Corporate Transparency Act and BOI Reporting for Small Businesses

The Corporate Transparency Act (CTA) enacted into law as part of the National Defense Act for Fiscal Year 2021 introduces critical reporting requirements for many small businesses in the U.S beginning on January 1, 2024. Central to this legislation is the mandate to disclose Beneficial Ownership Information (BOI) to the Financial Crimes Enforcement Network (FinCEN). This article provides an in-depth understanding of the CTA and BOI reporting, emphasizing its impact on small businesses, including who must report and what information is required.

Understanding the Corporate Transparency Act

The CTA aims to curb illegal activities by enhancing transparency in the ownership of legal entities. It mandates the disclosure of beneficial owners of various business entities to FinCEN, a significant shift in the reporting landscape for small businesses.

• Scope and Implications: Targeting smaller entities such as LLCs (yes, even single member LLCs) and other similar structures, the Act requires these businesses to report detailed information about their beneficial owners. The rationale behind this is to deter the misuse of anonymous shell companies for illicit activities, ensuring a level of transparency in business operations. It is anticipated that 32.6 million businesses will be required to comply with this new reporting requirement.

• Defining Beneficial Ownership: A beneficial owner, under the CTA, is anyone who, either directly or indirectly, exercises substantial control over the entity or owns or controls at least 25% of the ownership interests. This includes individuals who may not be immediately apparent in the business’s official documentation but who have significant influence or financial stakes.

Reporting Beneficial Ownership Information

The BOI reporting is a pivotal aspect of the CTA, requiring businesses to provide detailed information about their beneficial owners to FinCEN. This initiative is designed to provide a clearer picture of the true ownership of entities and prevent financial crimes.

• Information Requirements: Businesses need to report personal details of beneficial owners, including names, addresses, dates of birth, and identification numbers (from IDs like passports or driver’s licenses). Entities themselves must report their own identifying information, such as business name, address, and TIN.

• Compliance Timeline: There are different filing timeframes depending on when an entity is registered/formed or if there is a change to the beneficial owner’s information:

• New entities (created/registered in 2024) — must file within 90 days
  • New entities (created/registered after 12/31/2024) — must file within 30 days
  • Existing entities (created/registered before 1/1/24) — must file by 1/1/25
  • Reporting companies that have changes to previously reported information or discover inaccuracies in previously filed reports — must file within 30 days

Exemptions from Reporting

Not all entities are required to comply with the CTA’s reporting requirements. Understanding these exemptions is crucial for small business owners to determine their obligations.

• Exempt Entities: The Act exempts certain entities based on size, regulation, and risk factors. This includes publicly traded companies, government entities, banks, credit unions, and insurance companies. Additionally, entities that employ more than 20 full-time employees in the U.S., filed federal income tax returns reporting more than $5 million in gross receipts or sales, and have an operating presence at a physical office within the U.S. are exempt.

• Rationale for Exemptions: These exemptions are based on the assumption that such entities already have sufficient transparency and are subject to other regulatory oversight. For small businesses that do not meet these criteria, understanding the nuances of these exemptions is critical to determine if they fall under the reporting requirements.

Penalties for Non-Compliance

The failure to accurately report BOI or to deliberately provide false information can result in severe penalties, highlighting the importance of compliance.

• Potential Penalties: Penalties for willfully not complying with the BOI reporting requirement can result in criminal and civil penalties of $500 per day and up to $10,000 with up to two years of jail time.

Preparing for Compliance

Small business owners should proactively prepare for compliance with the CTA. This involves identifying all beneficial owners, gathering required information, and keeping abreast of the latest regulatory developments.

• Proactive Steps: Review your business structure and ownership details to identify beneficial owners. Collect necessary personal information and establish a process for maintaining and updating this data as needed.

Our Services

Unfortunately, the CPA community has not received clear guidance on how we can help our clients with this new compliance burden. As the CTA is not a part of the tax code, the application of the regulations requires legal guidance. Assisting you with the CTA could be considered “unlicensed practice of law” and is not currently covered by CPA liability insurance. Consequently, assisting with your compliance with the CTA, including BOI reporting, is not something that we will be able to assist you with at this time. As your partner, we simply care about your financial wellbeing and want you to be aware that this requirement exists.

Please consider consulting with legal counsel if you have questions regarding the applicability of the CTA’s reporting requirements and issues surrounding the collection of relevant ownership information. Information regarding the BOI reporting requirements can be found at https://www.fincen.gov/boi.