As of 2024, the Corporate Transparency Act (CTA) introduces a new federal requirement that will impact many closely-held businesses across the United States. Designed to combat financial crimes such as money laundering, tax evasion, and terrorism financing, the CTA establishes a national database to identify the “beneficial owners” behind companies. If you own or manage a small business, especially a limited liability company (LLC), corporation, or limited partnership, understanding the CTA and its reporting requirements is essential to avoid civil and criminal penalties.
In this blog, we’ll explain what the CTA is, who needs to comply, and the steps you can take to ensure your business adheres to these new regulations.
What is the Corporate Transparency Act (CTA)?
The CTA is a federal law designed to increase transparency about the ownership of U.S. companies. Its primary goal is to establish a national database of beneficial owners—those who own or control at least 25% of a company and executive officers, board members, and other control persons. The database, managed by the Financial Crimes Enforcement Network (FinCEN), aims to help law enforcement and financial institutions combat illegal activities such as money laundering, terrorism financing, and tax evasion.
Although the law is aimed at curbing illicit financial activities, it applies to many small and closely-held businesses that have no involvement in illegal activities. This is why understanding and complying with the CTA is critical for businesses of all sizes, even those with minimal operations.
Does the CTA Apply to Your Business?
Most likely, yes. The CTA applies to a wide range of business entities, each referred to as a reporting company, including:
- Limited Liability Companies (LLCs)
- Corporations
- Limited Partnerships
- Certain Business Trusts
This broad application even extends to companies that exist solely to hold assets, such as real estate, or those that don’t conduct active business operations. Even if your business is dormant or holds no significant revenue, it may still fall under the CTA’s reporting requirements.
However, there are exceptions. Certain types of businesses and entities are not required to report under the CTA. These include:
- Large businesses that meet all three of the following criteria:
- Employ 20 or more full-time employees in the U.S.
- Have gross annual revenues exceeding $5 million from U.S. operations.
- Maintain a physical office in the U.S.
- Heavily regulated entities such as banks, insurance companies, utilities, and SEC reporting companies.
- Non-profit organizations that qualify for 501(c) tax-exempt status.
If your business does not qualify for one of these exceptions, it is considered a “reporting company” under the CTA and must submit the required information to FinCEN.
What Information Must Be Reported?
If your business is classified as a reporting company under the CTA, you will need to submit a report to FinCEN with specific details about both your business and its beneficial owners. The goal is to create transparency regarding the real people who own, control, or benefit from the business.
For the Business:
- Full legal name of the company.
- Any trade names (DBAs).
- Principal business address.
- State or tribal jurisdiction where the company is formed.
- Taxpayer Identification Number (TIN).
For Each Beneficial Owner:
- Full legal name.
- Date of birth.
- Residential street address (P.O. boxes are not accepted).
- Unique identifying number from a government-issued document, such as:
- U.S. passport
- State-issued driver’s license
- U.S. state or tribal ID card
- A non-U.S. passport, if the individual does not have the other forms of ID.
- A scanned image of the document used to obtain the unique identifying number.
Understanding Beneficial Owners
A beneficial owner is generally defined as any individual who directly or indirectly owns or controls at least 25% of a company’s ownership interests or has substantial control over the company. This can include senior officers, board members, or individuals with the ability to make significant decisions regarding the company’s operations.
In cases where a company is owned by a trust, trustees, beneficiaries, or even trust protectors may be considered beneficial owners, depending on the level of control they exert over the business. Identifying beneficial owners can become complex in these situations, and it is advisable to consult legal counsel to ensure compliance.
Key Reporting Deadlines
The CTA introduces different deadlines depending on when your company was formed. To avoid penalties, ensure you meet these deadlines:
- Existing Businesses (Formed Before January 1, 2024):
- Must file their initial report with FinCEN by January 1, 2025.
- New Businesses (Formed After January 1, 2024):
- Must file their initial report within 30 days of formation.
