illegal activities.
Reporting Requirements
The Act requires certain small and medium-sized businesses to report information on the company and persons who control the business, the company’s beneficial owners, to the U.S. Treasury Department’s Financial Crimes Enforcement Network or FinCEN. Any US domestic corporation, limited liability company, or any other entity formed by filing a document with the secretary of state or similar office, or a foreign entity that has registered to do business in the US is required to report, unless an exemption applies.
Exemptions
Certain types of businesses such as tax-exempt entities (non-profits), inactive entities, banks, credit unions, insurance companies, and accounting firms are exempt. Large operating businesses are also exempt from the reporting requirement. A “large operating business” is one that meets all of the following: (a) employs more than 20 full-time employees (averaging at least 30 hours per week); (b) more than 20 full-time employees are employed in the Unites States; (c) the business has an operating presence at a physical office in the United States; (d) the business filed a federal tax return for the previous year showing more than $5 Million in gross receipts or sales; (e) the business reported the more than $5 Million in gross receipts or sales on the entity’s IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065 or other applicable IRS Form; and (f) when excluding gross receipts or sales from sources outside of the United States, the company’s gross receipts or sales still remains more than $5 Million.
Deadlines for Reporting
Reporting with FinCEN will depend on the company’s date of formation. Reporting companies formed before January 1, 2024, will have additional time — until January 1, 2025 — to file their company information and Beneficial Owner Information (BOI) initial reports. Reporting companies formed on or after January 1, 2024, will have 90 days after receiving notice of their company’s registration to file their initial company information and BOI reports. Reporting companies formed on or after January 1, 2025, will have 30 days after receiving notice of their company’s registration to file their initial company information and BOI reports Once the initial report is filed, there is no annual or quarterly reporting requirement, however If there are changes to the reported information, the changes must be reported within 30 days.
Information to Report
The reporting company is responsible for filing 3 categories of information: (1) Reporting Company information; (2) Beneficial Owner information (“BOI”); and (3) Company Applicant information (only required if the entity is formed on or after January 1, 2024).
Company Information
Company information that will need to be reported includes items such as (a) the full legal name of the company; (b) trade names or “doing business as” names; (c) complete current address; (d) the state of formation; and (e) the IRS Taxpayer Identification Number.
Beneficial Owner Information
A beneficial owner is any person who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests (equity, stock, voting rights, capital interest or profit interest). A person “exercises substantial control” over a reporting company if the person is either:
(a) a senior officer (Chief Executive Officer, Chief Financial Officer, President, General Counsel, Chief Operating Officer, or any other office who performs a similar function); or
(b) has authority to appoint or remove certain officers or a majority of directors (or managers) of the reporting company; or
(c) an important decision-maker for the reporting company; or
(d) in a position with any other form of substantial control over the reporting company.
BOI information that will need to be reported includes: (a) full legal name; (b) date of birth; (c) complete current address; and (d) a unique identifying number (either from the person’s passport, state government issued identification document or driver’s license), and (e) image of the document.
Starting on January 1, 2024, BOI reports must be filed electronically using FinCEN’s secure filing system. FinCEN will store BOI reports in a centralized database and only share this information with authorized users for purposes specified by law.
Company Applicant Information
Following January 1, 2024, for all entities formed which fall under the Act, information on the company applicant (the person who files the company registration documents) that will need to be reported includes: (a) full legal name; (b) date of birth; (c) complete current address; and (d) a unique identifying number (either from the person’s passport, state government issued identification document or driver’s license), and (e) image of the document.]
Penalties for Failing to Repot or Update Information
Intentionally failing to report or update BOI will result in (a) a civil penalty of up to $500 for each day that the violation continues or has not been remedied; and (b) a fine of up to $10,000, imprisonment of up to two (2) years, or both. The statute and regulations do, however, limit violations to willful conduct.
Action Required
Entities Not Yet Formed
If you plan to form a company that qualifies as a small or medium-sized business, it is in your best interest to form the company before January 1, 2024, in order to take advantage of the extended reporting date of January 1, 2025. Also, the company applicant (person filing the registration to form the entity) will not have to report personal information if the entity is formed prior to January 1, 2024.
Entities in Existence
For entities formed prior to January 1, 2024, you will need to gather certain information in advance of the January 1, 2025 reporting deadline and consult with your business attorney on whether your company is required to report certain information under the Act. To determine if the Act applies, first determine if your company was (a) formed by filing a registration document with the Secretary of State; or (b) formed outside of US but registered in the US as a foreign entity. If either applies, then the entity falls under the Act. Second, determine if an exemption applies1. If no exemption applies, your company will be required to report company information and BOI by January 1, 2025.
It is best to designate a person who will be responsible for gathering the required information, make the filings on (a) the company’s information and (b) BOI, with FinCEN, and monitor the information to make sure any changes are reported in a timely manner. For entities formed on or after January 1, 2024, Company Applicant Information will also need to be reported. If a commercial registered agent is used to form an entity, that commercial agent should serve as the Company Applicant under the Act. BOI reports, however, will need to be submitted by a person designated by the company.
For additional information on the reporting requirements and to determine whether your company is required to report under the Act, please reach out to us at info@lotuslawfirm.org.