Business Reporting Requirements Under the Corporate Transparency Act

 Posted on November 30, 2022 in Taxation Law

Businesses that operate in the United States must meet a variety of legal requirements, including disclosing information to the government. In addition to submitting the proper information to the IRS when filing tax returns and other required forms, other types of disclosures need to be made to government agencies. This now includes reports required under the Corporate Transparency Act (CTA). This law was passed in 2019, and the final rule regarding reporting requirements was released in September 2022. Businesses will need to make sure to file the proper reports to avoid potential civil and criminal penalties.

What Is the Corporate Transparency Act?

Congress passed the CTA with the intent of preventing money laundering by people and organizations involved in drug trafficking, fraud, and other illegal activities. These activities often involve the creation of shell companies that conceal the identities of the owners and allow criminals to access and use assets in the United States. To combat these activities, the CTA requires companies to submit reports detailing their beneficial ownership information (BOI).

What Are the CTA's Reporting Requirements?

The new rule that was issued by the Financial Crimes Enforcement Network (FinCEN) goes into effect on January 1, 2024, and it states that "reporting companies" are required to file reports identifying a company's beneficial owners, as well as people who are considered "company applicants." Beneficial owners include any individuals who either exercise substantial control over how a company operates or who own or control at least 25 percent of a company's ownership interests. Company applicants include the individuals who file the documents that establish a company as a legal entity or those who direct or control applications filed by other parties.

Both domestic and foreign companies may be considered reporting companies. Domestic reporting companies include corporations, LLCs, and any other business entities created in the United States by filing documents with a secretary of state or another similar office. Foreign reporting companies include companies formed under the law of another country that have registered to do business in the United States by filing documents with a secretary of state. Some exceptions apply, including for publicly owned companies that are regulated by the Securities Exchange Act, public utilities, and tax-exempt organizations. Most private, for-profit businesses will be required to file BOI reports unless they are classified as "large operating companies" with more than 20 employees and more than $5 million in annual gross receipts. Because trusts generally will not require documents to be filed with a secretary of state, they will usually be exempted from these reporting requirements.

BOI reports filed with FinCEN must include identifying information for all beneficial owners and company applicants. Four pieces of information are required:

• Name

• Birth date

• Address

• An ID number from an acceptable identification document, such as a driver's license or passport, as well as an image of the document

Reporting companies that were created or registered prior to January 1, 2024 will have one year to file the required BOI reports. Companies created or registered after January 1, 2024, must file BOI reports within 30 days after they receive notice of their creation or registration. If changes need to be made to previously filed reports, including in situations involving a change in ownership or the discovery of an inaccuracy, new reports must be filed within 30 days after the change occurred or the inaccuracies were discovered. Failure to file the proper reports may result in both civil and criminal penalties, including fines of up to $10,000, imprisonment for up to 3 years, or both.

Contact Our San Jose Business Formation Lawyer

The Corporate Transparency Act has put some new requirements in place that will need to be followed during the business formation process, and existing businesses will need to be sure to file the proper BOI reports in order to avoid penalties. At John D. Teter Law Offices, we can provide guidance on the types of reports that must be submitted, and we can also help address any penalties that may be assessed due to noncompliance. To learn how we can help your business address these issues correctly, contact our San Jose, CA business law attorney at 408-866-1810.

Sources:

https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet

https://www.congress.gov/bill/116th-congress/house-bill/2513

https://www.americanbar.org/groups/business_law/publications/blt/2022/02/corp-transparency-act/