The Corporate Transparency Act Will Take Effect Soon: Here’s What Small & Mid-Sized Businesses Need to Know
On January 1, 2024, the long-looming Corporate Transparency Act (CTA) will take effect. The Act, which was passed into law in January 2021, will require the beneficial owners of a reporting company to submit identifying information about themselves and their organization to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) (definitions of “beneficial owner” and “reporting company” will be provided below).
At a high level, the CTA was established to detect and prevent the use of shell companies that facilitate “terrorism, money laundering, and other misconduct,” according to the summary of the Act.
“Other countries have followed similar laws for a long time – we are now catching up with the rest of the world,” said Filejet CEO, Andy White. “Unfortunately, the Act will also be one more pebble in the scale of making business more difficult.”
That increased difficulty won’t be limited to a small slice of businesses – it will extend to a majority of organizations. A FinCEN analysis estimates “there will be at least 32.6 million ‘reporting companies’… in existence when the proposed rule becomes effective.”
If you work for a small- to mid-sized organization, chances are good you may be one of those 32.6 million reporting companies.
If you have concerns about how the CTA will affect your organization, you aren’t alone. The new requirements are daunting and the penalties for noncompliance – which include a fine of up to $10,000 – are steep.
But here’s some reassurance: if the CTA is on your radar (and it obviously is because you’re here), you are ahead of the game. At this point, awareness and education are the most productive things your organization can do to prepare. If you’re here, you are likely in the “education” phase – and starting to have questions. Luckily, we have answers.
Below are some of the most frequently asked questions we’ve received from Filejet customers – and some key things to keep in mind as your organization gears up for January 1.
*A friendly (but important) reminder: this is not legal advice and should not be perceived as such. We are not lawyers. If you are a lawyer, we are happy to leave the legalese to you. If you aren’t a lawyer, please connect with your organization’s counsel. The answers below are based off of the contents of the Act itself, reference materials and resources produced by FinCEN – and what we’re hearing and reading.
What Is a Reporting Company?
As outlined by FinCEN, “reporting companies” include any domestic and foreign entity that was formed by filing a document with a secretary of state or similar office in the U.S.
While that definition may make it sound like “reporting companies” include every U.S. entity under the sun, there are exemptions. 23 of them, to be exact. They are:
- Securities reporting issuers
- Governmental authorities
- Credit unions
- Depository institution holding companies
- Money services businesses
- Brokers or dealers in securities
- Securities exchanges or clearing agents
- Other Exchange Act registered entities
- Investment companies or investment advisers
- Venture capital fund advisers
- Insurance companies
- State-licensed insurance producers
- Commodity Exchange Act registered entities
- Accounting firms
- Public utilities
- Financial market utilities
- Pooled investment vehicles
- Tax-exempt entities
- Entities assisting a tax-exempt entity
- Large operating companies
- Subsidiaries of certain exempt entities
- Inactive entities
For more information about what qualifies as a reporting company, refer to Part C of FinCEN’s BOI reporting FAQs.
What Is a Beneficial Owner?
In the simplest terms, if you:
- Have substantial control over a reporting company; or
- Own or control at least a quarter of the ownership interests of a reporting company
… you are a beneficial owner.
In this context, “substantial control” includes, but is not limited to, senior officers (aka anyone in the C-suite), anyone who can remove or appoint a senior officer, and anyone who makes important decisions about a business, its finances, and/or its structure.
“Ownership interests” include, but are not limited to, any individual with equity, stock, or voting rights, anyone with capital or profit interest, anyone with convertible instruments, and anyone with options or privilege to buy or sell any of the items listed above.
It isn’t uncommon for an organization to have more than one beneficial owner. If your organization has multiple beneficial owners, each must submit his or her information to FinCEN. FinCEN refers to this filing as a BOI (beneficial ownership information) report.
Is There an Easy Way to Figure This Stuff Out?
Yes, you are correct – these are not exactly straightforward determinations.
To demystify the process, FinCEN recently released a Small Entity Compliance Guide that outlines – in thorough detail – what a reporting company is and who beneficial owners are.
