The Corporate Transparency Act for Small Business Owners- 4 Tips

The Corporate Transparency Act will impact millions of small businesses and add to their regulatory woes

U.S. business owners have, for the most part, been free from onerous filing requirements. Aside from the initial filing of incorporation documents, the filing of tax returns, and the maintaining of licenses, the vast majority of small businesses have not had to be concerned about filing reports with the Federal government concerning their company structure, beneficial  ownership, or manner of corporate control.  But this has all changed as of January 1, 2024 with the advent of the Beneficial Owners Information reporting requirement that came on line pursuant to the implementation of the 2021 Corporate Transparency Act.

The concern behind  the  enactment of the Corporate Transparency Act (“CT ACT”) was to combat higher incidents of U.S. companies being used as foreign fronts for money laundering and other illegal activities.  Part of the problem to be remedied was that foreign beneficial owners  could shield their identities from regulators.

Under the authority of the Financial Crimes  Enforcement Network (“FINCEN”), a division of the U.S. Department of Treasury, all non-exempt domestic and foreign business entities, who have registered to do business in the U.S., basically all U.S.-based operating businesses, subject to certain exceptions and timing limitations, will be obligated to file a  Beneficiary Owners Information Report (“BOIR”) with FINCEN identifying all the beneficial owners of an enterprise and all persons who exercise substantial control over it, including, all the enterprise’s senior officers. Moreover, businesses subject to this reporting requirement will have to file with FINCEN an updated BOIR every time there is  a change in beneficial ownership or a change in the identity of those persons exercising substantial control over the enterprise. An updated BOIR is required to be filed within 30 days following any such change.

The failure timely to file BOIRs can  result in a daily fine of $500.00 per day of non-compliance or criminal penalties of up to 2 years in prison and a  $10,000 fine.

Four things small business owners need to know: 

1. Timing Requirements

Businesses, which prior to January 1, 2024, have  been incorporated in the U.S., or registered to do  business in a state as a foreign business, must file their initial BOIR prior to January 1, 2025.

Businesses, which after January 1, 2024, have  been incorporated in the U.S., or registered to do  business in a state as a foreign business, must file their initial BOIR within 90 days following the earlier date of notice that a business has been incorporated or has been registered to do business.

Businesses, which after January 1, 2025, have  been incorporated in the U.S., or registered to do  business in a state as a foreign business, must file their initial BOIR within 30 days following the earlier date of notice that a business has been incorporated or has been registered to do business.

2. Exceptions

There are 23 exceptions to an enterprise’s having to meet the BOI reporting requirement, of which the most significant exception is the “Large Operating Company”  exception, which exempts from the reporting requirement entities that employ more than 20 fulltime workers in the U.S. and that generated more than $5,000,000 in gross revenue in the prior year. Financial and banking companies, tax exempt entities, accounting firms, insurance companies, inactive companies, and certain specialized service providers may  qualify for an exemption from BOI reporting, but then must have documentation available to substantiate their qualifying for such exemption.

3. Beneficial Owners

It is important to note that beneficial owners may not just be the direct owners of the reporting company but would  also include the  owners of a  corporate entity which, itself, may have an  ownership stake in the reporting company. The reporting requirement mandates that all beneficial owners who directly or indirectly own at least 25% of the reporting entity must be identified in the BOIR.

4. Persons having “Substantial Control” over the Enterprise

Persons having “substantial control” over the enterprise include senior officers, like the President, Financial Director, Operating Officer, important  decision makers, and other persons with significant decision-making authority must also be identified.

Here’s the Take Away for small business owners:

• Starting January 1, 2024, most small businesses in the U.S. will be required to file a Beneficial Ownership Information Report (BOIR) with the U.S. Department of Treasury identifying the business’s beneficial owners, i.e., individuals who own the enterprise directly or indirectly through other enterprises as well as all persons exercising substantial  control over the business, including its senior officers.
• For businesses incorporated, or foreign businesses registered to do business in  a state, prior to January 1, 2024, the deadline for filing a BOIR will be January 1, 2025.
• Additionally, a BOIR will need to be filed every time there is a change in beneficial ownership or a  change in the personnel who exercise substantial control over the reporting business.
• Businesses should consult fincen.gov/boi and the small businesses compliance guide, which can be found here.
• Businesses should consult with corporate counsel to confirm whether they are covered as reporting companies and, if so, about how best to implement policies and procedures so that they can meet the new reporting requirements of the CT Act.

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