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More than 32 million U.S. business owners must comply with the Corporate Transparency Act by filing their beneficial ownership information with the Financial Crimes Enforcement Network (FinCEN). Photo by Tyler Franta on unsplash.com

published on March 14, 2024 - 12:56 PM
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Around 32.6 million businesses in the United States may be required to comply with the Corporate Transparency Act (CTA). The CTA is a federal law that came into effect on Jan. 1 that imposes new reporting obligations on millions of business entities. It was enacted into law as part of the National Defense Act in 2021 and requires disclosing certain institutions’ beneficial ownership information (BOI) on individuals who own or control a company.

While a federal judge last week ruled against the CTA as unconstitutional, reported tax information firm Wolters Kluwer, the narrow nature of the summary judgment means BOI reports are still obligated by tens of millions of businesses except for less than 65,000 members of the National Small Business Association.

The BOI reporting is intended to help U.S. law enforcement combat money laundering, the financing of terrorism and other illicit activity. CTA is not part of the tax code, but rather part of the Bank Security Act.

A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company.

An individual has substantial control of a reporting company if they direct, determine or exercise substantial influence over its important decisions. This includes any senior officers of the reporting company, regardless of formal title or if they have no ownership interest in the reporting company.

The detailed CTA regulations define “substantial control” and “ownership interest” further.

Organizations must report the information to the Financial Crimes Enforcement Network (FinCEN). Under the CTA, BOI reports will not be filed with the IRS, but with the Financial Crimes Enforcement Network (FinCEN).

Business owners who don’t follow the regulations can face severe penalties for non-compliance with the CTA, such as civil penalties of up to $500 for each day the violation continues or criminal penalties, including jail time or a fine of up to $10,000.

“I recently co-authored an article that provides an overview of the CTA. It can be found on Baker Manock & Jensen website,” said Haley Georgouses, an associate with Fresno law firm Baker Manock & Jensen. “There are also many resources on FinCEN’s website.”

For clients who request Baker Manock’s assistance with the CTA, Georgouses said they help with the entire reporting process from start to finish — ensuring all required information is included in the CTA filing, analyzing who needs to be disclosed as a “beneficial owner,” determining whether a company qualifies for a filing exemption and helping submit the CTA filing with FinCEN.

There are two types of reporting companies that will need to report to FinCEN. Domestic reporting companies are corporations, limited liability companies and any other entities created by filing a document with a secretary of state or similar office in the United States.

Foreign reporting companies are entities, including corporations and limited liability companies, formed under the law of a foreign country registered to do business in the United States by filing a document with a secretary of state or any similar office.

The CTA does exempt some types of entities from the reporting requirements, such as certain banks, credit unions, government authorities, insurance companies and tax-exempt entities. The deadlines for filings with FinCEN vary depending on when the organization was formed.

For businesses formed before Jan. 1, 2024, an initial filing must be made by Jan. 1, 2025. If a company was formed on or after Jan. 1, 2024, and before January 1, 2025, it will have 90 calendar days from its creation or registration to file its initial report.

In a blog by Fresno CPA firm Boos and Associates, there are 23 categories of exemptions, including publicly traded companies, banks and credit unions, securities brokers/dealers, public accounting firms, tax-exempt institutions, and certain inactive organizations.

These are not blanket exemptions, and the government already regulates many organizations and discloses their BOl to a government authority.

Certain “large operating entities” are exempt from filing. For other businesses to qualify for exemption, the company must employ more than 20 people in the U.S., report gross revenue (or sales) of over $5 million on the prior year’s tax return and be physically present in the U.S.

Different filing time frames apply depending on when an organization is registered or formed or if there is a change to the beneficial owner’s information.

Companies must report the full name of the reporting company, any trade name or business as (DBA) name, business address, state or Tribal jurisdiction of formation, and an IRS taxpayer identification number (TIN).

Additionally, information on the business’ beneficial owners and for newly created institutions, as well as the company applicants is required. This information includes name, birthdate, address, unique identification number, and issuing jurisdiction from an acceptable identification document and an image of such document.

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