Regulations that impact businesses are constantly evolving, and many of these regulations impact businesses of all sizes. Failure to comply with regulations or reporting requirements can result in fines or penalties that limit or permanently revoke your ability to do business.
Business owners need to understand the requirements of the Corporate Transparency Act to ensure compliance and remain in good standing. Let’s discuss everything you need to know about the Corporate Transparency Act.
What Is the Corporate Transparency Act?
The Corporate Transparency Act (CTA) is an act designed to help the federal government combat misappropriation and misreporting of funds by collecting substantially more ownership information about businesses than previously required.
The CTA prevents illegal tax evading activities like tax fraud and money laundering. The Corporate Transparency Act also works to establish a detailed paper trail to ensure that funds from a business aren’t used to finance terrorism or other illegal activities that may harm national security.
The simple explanation: You may have heard people refer to certain businesses as a “front,” which means that the business is a way to disguise an illegal operation through a legitimate United States business entity. The CTA is designed to combat fronts that damage the economy and fortify criminal activity.
The Corporate Transparency Act requires business owners to comply with the U.S. Department of Treasury Financial Crimes Enforcement Network (FinCEN) by submitting a Beneficial Ownership Information Report (BOI) report.
The Department of the Treasury oversees most major financial transactions across the United States and takes a specific interest in assuring that money moves legally throughout the country.
When Does the Corporate Transparency Act Go Into Effect?
The Corporate Transparency Act was enacted in 2021, but like all major changes, it didn’t go into effect during the previous years. The act officially went into effect on January 1, 2024. Businesses are expected to be in compliance within the fiscal year 2024 and every year moving forward.
Requirements gradually roll out. Businesses established long before the Corporate Transparency Act was written will have a little extra time to meet the new requirements. The Corporate Transparency Act will be part of the new standard process for establishing a domestic business in the United States for emerging new businesses that have yet to register.
Who Must Comply With the Corporate Transparency Act?
Aside from sole proprietorships or single-member business structures, all businesses must comply with the Corporate Transparency Act. If there’s only one name assigned to a business, every paper trail leads back to a single person. Small businesses that involve more than one owner, member, or partner are responsible for compliance with the act.
Limited partnerships must comply because they, by definition, share ownership of a business. A limited liability company (LLC) or another incorporation with only one owner may not need to comply with the act if there are no other people with the power to make decisions for their business.
Are There Exemptions for the Corporate Transparency Act?
Financial institutions or advisors, banks, investment companies, private investment firms, credit unions, accounting firms, insurance companies, holders of investment vehicles, and anyone who would be considered a creditor aren’t required to report through the CTA.
Any group or institution whose financial involvement with a business would constitute the action of providing a service (i.e. lending capital) wouldn’t be considered an owner of a business.
Very large corporations are also exempt from the Corporate Transparency Act due to the size and scope of their operations. You may not need to submit an ownership report if you have a primary physical office in any state and regularly employ more than 20 people in full-time positions. If your business scales over time, you will no longer need to submit this report.
What Is Beneficial Ownership?
Reporting requirements dictate that businesses submit beneficial ownership information. Beneficial ownership reporting involves everyone who holds any kind of beneficial stake in a business or company of any size, whether direct or indirect.
Anyone who can influence the decisions or trajectory of a company is considered a beneficial owner. This can include a beneficial owner’s spouse, who benefits directly from the company and could be considered an important voice in the company’s operations, even if their name isn’t listed on any formal company paperwork. This may also include investors.
A Beneficial Ownership Information report must contain information about everyone who could be considered a beneficiary of the company besides regular employees unless they also hold 25 percent or more of the company’s shares.
What Information Should a Beneficial Ownership Report Contain?
The Beneficial Ownership Report process is heavily guided for electronic filing on FinCEN.gov. You’ll obtain a FinCEN Identifier through FinCEN’s website, which is a unique identifying number you’ll use to communicate with them. The electronic filing process will prompt you for information you likely already have memorized and other information that should be easy for you to obtain.
You’ll need to provide basic information like your full legal name, date of birth, street address, social security number (or tax identification number), and proof of state-issued identification like your driver’s license. The BOI report will ask you for basic information about the business in which you have a beneficial ownership interest.
Company applicants will have different requirements from other types of owners. Non-company applicants may also be required to provide a copy of their most recent tax return depending on the type of ownership or stake they hold within a company.
What Happens if You Don’t File a Beneficial Ownership Report?
Businesses that fail to file a Beneficial Ownership Report may be subject to civil penalties or criminal penalties depending on the nature of the infraction. Civil penalties are standard for simple noncompliance. Criminal penalties are utilized when omissions are intentional in order to avoid the consequences of knowingly evading the rules.
Illicit activities aren’t limited to anti-money laundering provisions or the financing of terrorism. Any deliberate improper financial conduct can result in a criminal penalty if it’s clear that a business willfully engaged in such conduct.
What Are the Filing Deadlines for BOIR Reports?
Reporting companies formed prior to January 1, 2024 have until January 1, 2025 to file their report with FinCEN. Major changes usually come with a compliance grace period for businesses established prior to the enactment of new requirements.
If your company is formed between January 1, 2024 and January 1, 2025, you have 90 calendar days to file your initial report with FinCEN. The compliance window will shorten for businesses established on or after January 1, 2025, who will only have 30 days after officially registering their business to file their first report.
Updates or corrections must be filed within 30 days of any major changes with the beneficial owners of a company becoming official or an error being spotted by a company. There is some leeway for error corrections — if you don’t notice an error until 31 days after you’ve filed your report, you won’t be penalized.
FinCEN relies on good faith for error corrections. If they have no reason to believe an error or omission was intentional, you’re unlikely to experience a penalty. It’s a wise business decision to thoroughly check the information on your BOI filing to avoid errors and to double check for errors or omissions and make prompt corrections to avoid potential consequences.
Maintaining Compliance With Mosey
Small business owners have many important regulations to keep track of, from legal requirements to compliance and more.
With regulations and requirements constantly evolving and emerging, it can be difficult to keep one eye on the landscape and another eye on the day-to-day operations of your business. That’s where Mosey can be an invaluable partner to your operations.
Mosey’s automated compliance solutions are designed to help business owners maintain compliance with state and local requirements that impact the way they operate. Mosey’s automations run in the background while you remain focused on growth and innovation.
We encourage you to continue to expand your knowledge of the Corporate Transparency Act and how it can impact your business. Schedule a demo with Mosey today to learn how we can simplify running your small business.
