In the ever-evolving landscape of financial regulation and corporate transparency, the Corporate Transparency Act (CTA) has emerged as a pivotal piece of legislation. Enacted in 2021 as part of the National Defense Authorization Act, the CTA will require most small and medium-sized businesses operating in the United States to file reports with the federal government regarding their beneficial owners. The CTA took effect on January 1, 2024, and its key provisions are described below.
Objective and Legal Rationale
The primary objective of the CTA is to combat various forms of financial misconduct, including money laundering, terrorist financing, corruption, fraud, and other crimes. Congress recognized that the ability to conceal beneficial ownership information has been exploited for illicit purposes. The CTA is the first reporting requirement of its kind. By requiring the disclosure of beneficial ownership, lawmakers aim to bolster the nation's anti-money laundering and counter-terrorism efforts.
Reporting Companies
The CTA applies to any business that is deemed a “reporting company” under the law. Unless a specific exemption applies, each corporation, limited liability company, or other similar entity (1) created by filing a document with the secretary of state or similar office in any state or territory or with a federally recognized Indian Tribe within the United States, or (2) formed under the laws of a foreign country and registered to do business in the United States is considered a reporting company.
Certain types of businesses are specifically exempted from the CTA’s scope, including publicly traded companies, regulated businesses (such as banks, investment companies, insurance companies, and broker dealers), investment vehicles operated by investment advisors, tax-exempt and government entities, subsidiaries of exempted companies, and “dormant” companies. Importantly, businesses that have more than 20 full-time employees, an operating presence at a physical office within the United States, and annual gross receipts of at least $5 million are also exempt from the CTA’s reporting requirements.
Impact on Small LLCs and Corporations
Although it is common for certain regulations to contain exemptions for small LLCs and corporations to provide relief for small businesses and for other policy reasons, the CTA does not grant explicit exemption status to these entities because they are in fact the intended subjects of the CTA. As such, private companies – and particularly small LLCs and corporations – will be impacted most by the CTA, particularly by losing the ability to shield beneficial owner identity and increasing the cost of compliance. To prepare, business owners should consider how these new requirements will specifically impact their business and begin formulating a compliance plan.
Reporting Requirements
The CTA’s reporting requirements mandate that, in addition to company-specific information, reporting companies will need to disclose the full legal names of their “beneficial owners,” along with dates of birth, current residential or business addresses, and driver’s license numbers (or other unique identifying numbers). Companies must also submit updated reports within 30 days after the date on which such change occurs, and corrected reports within 30 days of becoming aware of any inaccuracy to this beneficial owner information (BOI).
A key definition – beneficial owner – is defined as any individual who, directly or indirectly, (1) exercises “substantial control” over the reporting entity or (2) owns or controls 25% percent or more of the reporting entity’s ownership interests. Certain individuals are expressly excluded from this definition.
In determining whether an individual exerts substantial control, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) will consider an individual’s role within the reporting company, as well as the ability to direct, determine, or exercise substantial influence over the company’s decisions. This control can be exercised directly (for example, as a senior officer or member of the board of directors) or indirectly (for example, as the owner of an intermediary entity that controls the reporting company).
On January 1, 2024, FinCEN began accepting reports filed online using the agency’s BOI E-Filing System, available at https://boiefiling.fincen.gov.
Because of FinCEN’s amendments to the BOI Reporting Rule on November 30, 2023, companies created or first registered in 2024 have the benefit of an extended reporting period, as follows:
- Domestic reporting company: report due within 90 days of the earlier of: (1) the date of actual notice of creation, or (2) the date on which a secretary of state provides public notice of creation.
- Foreign reporting company: report due within 90 days of the earlier of: (1) the date of actual notice of registration to do business, or (2) the date on which a secretary of state provides public notice of registration.
However, for reporting companies created or registered on or after January 1, 2025:
- Domestic reporting company: report due within 30 days of the earlier of: (1) the date of actual notice of creation, or (2) the date on which a secretary of state provides public notice of creation.
- Foreign reporting company: report due within 30 days of the earlier of: (1) the date of actual notice of registration to do business, or (2) the date on which a secretary of state provides public notice of registration.
For domestic reporting companies created before January 1, 2024, and companies that became a foreign reporting company before January 1, 2024, a report is due by or before January 1, 2025.
Penalties:
The CTA authorizes civil penalties of up to $500 for each day of a violation (capped at $10,000) and the possibility of imprisonment for perpetrators for up to two years. These penalties may be significantly increased if a violation occurs while another law is being violated.
Conclusion:
In conclusion, the Corporate Transparency Act represents a significant shift in corporate reporting requirements and adds another level of corporate record-keeping and reporting. It is crucial that businesses stay informed of all applicable regulatory requirements, and if needed, retain competent legal counsel to maintain their compliance and help avoid potentially costly penalties.
Doug Mitchell is a Partner at Scale. As an experienced business and real estate transactional attorney, Doug provides comprehensive business, real estate, and outside general counsel services to startup, growth stage, and mature businesses across various sectors.
Channah Rose is a Partner at Scale. She is experienced in the complete range of corporate and securities transactions, from company formations to complex restructurings, from SAFE rounds to Series D financings, and from distressed asset sales to business combinations valued in the hundreds of millions.
Nora Wong is Counsel at Scale. She focuses her practice on advising emerging companies and is experienced in supporting compliance initiatives and regulatory relations.
Disclaimer: This article is provided for informational purposes only and is not intended as, and should not be construed as, legal advice or counsel of any kind. Please consult with your attorney, business consultant, compliance manager, or other appropriate professional.
1 31 U.S.C. § 5336 (2021).
2 See discussion infra in “Reporting Requirements.”
3 31 C.F.R. § 1010.380(c)(1) (2024).
4 Id. § 1010.380(c)(2).
5 See Summary: S.1978 — 116th Congress (2019–2020), Congress, https://www.congress.gov/bill/116th-congress/senate-bill/1978 (describing the CTA legislation as applying to “certain new and existing small corporations and limited liability companies”).
6 31 C.F.R. § 1010.380(b)(1)(ii) (2024).
7 Id. § 1010.380(b)(4)(iii).
8 Id. § 1010.380(d).
9 Id. § 1010.380(d)(3) (specifically exempting, e.g., minor children and creditors of reporting companies).
10 Id. § 1010.380(d)(1)(i).
11 Id. § 1010.380(d)(1)(ii).
12 Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024, 88 Fed. Reg. 83,499 (Nov. 30, 2023) (to be codified at 31 C.F.R. pt. 1010).
13 31 C.F.R. § 1010.380 (a)(1)(i)(A) (2023).
14 Id. § 1010.380(a)(1)(ii)(A).
15 Id. § 1010.380(a)(1)(i)(B).
16 Id. § 1010.380(a)(1)(ii)(B).
17 Id. § 1010.380(a)(1)(iii).
18 31 U.S.C. § 5336(h)(3)(A) (2024).
