The Corporate Transparency Act (CTA): What Does it Mean for Me and My Business?
February 5, 2024
The CTA became effective on January 1, 2024, an effort by the Department of the Treasury to increase transparency in entity ownership. The primary goal is to crack down on illegal business activities, money laundering, and financial crime run through US business entities.
The Financial Crimes Enforcement Network (FinCEN), a bureau within the United States Treasury, began imposing certain reporting requirements. FinCEN is the same government bureau that receives and processes the Foreign Bank Account Reporting (FBARs) and the online portal is expected to be similar to that used now for FBAR reporting. Non-compliance with the reporting requirements can lead to severe penalties and criminal prosecution. A failure to comply could result in a $500-per-day penalty (up to $10,000) and up to two years of imprisonment.
This article summarizes the key points as they relate to private clients, including families who use Partnerships or S-Corps to hold real estate and financial assets, manage their family office affairs, and provide liability protection or ring fence assets from overall family wealth. Most personal holding vehicles and other US entities that were created for the purposes of tax and estate planning will be impacted by the reporting required under the CTA and will not be exempt from reporting on their beneficial ownership. For instance, the CTA classifies LLCs as reporting companies, obliging every LLC formed in the USA to file a report, unless it qualifies for an exemption.
The CTA applies to the following:
- Any domestic or foreign entity which is not exempt that is a “reporting company” under the CTA (as determined under FinCEN’s final rule)
- Individuals who are the “beneficial owners” of a reporting company
- Individuals who have, on or after January 1, 2024, filed documents to create the reporting company or to register a reporting company to do business in the United States (a “company applicant”).
Important Dates:
Reporting companies formed or registered before January 1, 2024, have until January 1, 2025, to satisfy the requirements and reporting. Reporting companies formed or registered between January 1, 2024, and January 1, 2025, are required to file a report within 90 calendar days. Reporting companies formed after January 1, 2025, are required to file a report within 30 calendar days.
Exemptions:
While certain exemptions exist, they mainly apply to large entities that are already subject to stringent reporting or oversight standards, for example publicly listed companies, financial institutions, insurance companies and public utilities. Most ordinary operating business, small companies, and personal holding companies will unlikely qualify for an exemption.
Reporting Process:
Determining if you or any of your business entities need to file a Beneficial Ownership Information Reports (BOI Reports) involves two steps.
- Determine each entity’s classification under the CTA.
- Based on classification, determine whether it falls within any of the specified exemptions. As mentioned above, we do not expect most closely held family entities to qualify for an exemption.
BOI Reporting Requirements:
A beneficial owner of a reporting company is any individual who:
- Directly or indirectly exercises “substantial control” over the company and/or
- Owns or controls at least 25% of the ownership interests of the reporting company.
“Substantial control” is the least clearcut of the potential reporting requirements and could be triggered under the CTA in a variety of ways. The business activities of each person closely connected with the company must be reviewed to determine whether that person exercises “substantial control” over the reporting company.
For domestic and foreign companies, the individual primarily responsible for directing or controlling the filing of the document that creates or first registers the company to do business in the United States is also considered a “Company applicant”. A company applicant for a domestic reporting company is the individual who directly files the document that creates the reporting company. For a foreign company that is required to report, a company applicant is the individual who directly files the document that first registers the company to do business in the United States. Only reporting companies created or registered on or after January 1, 2024, are required to provide information relating to their company applicants, and no reporting company will be required to provide information for more than two company applicants.
What to Report:
- Beneficial Owners: legal name, date of birth, business address or primary residence address, Social Security Number (if applicable), the name of the issuing state or country, and number of the passport or driver’s license for the Beneficial Owners and Control Persons.
- Company Applicant: name of reporting company, trade name or “doing business as”, address of company, jurisdiction of formation, and TIN or EIN
In addition to the required initial filing, there are requirements to update the original filing when there are changes concerning the reporting company or its beneficial owners. For instance, if a beneficial owner changes the address, legally has a name change due to marriage or divorce, and obtains a new driver’s licence, it may require an updated filing to a company’s BOI Report. The reporting company must file an updated report within 30 calendar days after the changes.
If you would like to request assistance, please contact your advisor or attorney. Please note that unless you specifically request us to provide support to you or your business for anything relating to the CTA, we cannot take any action to assist you, even if we have the information for your business. We also recommend you speak with your attorney and corporate services providers for advice and support in complying with the CTA.
For more information, visit FinCen’s website: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.