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What Is the Corporate Transparency Act?

01/26/2024 - Risk Management, Business Insights, Growing Your Business

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Business Insights: What Is the Corporate Transparency Act?

If you’re a small-business owner, you may be subject to reporting requirements under the Corporate Transparency Act.

In this article, we’ll explain the purpose of this federal law, how and why it affects small businesses, and what business operators need to know to stay in compliance.

In force as of January 1, 2024, the Corporate Transparency Act (CTA) is a federal antifraud law that places new reporting requirements on many small businesses.

Specifically, the CTA requires reporting businesses to proactively disclose their beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN) of the United States Department of the Treasury.

This effectively bans anonymous shell corporations, which criminal enterprises have often used to hide income from illicit activities, evade taxes, commit securities fraud, and fund terrorism. The information that businesses provide will not be made public, but FinCEN is authorized to disclose it to certain law enforcement agencies and regulators.

Failure to report correct and complete BOI to FinCEN may result in costly penalties, including fines of up to $500 per day of noncompliance.

How Does It Affect Small Businesses?

Because the CTA aims to crack down on shell corporations – entities without significant assets or business operations – most “large operating businesses” are exempt from its reporting requirements. Meanwhile, most small businesses are responsible for reporting their beneficial ownership information (BOI) to the government.

Corporations, LLCs, and many partnerships may be affected. However, most sole proprietorships and general partnerships – including those operating under a separate “DBA” name and/or tax identification number – are not subject to this law.

Who Must File?

The CTA defines reporting companies as entities that are formed or registered to do business at the state level (i.e., most LLCs, LLPs, corporations) and that do not qualify for an exemption. The complete rules are lengthy and complex, but here are five of the 23 different exemptions listed:

  • Companies with more than 20 full-time employees, a physical presence in the U.S., and reported gross receipts over $5,000,000 for the previous tax year
  • Banks, credit unions, money services businesses, securities brokers, investment advisers, insurance companies, accounting firms, and certain other financial businesses
  • 501(c) nonprofit organizations, governmental authorities, and public utilities
  • Subsidiaries of exempt entities
  • Inactive businesses

All business owners should consult current FinCEN sources to determine their reporting obligations. And if you’re in any doubt, talk to your attorney or accountant.

Any authorized person – like an owner, employee, or attorney – may file on behalf of a reporting company.

Who Is a Beneficial Owner?

FinCEN defines a beneficial owner as “any individual who, directly or indirectly, exercises substantial control over a reporting company, or owns or controls at least 25 percent of the ownership interests of a reporting company.” If a reporting company has multiple beneficial owners, they must all be reported.

Individuals who exercise “substantial control” can include:

  • Senior officers like presidents, partners, CFOs, COOs, and general counsels
  • Anyone with the authority to appoint or remove senior officers
  • Other people with significant influence over operations, finances, and business structure

Ownership interests can include:

  • Equity, stock, or voting rights
  • Capital or profit interest
  • Convertible instruments, options, or privileges

For most small businesses, identifying beneficial owners is fairly straightforward. If your enterprise has a more complex ownership structure, consult an attorney or accountant.

What Needs to Be Reported?

Once you have identified your business’s beneficial owners, you will need to supply the following information to FinCEN:

  • Your company’s legal name, trade name(s), jurisdiction, physical address, and tax identification number
  • Each beneficial owner’s name, date of birth, residential address, and passport or driver’s license number
  • For businesses formed on or after January 1, 2024, only: additional information about your company applicants (the individuals responsible for filing or directing the filing of the report)

 When Do Businesses Have to File?

Filing deadlines depend on the date your company was created or registered:

  • Reporting companies created before January 1, 2024, have until January 1, 2025, to file their initial BOI reports using FinCEN’s secure filing system.
  • Reporting companies created on or after January 1, 2024, and before January 1, 2025, have 90 days after their effective date of creation to file their initial BOI reports using FinCEN’s secure filing system.
  • Reporting companies created on or after January 1, 2025, have 30 days after their effective date of creation to file their initial BOI reports using FinCEN’s secure filing system.

There is no ongoing annual reporting requirement, but businesses must file updates and corrections as needed. If your BOI or basic business information changes, you must notify FinCEN within 30 days.

What If You’ve Received a Request for Information?

Beware! FinCEN reports that scammers have been attempting to solicit sensitive information from business owners under the guise of the CTA. These emails or letters may be titled “Important Compliance Notice” and prompt you to click on a URL or scan a QR code. FinCEN will not make unsolicited requests and accepts reports only through its secure filing system via its website. There is no fee for filing your BOI.

How Should You Prepare?

Small-business operators should plan ahead to ensure that they stay in compliance with the CTA:

  1. Review the complete rules and procedures at fincen.gov/boi.
  2. Subscribe to get email updates about reporting obligations.
  3. Seek advice from an attorney or accountant if needed.
  4. Create a list of beneficial owners and their information.
  5. Decide who will prepare and submit the report.
  6. Mark your calendar so you don’t miss the deadline.
  7. Make a plan for keeping your BOI records up to date.

A Financial Partner You Can Trust

For personalized guidance on keeping your enterprise moving in the right direction, reach out to a WesBanco Business Banker or find a location near you.

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Content is for informational purposes only and is not intended to provide legal or financial advice. The views and opinions expressed do not necessarily represent the views and opinions of WesBanco.

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