Your 5-Minute Guide To The Corporate Transparency Act

IMPORTANT UPDATE: On March 1, 2024, the Corporate Transparency Act was ruled unconstitutional as a result of a lawsuit filed by the National Small Business Association. While the act’s requirements might be struck down for everyone in the near future, at this time the case only applies to the plaintiff. James Moore is closely tracking this news as this lawsuit continues to play out in federal court and will keep you informed on any significant updates.

If you’re a business owner, it’s important to understand how the Corporate Transparency Act will impact your company and the steps you should take to comply with these regulations.

What is the CTA?

Passed on Jan. 1, 2021, the CTA is part of a larger bill called the Anti-Money Laundering Act of 2020 (AMLA). The AMLA was created to prevent financial crimes like money laundering, terrorist financing and tax evasion. It requires U.S. companies to report any transactions “highly likely” to be related to criminal activity, such as:

  • Transactions from foreign countries or countries with a high rate of corruption or organized crime
  • Companies or individuals who have previously been associated with illegal activity

Businesses are required to report their income, assets and liabilities to the Financial Crimes Enforcement Network (FinCEN). This division of the Treasury Department collects and analyzes information about financial transactions to combat money laundering, terrorist financing and other financial crimes. Recent fines levied by FinCEN for violations of the Anti-Money Laundering Act have been as high as $390 million.

On Dec. 7, 2021, FinCEN issued a Notice of Proposed Rulemaking to give the public an opportunity to review and comment on the proposed rule to implement the CTA’s beneficial ownership information (BOI) reporting provisions. This rule would significantly enhance the ability to protect the U.S. financial system from illicit use. It would also provide essential information to law enforcement and others to help prevent corrupt actors, terrorists and proliferators from hiding money or other property in the United States.

Who does the CTA affect?

The CTA applies to any company that is incorporated or formed in the U.S., even if it’s based overseas. It also covers any foreign entity that conducts business in the United States or operates a branch within U.S. borders.

What are some of the new requirements under the CTA?

The CTA imposes new requirements to report beneficial ownership and company applicant for business entities that never before were subject to such reporting requirements. The CTA defines a beneficial owner as any individual who directly or indirectly:

  • Exercises substantial control over the reporting company, or
  • Owns or controls at least 25% of the ownership interests in the reporting company.

For example, you own 100 shares of stock in a company and your brother owns another 100 shares. Together you own all 200 shares and are considered beneficial owners of the corporation.

A company applicant is the individual who applied to form a corporation, limited liability company or other similar entity.

Who is required to report?

Domestic and foreign companies alike must report this information. This includes corporations and limited liability companies (LLCs). A domestic reporting company could also be any entity created by filing the document with a secretary of state or similar office under the law of the state or Indian tribe.

If the company is formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction, it’s considered a foreign company and is subject to reporting requirements.

Companies exempted under the CTA:

There are 23 types of entities exempted from reporting. Some of the more common types include:

  • Tax-exempt entities
  • Investment advisors
  • Financial institutions (banks)
  • Insurance companies
  • Public utilities
  • SEC reporting companies

When do you have to report to the CTA?

Under the proposed rules, any registered company that existed before the regulations go into effect will have one year to register. Companies created after the regulations go into effect will have 14 days to register with FinCEN. Companies will also be required to correct and update information with FinCEN within 30 days.

FinCEN expects to enforce the reporting requirements in 2023.

What does your business need to submit to the FinCEN?

FinCEN requires the following basic information:

  • Full name and any alternative names through which the company engages in business;
  • Business street address;
  • Jurisdiction of formation or registration; and,
  • Taxpayer identification number (TIN)

For each beneficial owner and company applicant, reporting companies must disclose:

  • The individual’s full legal name;
  • Date of birth;
  • Current residential or business street address; and,
  • A unique identifying number from an acceptable identification document (e.g., a valid passport or driver’s license). A scanned copy of this document must also be provided.

As an alternative, the reporting company can provide the individual’s FinCEN identifier — a unique number assigned to that person by the network. The proposed regulations describe how to obtain a FinCEN identifier and when it may be used.

For more guidance, or if you’re not sure if your company is required to report under CTA, contact a knowledgeable international tax CPA.