According to Congress, more than 2 million corporations and limited liability companies are being formed annually under the States' laws. Unfortunately, most or all the States do not require information about the beneficial owners of these entities.
As such, Congress senses that money launderers, terrorists, drug traffickers, and other bad actors purposefully use this disconnect to conceal their illicit activities within a maze of corporate entities in an attempt to evade detection. Congress likens these corporate structures to Matryoshka (Russian Nesting) Dolls.
To uncover and put a stop to these crimes, Congress passed the Corporate Transparency Act (CTA) in 2021.
The Corporate Transparency Act is a bipartisan legislative action designed to strengthen and modernize financial transparency and anti-money laundering policies in the United States. The Act went into effect on January 1, 2024.
Its primary objective is to prevent using shell companies and other opaque corporate structures to conceal illegal activities, such as money laundering, financing terrorism, tax evasion, and other financial crimes.
The CTA requires certain U.S. companies to report specific information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. This reporting is critical in closing gaps that have been exploited by illicit activities in the past.
Willful disregard of the CTA reporting requirements can include penalties of up to $10,000 and/or up to two years in prison.
A beneficial owner isn’t just someone who holds an equity interest in a company; the definition is broader and more nuanced, aiming to uncover the actual individuals who exercise control or significant influence over a company.
In the context of the CTA, a beneficial owner is an individual who either directly or indirectly owns a substantial portion of the company (typically 25% or more) or exercises significant control over it.
It’s important to note that the definition of a beneficial owner is intentionally broad to prevent individuals from circumventing the law through complex ownership structures or arrangements.
BOI reporting is at the heart of the CTA. It is designed to clarify who truly owns and controls businesses operating within the United States.
Filing is simple, secure, and free of charge. Beneficial ownership information reporting is not an annual requirement. Unless a company needs to update or correct information, a report only needs to be submitted once.
For each beneficial owner, companies are required to report:
Individuals may request a FinCEN identifier by completing an electronic web form at https://fincenid.fincen.gov. When a beneficial owner or company applicant has obtained a FinCEN identifier, reporting companies may report the FinCEN identifier of that individual in place of that individual’s otherwise required personal information on a beneficial ownership information report.
Companies that fall under the reporting criteria and were established before January 1, 2024, must ensure their filings are completed by January 1, 2025.
Meanwhile, companies created or registered on or after January 1, 2024, must submit their initial report to FinCEN within 30 days following either their formal establishment notice or their debut to the public.
The CTA focuses on smaller, private entities traditionally under less regulatory scrutiny than their larger counterparts. This includes privately owned corporations and Limited Liability Companies (LLCs) that are either formed or registered to do business in the United States.
While the CTA is broad in its reach, it offers exemptions to certain entities, allowing them to bypass the reporting requirements. These exemptions are generally granted to entities that already operate under a significant degree of regulatory oversight, reducing the risk of using them for unlawful purposes.
Companies that are exempt from the CTA are:
Privately held companies, previously not obligated to disclose financial or ownership information publicly, must unveil their ownership structures, which could alter stakeholder relationships, investment strategies, and governance practices.
The increased administrative requirements come with a need for meticulous record-keeping and potential restructuring of ownership if current arrangements provide anonymity.
Compliance is a regulatory demand and a strategic advantage that can elevate your business. The CTA has many intricacies, and incorporating them into existing reporting policies can be difficult for small businesses.
Clearview Group’s Business Income Tax Practice is equipped to guide you through the nuances of the CTA. Our expertise will help ensure seamless compliance, leaving you free to focus on your business's day-to-day operations.
Talk to our tax experts about how to prepare for the new reporting requirements of the Corporate Transparency Act.
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