The U.S. Corporate Transparency Act: A Primer

5 min read

Here’s what you should know about doing business in the United States next year.

The United States Corporate Transparency Act (CTA) will take effect on January 1, 2024, leaving businesses just a few short months to come into compliance with the new law. Designed as an anti-money-laundering initiative, the CTA requires certain businesses to register specific information with the government in order to make identifying the owners of those businesses easier. With significant penalties for failure to comply, businesses have a vested interest in ensuring their information is organized and prepared for submission as soon as possible. Here’s what you need to know about the CTA.

What is the Corporate Transparency Act?

The CTA is a law that aims to prevent tax fraud, money laundering, and other financial crimes. In general terms, the act requires most American corporations to register their beneficial owners with the federal government through FinCEN. Under the law, a beneficial owner is someone who owns or controls at least 25% of the company, or otherwise has “substantial control” over the company. 

“Substantial control” could mean that the person in question is a senior officer, has the authority to appoint and remove board members, or otherwise directs major decisions for the company. This control could be exercised directly or indirectly, including through joint ownership, through an intermediary, as a trustee, or by controlling a company that has ownership interest in the company in question.

Who is Subject to the Corporate Transparency Act?

The CTA applies to every corporate entity created by filing documents with a Secretary of State. Reporting companies, such as corporations, LLCs, and entities formed or registered for business purposes fall under the purview of the CTA. This includes both newly-created and existing companies, and even foreign companies if those companies are registered to do business with a U.S. Secretary of State.

However, certain companies are exempted from the CTA. Exemptions apply to:

• Regulated companies like banks
• Companies that have more than 20 employees AND more than $5 million USD in annual revenue
• Companies that are inactive

There are also exemptions for publicly traded companies, investment companies, tax-exempt organizations, and wholly-owned subsidiaries of other exempt entities.

In essence, this means the CTA applies to active, unregulated companies with fewer than 20 employees and less than $5 million USD in annual revenue.

What are the New Requirements Under the CTA?

Corporations that are subject to the CTA must register their legal name as well as any and all trade or doing-business-as names, plus their street address. Foreign companies operating in the United States must provide their primary U.S. location, plus their jurisdiction of formation, jurisdiction of registration in the United States, and either their Tax Identification Number or their corresponding foreign tax identification number. U.S.-based companies must provide their Tax Identification Number and jurisdiction where the company was formed.

The CTA requires each company in question to provide the name, date of birth, and home address of the company’s beneficial owner. Companies must provide the beneficial owner’s identification in the form of a U.S. passport, foreign passport, or a state ID.

Corporations formed on or after January 1, 2024 must provide this information within 30 days of formation. Existing companies have until January 1, 2025 to come into compliance with the Corporate Transparency Act. The CTA also requires companies to update any changes in their information within 30 days of that change.

What are the Penalties for Failure to Comply?

Failing to comply with the CTA can result in both civil and criminal penalties for both the company in question and the company’s controlling individual. Failure to comply can result in a $500 USD fine for every day the company is in violation; beneficial owners can also be fined up to $10,000 USD, or imprisoned for up to 10 years, or both.

What Steps Should Companies Take Now?

FinCEN will begin accepting Beneficial Owner Information (BOI) reports on January 1, 2024. Until that time, no action is legally required. However, companies that do business in the United States should start preparing for the new law now.

First and foremost, you’ll want to start by determining whether your organization is a “reporting company” – that is to say, whether the CTA’s BOI requirement applies to you.

If the BOI requirement does apply to you, you’ll want to start collecting the information you’ll be required to submit. This includes information relating to the company itself, plus the individuals who control the company. Individuals must report their full legal name, birth date, current address, and a unique ID number from some form of identification such as a state-issued driver’s license.

Of course, the amount of information required can be daunting if you’re working with a pen-and-paper entity management system. By adopting an electronic corporate entity database now, you can prepare yourself – and your clients – to comply with the CTA as soon as it comes into effect.

The U.S. Corporate Transparency Act is coming into effect in short order, leaving companies with little time to gather and submit their required BOI reports. With significant penalties for failure to comply, it’s critical that you determine whether your organization is subject to the CTA – and to start preparing now for its introduction.

Is maintaining corporate entities too unwieldy and time-consuming? Do you need to digitize your records to prepare for the Corporate Transparency Act? Check out Appara’s Legal Entity Management application today.