But, if you don’t have the bandwidth to read the entire guide right now (or don’t feel like doing back-of-the-napkin calculations), you’re in luck. Filejet created a tool to help you determine whether your organization is a reporting company.
To use the tool, simply enter your information and respond to some yes/no questions. Based on your answers, the tool will let you if your organization needs to file.
What Information Do We Need to Submit?
Per FinCEN’s guidance, each BOI report must include the following information:
For more information, see Chapter 4 of the Small Entity Compliance Guide.
How Long Do We Have to File?
If your company currently exists – or will exist prior to January 1, 2024 – you will have until January 1, 2025, to file your first report.
As the rule currently stands, if you start a company after January 1, 2024, you will have 30 days from the effective date of your organization’s registration to file your report.
However, FinCEN very recently released a statement saying it was proposing an amendment that would extend the filing period to 90 days from the effective date of registration. Continue to watch this space for updates.
For more information, see Chapter 5 of the Small Entity Compliance Guide.
How Often Does Information Need to be Submitted?
BOI reports will need to be filed annually and any time information about a reporting company or beneficial owner(s) change. No fee needs to be submitted to the state with the report.
How Do We Submit This Information?
FinCEN is in the process of building a portal through which BOI reports can be e-filed.
The portal is not yet complete, but a FinCEN representative who spoke at a conference Andy recently attended, confirmed that it will be ready by January 1, 2024.
What Happens if I’m Not Compliant?
Maintaining legal compliance is always a “big deal.” (We know you may think we are biased, but… it just is, plain and simple.)
Even though we think all legal compliance is a “big deal,” BOI reporting is a capital letters, bold type “Big Deal.” The Federal government isn’t messing around here.
Civil and criminal penalties exist for noncompliance. If you fail to accurately, or completely, report information about your reporting company or beneficial owners, you could face:
- A civil fine of up to $10,000 (for each day you are in violation, you could owe up to $500); and / or
- Imprisonment for up to three years
So, while Filejet has always encouraged clients to take legal compliance seriously, we also can’t stress strongly enough how important it is that your organization complies with the CTA.
What Should I Do Now to Prepare?
By reading through the literature, and asking the right questions, you’re already on the right track. You have plenty of time to get your ducks in a row.
If you’ve gotten this far and haven’t yet determined whether your organization qualifies as a “reporting company,” do so now. If it does, identify your beneficial owner(s).
If you are not the beneficial owner – or if you are and there are others in addition to yourself – make those people aware. Some individuals may be hesitant to have a public record of their involvement with your organization, so take time to discuss their concerns among leadership.
What Role Does Entity Management Play Here?
If you feel intimidated by the CTA, we get it. BOI reporting requirements are somewhat convoluted, and updates are still being made. Having to maintain compliance with yet another jurisdiction adds an extra wrinkle to the course of doing business.
Aside from determining whether you need to file, compiling all of the information needed to file may seem like a heavy lift – if your entity information isn’t in proper order.
If your organization manages its entities manually – with spreadsheets and calendar reminders, or with a traditional registered agent – it may be challenging to consistently adhere to the CTA. Because you must file a report with FinCEN any time there is a change to your organization or beneficial owner(s), gathering the correct information may be challenging if no single source of truth exists (and it can’t with a manual process).
But, if your entities are properly maintained (with automated software, perhaps) filing your BOI reports will be a piece of cake.
How Can Filejet Help?
Here’s some good news: Filejet’s infrastructure was built to evolve alongside changing rules and regulations. That means Filejet will be able to handle your BOI filing when the CTA takes effect in January.
Filejet will automatically file your organization’s BOI report for you – just like it does with annual report, DBA, business license, and other filings. As long as all of your information is up to date in the portal (and we will make sure to notify you if it’s not), complying with the CTA will be a proverbial walk in the park for your organization.
While Filejet will handle filing for you, we do advise that you stay abreast of changes made to the Act and reporting requirements. Updates are ongoing. Please monitor FinCEN’s BOI newsroom to stay in the loop.