The U.S. government is quietly phasing in a new reporting requirement for a broad range of business and not-for-profit entities beginning January 1, 2024, under the Corporate Transparency Act (CTA) which was passed in fiscal 2021. The CTA is meant to prevent the use of shell companies to conceal the profits of criminal activities by creating a database, the Beneficial Ownership Secure System (BOSS). The only authorized users of this database will be federal and state governmental agencies, as well as financial institutions performing required due diligence with customer consent, and foreign law enforcement agencies/authorities who submit qualifying requests.
At this point, the most critical thing you should be aware of is that the CTA is a broad-reaching policy that affects the business owners of a vast majority of privately held small businesses. There are certain exemptions for reporting, which apply to the following industries/business entities: entities that file reports with the SEC, government authorities, banks, credit unions, tax-exempt entities, and “large operating entities”. “Large operating entities” are defined by these qualifications: A) business has a physical street address in the USA, B) business has 20 or more full-time employees, C) prior year federal income tax return filed by the business showed more than $5 million of annual U.S.-only gross receipts.
Beneficial Owners of applicable entities are the primary target of the CTA reporting. “Beneficial Owner” is defined as someone who exercises (indirectly or directly) substantial control over the company and owns or controls 25% or more of total “ownership interest” in the company. For the purposes of the CTA, “ownership” includes all forms of stock, traditional equity, capital or profits, interest in the company, convertible instruments, warrants, rights, options, and privileges to acquire. Any senior officer (ex. CEO, CFO, COO, and general counsel) is considered to have substantial control over a reporting company. The beneficial owners are required to disclose their full legal name, date of birth, address, as well as provide a copy of their non-expired driver’s license, state ID, or passport. In the case of foreign nationals, a nonexpired foreign passport is an acceptable replacement when the above options are not available.
Even though implementation of the CTA begins January 1, 2024, businesses already in existence will have a full year to begin reporting their Beneficial Owners and must comply by January 1, 2025. New businesses established on or after January 1, 2024 will be required to register within 90 days of creation. There are also requirements to update the original registration for any subsequent events/changes that occurred or for the correction of an error on the initial registration, with timelines ranging from 30 to 90 days to comply. If the business terminated or dissolved, no report is required. Reporting will be done electronically through a secure filing system via the Financial Crime Enforcement Network (FinCEN) website, which is currently in development. There are stiff penalties for noncompliance including fines of $500 per day, up to $10k per violation, as well as possible jail time of up to two years.
Be aware of a fraudulent letter that some business owners have been receiving in the mail recently. It appears to be a notice from the United States Business Regulations Department with the Subject: Important Compliance Notice – Corporate Transparency Act (CTA) – Filing Requirement and may include a How to File section at the bottom with a QR code. However, this is a scam and a fraudster trying to obtain information from the recipient. Do NOT respond to this letter, scan any QR codes, or click on any links (if received in electronic form).
If you are concerned that you might be impacted by the Corporate Transparency Act, please contact your AHP professional as they can best assess the impact of these new regulations and how they affect you.