What is the Corporate Transparency Act (CTA)
The CTA was enacted in 2021 to enhance the transparency in entity structures and ownership in an effort to combat money laundering, tax fraud, and other illegal activities. One of its key elements, beginning in 2024, will require all “reporting companies” to disclose certain beneficial ownership information (BOI) to the U.S. Treasury’s Financial Crimes and Enforcement Network (FinCEN). Beginning January 1, 2024, “reporting companies” will need to submit a report to FinCEN which contains personal information about the reporting company’s “beneficial owners.”
A “reporting company” can include a domestic reporting company or a foreign reporting company. A domestic reporting company is any corporation, including C corporations and S corporations, limited liability company (LLC), including a single member LLC, limited partnership or similar entity (e.g., LLPs and LLLPs) created by filing a document with any U.S. state, territory or Indian tribe (domestic reporting companies). A foreign reporting company is any non-U.S. entity that registers to do business with any U.S. state, territory or Indian tribe (foreign reporting companies).
Trusts (other than trusts created by a filing, such as statutory or business trusts, e.g., Delaware Statutory Trust) are themselves not reporting companies. Similarly, a sole proprietorship would not be a reporting entity.
The CTA and the regulations provide 23 exemptions from the reporting company definition. These exemptions generally apply to highly regulated businesses, including:
Information Required to be Reported
Reporting companies must identify each of their “beneficial owners.” A “beneficial owner” is any individual who, directly or indirectly, exercises “substantial control” over the reporting company OR who “owns” or “controls” at least 25% of the “ownership interests” in a reporting company (ownership interests include equity, stock, or voting rights, capital or profit interests, convertible instruments, options, and any other instrument, contract, or other mechanism used to establish ownership).
Once the beneficial owner individual(s) is/are identified, each reporting company will be required to submit its BOI reports to FinCEN. A reporting company will be required to identify itself and report four pieces of information about each of its beneficial owners:
If an individual provides the four pieces of information to FinCEN directly, the individual may obtain a “FinCEN identifier,” which can then be provided to FinCEN on a BOI report in lieu of the required information about the individual. The information submitted is only to be disclosed to federal and state law enforcement agencies in specified circumstances, and to financial institutions in connection with their know-your-customer obligations with the reporting company’s consent.
Existing entities formed prior to Jan. 1, 2024, will have one year from that date to file their initial BOI report.
New entities formed after Jan. 1, 2024, must file their initial BOI report within 30 days after their formation. However, on Sept. 28, 2023, FinCEN proposed extending this deadline to 90 days for entities formed in calendar year 2024.
The submission process has not been finalized, but the reports are expected to be filed electronically through an online interface. Reports will not be accepted until January 1, 2024.
The CTA provides for both civil and criminal penalties (up to $10,000 and two years’ imprisonment) for willfully providing false information, failing to provide complete information or failing to update information. An individual may be held liable under the CTA if they caused the failure or were a senior officer at the time of the failure.
Forthcoming submission and filing instructions, as well as additional guidance, is expected to be issued by FinCEN as the 2024 reporting year nears.
The summary information in this document is being provided for education purposes only. Recipients may not rely on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.
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