22 Oct 2024 Understanding the Corporate Transparency Act
For taxpayers who own or control businesses, it’s essential to understand the Beneficial Ownership Report rules. Compliance helps ensure that the company is not subject to fines or legal action. Taxpayers must keep detailed records and stay up to date with their company’s ownership structure to avoid potential penalties.
The Beneficial Ownership Report is part of a growing global effort to increase transparency around who owns and controls businesses. In the United States, the Corporate Transparency Act (CTA), passed as part of the Anti-Money Laundering Act of 2020, mandates that many businesses must report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). The main goal is to prevent individuals from using anonymous shell companies to engage in illegal activities such as money laundering, tax evasion, and financing of terrorism.
Who Must File?
The filing requirement applies to a wide range of businesses, including corporations, limited liability companies (LLCs), and other entities formed in the U.S. or registered to do business in the U.S. Most small and medium-sized businesses will be subject to this rule, as the law is designed to target shell companies. However, there are certain exemptions for larger or more heavily regulated entities, such as publicly traded companies, banks, credit unions, and certain tax-exempt organizations. These entities are considered low risk for illicit financial activity and, therefore, are not required to file.
What Must Be Reported?
Businesses required to file must disclose information about their beneficial owners—people who ultimately own or control the company. A beneficial owner is defined as someone who:
- Owns or controls at least 25% of the company’s equity, or
- Exercises substantial control over the company’s operations.
The report must include:
- Full legal name
- Date of birth
- Residential address
- Unique identifying number from a passport, driver’s license, or other government-issued ID.
If there is more than one person fitting the criteria, all must be reported. The beneficial ownership information must be submitted to FinCEN, which will maintain this data in a secure, non-public database accessible to law enforcement and certain regulatory agencies.
Exemptions
Certain types of businesses and entities are exempt from filing. These include:
- Large operating companies (with over 20 full-time employees, more than $5 million in revenue, and a physical U.S. office),
- Governmental entities,
- Banks, investment advisers, and broker-dealers, which are already subject to federal oversight,
- Tax-exempt charitable organizations.
Deadlines
For businesses formed after January 1, 2024, the report must be filed within 30 days of the company’s formation or registration. Existing companies the report must be filed by January 1, 2025 to file their reports. If there are any changes to the information provided, such as a new beneficial owner or a change in ownership percentage, businesses have 30 days to update the report.
Penalties for Non-Compliance
Failing to file the Beneficial Ownership Report or submitting false information can result in significant penalties. Civil penalties include fines of up to $591 per day for each day the violation continues. Criminal penalties may include fines of up to $10,000 and/or up to 2 years imprisonment for willful violations. However, FinCEN may waive penalties for certain first-time violations if they are corrected within 90 days of discovering the error.