- Updated Reports:
- If there are any changes to beneficial ownership, such as an individual moving, changing their name, or a new owner joining the company, an updated report must be filed within 30 days of the change.
- Corrected Reports:
- If a report contains errors or omissions, it must be corrected as soon as possible, and the corrected information must be filed within 30 days of discovering the error.
It is critical to stay on top of any changes in ownership or management to ensure ongoing compliance. A failure to file updated or corrected reports on time could result in significant penalties.
Penalties for Non-Compliance
Failing to comply with the CTA’s reporting requirements can lead to severe penalties:
- Civil penalties: Businesses that fail to report, provide inaccurate information, or submit late reports can face civil fines of up to $500 per day, which can quickly accumulate.
- Criminal penalties: More serious violations, such as willfully submitting false information, can result in criminal fines of up to $10,000 and even imprisonment for up to two years.
Given these substantial penalties, even small businesses that are only loosely connected to their beneficial owners need to ensure they comply with the CTA’s regulations.
Why Is Compliance So Important?
The CTA’s aim is to create transparency and accountability within the U.S. business landscape, but the burden of compliance falls heavily on businesses. Many closely-held businesses might be unaware of the law or the extent of its reach, leading to unexpected penalties.
Additionally, because beneficial ownership can change frequently in certain businesses—particularly those owned by trusts or with multiple layers of control—it’s crucial to stay vigilant about monitoring changes. Non-compliance is not an option, as FinCEN has made clear that there are no extensions or exceptions for late filings.
What Should You Do Next?
To ensure compliance with the Corporate Transparency Act, take the following steps:
- Evaluate Your Business: Determine whether your business qualifies as a “reporting company.” Even if you have a small business or a single-member LLC, you may still be required to report.
- Identify Beneficial Owners: Make sure you clearly identify all individuals who meet the CTA’s definition of a beneficial owner. Pay particular attention to any trust arrangements or entities that control the business.
- Gather Necessary Information: Collect the required details (e.g., full name, date of birth, and identifying documentation) for each beneficial owner. Ensure you maintain up-to-date records, especially when ownership changes occur.
- Prepare Your Initial Report: Don’t wait until the deadline is looming. Submit your initial report to FinCEN well ahead of the deadline to avoid penalties.
- Set Up a Monitoring System: Develop internal procedures to track any changes in beneficial ownership, such as new owners, changes in officers, or even a beneficial owner moving to a new address.
- Seek Legal Guidance: The CTA’s rules are complex, particularly if your business involves trust ownership or has multiple layers of control. Consulting with a lawyer familiar with the CTA can help ensure you meet all the legal requirements and avoid penalties.
Downloadable Asset: Corporate Transparency Act Reporting Guide
We’ve prepared a free, comprehensive Corporate Transparency Act Reporting Guide to help you understand the specific steps required to comply with the CTA. In this guide, you’ll learn:
- What the CTA means for your business
- Detailed instructions for identifying beneficial owners
- A checklist of required information for your initial report
- Key deadlines and how to file updates if changes occur
Conclusion
The Corporate Transparency Act represents a major shift for small and closely-held businesses across the U.S. by requiring transparency around ownership. While the law primarily targets the reduction of financial crimes like money laundering and tax evasion, it applies broadly, impacting many businesses that have no criminal involvement. Compliance with the CTA is not just a legal obligation but a smart step for businesses to avoid significant penalties and protect their operations.
By taking proactive steps—such as identifying beneficial owners, setting up internal monitoring systems, and staying informed on reporting deadlines—you can ensure your business remains compliant with this new regulation. Remember, non-compliance can result in both civil and criminal penalties, so it’s crucial to act now and take the necessary steps to meet your obligations under the CTA.
If you’re unsure about your reporting obligations or need help getting started, contact Omnus Law today. Our team is ready to assist you in protecting your business from potential penalties under the CTA.
Don’t wait until the deadline—reach out to Omnus Law today to ensure your business stays compliant with the Corporate Transparency Act.