Client Alert: 5 Questions to CYA on the CTA

Business people negotiating a contract.

Kicking off 2024 with a bang, a pivotal shift looms for millions of U.S. small businesses: the Corporate Transparency Act (CTA). This unprecedented legislation requires detailed reporting to the federal government about small businesses, their owners, and those who filed formation documents. Failure to report is not a minor misstep: Non-compliance will expose you to civil penalties of $500 per day and criminal prosecution of up to $10,000 and two years’ imprisonment!

Here is what you need to know about CTA compliance:

1. Businesses with less than 20 full-time employees and less that $5 million in annual revenue are required to file reports with FinCEN.

  1. Businesses formed beginning in 2024 have only 90 days to file.
  2. Businesses formed prior to 2024 must file by 2025.

The Purpose of the Corporate Transparency Act

The Corporate Transparency Act (CTA) is intended to help the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) identify bad actors in the U.S. financial system but places the burden of compliance on law-abiding small business owners. Given the onerous prospect of civil liability and criminal prosecution, the purpose of this month's newsletter is to help our clients address CTA compliance directly.

Here are five questions business owners should be asking about CTA compliance:

1. Is my company exempt from reporting requirements?

The CTA specifically targets small businesses, so companies that are tax-exempt, or that otherwise have over 20 full-time U.S.-based employees and report more than $5 million in annual revenue to the IRS, are exempt. The CTA also specifically targets businesses that are not already subject to regulation by a federal agency, so financial institutions, public utilities, and SEC-registered entities are generally exempt. Unless your business is one of the 23 specific exemptions, it must report.

2. Who is a “beneficial owner” of my company?

If your company is required to report to FinCEN, then your next step is to identify the persons who own at least 25 percent of the company’s ownership interests, or otherwise exercise substantial control over the company. There are five exemptions to beneficial ownership reporting, including for minors, custodians, employees, and creditors.

3. Should my business report the individuals who formed the legal entity?

If the company is formed on or after January 1, 2024, then yes. If the company was formed before January 1, 2024, then no. The individuals who formed the legal entity include the individual who made the filing (e.g., business owner, paralegal, etc.) and the individual who directed the filing (e.g., business owner, attorney, accountant, etc.).

4. What gets reported?

A report must include legal name, U.S. address, jurisdiction of formation, and taxpayer ID of the company; and legal name, date of birth, current address, and unique government-issued identification number (e.g., U.S. passport or state driver’s license) of the beneficial owners and individuals involved with legal formation. Any change or correction to the information reported about a company or its beneficial owners must be filed within 30 days after the date on which the change occurred, or the error was discovered. A company is not required to report a change of information on individuals involved with formation unless such individuals have obtained FinCEN identifiers, in which case the update must be reported within 30 days.

5. When and how should my company file its initial report?

Beginning January 1, 2024, businesses must e-file reports with FinCEN. New businesses established from this date have a 90-day window to file their initial report during 2024, decreasing to a 30-day window beginning 2025. Meanwhile, businesses set up before this date get a grace period until January 1, 2025.

The CTA represents a generational change in the law for business formation and the clock is ticking for business owners to take care of the FinCEN filings.