The Corporate Transparency Act

Update 3/7/25 Enforcement Suspension: On March 2, 2025, the US Treasury Department announced it will not enforce fines or penalties associated with the CTA’s reporting requirements against US citizens, domestic reporting companies or their beneficial owners. The Treasury Department also said it plans to issue proposed rules to limit the CTA’s reach to foreign reporting companies only. The CTA has been the subject of several court cases over the past year and, since the law itself still remains on the books, businesses should continue to monitor the situation.

Recently, I watched a fascinating documentary about corporate fraud. In it, the company Centra Tech claimed to have partnered with one of the big lenders to produce a credit card customers could use to spend cryptocurrency. For people eager to convert their crypto gains into something both tangible and desirable, this was great news, and the company’s value skyrocketed overnight.

The problem is, it was all a lie. As in the case of Theranos, the company that claimed to be able to test for a full array of medical conditions using just a few drops of blood, the all-important-mechanism that would deliver on those promises simply didn’t exist. Investors bought the dream without bothering to investigate the reality. 

Grandiose corporate malfeasance makes for a great story, one that people watch with a certain amount of schadenfreude, believing they would never be so dumb as to fall for such a thing. 

But entertaining and delusional schemes like these are only the tip of the iceberg. A far more common way Americans get snookered is when companies launder their profits through shell companies in order to avoid paying tax on revenues. 

Off-shore tax avoidance and abuse is thought to exceed $100B in government losses per year. And those are just companies operating outside the United States. When you add domestic tax fraud into the mix, the figure jumps to almost $500B per year.

What makes shell companies – registered businesses with neither active operations nor assets – such successful vehicles for money laundering is the fact that they are hard to trace back to their legitimate owners. In fact, a  World Bank study conducted in 2011 found that almost three-quarters of large-scale business corruption cases relied on the secrecy of shell entities to hide the identity of the beneficial owners.

What has this got to do with you, an upstanding small business owner? 

The federal government has finally decided to crack down on this secrecy by enforcing provisions in the Corporate Transparency Act (CTA), and if you are deemed a “reporting company” you are obliged to take action. Read on to learn what this legislation means for you and your small enterprise.  

What Is the Corporate Transparency Act?

In an attempt to combat money laundering through shell and front companies both domestic and foreign, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) first introduced the Corporate Transparency Act as part of the National Defense Authorization Act for Fiscal Year 2021. 

The Reporting Rule, which was issued at a later date – September 30, 2022 –  is what you need to be concerned with. It implements the section of the CTA that determines who must report information to FinCEN and under what conditions.

In a nutshell, the CTA requires reporting companies to disclose their beneficial owners and (in some cases) company applicants. Qualifying businesses – including some 32 million small businesses nationwide – must submit beneficial ownership information (BOI) to FinCEN by the filing deadline.

Failure to timely submit a BOI report can have serious consequences. Noncompliance can result in $500 per day in civil fines, a $10,000 criminal penalty, and even prison time – up to two years. Even if you’ve never even heard of the Corporate Transparency Act, your business or senior officers of your business can suffer these penalties. 

FinCEN has released a comprehensive document explaining the rules we’re about to summarize. Entitled the Small Entity Compliance Guide, it is a must-read for small businesses that want to stay on the right side of the law.

Is Your Company Subject to the CTA Reporting Requirements?

Your small business is a “reporting company” and must submit an initial BOI report to FinCEN if it meets the following criteria and does not qualify for an exemption. 

There are two categories of reporting companies, both domestic and foreign. 

Domestic reporting companies are those formed under U.S. or tribal law. Here, we are talking about entities created by filing a document with a secretary of state’s office, such as corporations (C corps and S corps) and limited liability companies (LLCs), but likely not sole proprietorships. In fact, any entity created by filing documents with a secretary of state’s office is, by definition, a reporting company unless it qualifies for one of the exemptions listed below.  

Foreign reporting companies are companies which have registered to do business in the United States by filing formation documents with a secretary of state or tribal office. 

Essentially, if you filed formation papers, and you don’t meet any of the following exemptions, you are a reporting company. Small businesses will, in many cases, need to file a BOI report with FinCEN. This may come as a surprise to many mom and pop business owners. 

Exemptions

If your company is one of the following, it is exempt from having to file BOI documents to FinCEN:

1. Securities reporting issuer
2. Government authority
3. Bank
4. Credit union
5. Depository institutions holding company
6. Money services business
7. Broker or dealer in securities
8. Securities exchange or clearing agencies  
9. Other Exchange Act registered entity
10. Investment company or investment advisor
11. Venture capital fund advisor
12. Insurance company
13. State-licensed insurance producer
14. Commodity Exchange Act registered entity
15. Accounting firm
16. Public utility
17. Financial market utility
18. Pooled investment vehicle
19. Tax-exempt entity
20. Entity assisting a tax-exempt entity
21. Large operating company
22. Subsidiary of certain exempt entities
23. Inactive entity

The Small Entity Compliance Guide provides a handy checklist of criteria for each of the exemptions listed above. 

Note that “large operating company” is listed as an exemption. If you meet all of the following  criteria, you are not required to file a BOI report:  

• More than 20 full-time employees working in the U.S.
• A physical U.S. office where business is conducted
• Federal income tax filings for the previous year that show more than $5M in gross receipts, which were both properly reported on an applicable IRS form and earned in the U.S. (foreign receipts and sales don’t enter this calculation)

If you consider the purpose of the CTA – to stop money laundering through shell companies – this exemption makes sense. A large company with a physical presence is not what FinCEN is looking for. They are after the small entities that may be used as a conduit to launder deposits that make their way into off-shore accounts. 

What Information Does the BOI Report Require?

The BOI report requires information about your:

1. Entity: Name, address, jurisdiction of formation, and taxpayer identification number
2. Beneficial Owners: Individual name, date of birth, residential address, and identifying number and image from an acceptable government-issued ID
3. Company Applicants: (only for entities formed on or after January 1, 2024) individual name, date of birth, residential address, and identifying number and image from an acceptable government issued ID.

Individuals can obtain what is known as a FinCEN ID number, and simply submit their FinCEN ID number on the report rather than the personal information described. (You’ll need to provide the same information described above to get a FinCEN ID number.)

Who Are Considered To Be Beneficial Owners?

Beneficial owners are individuals who own at least 25% of the company or exert “substantial control” over the business.

The CTA defines “substantial control” as active engagement in the daily operations of the company – as opposed to a silent investor who owns a small share of the business but is otherwise removed from business operations.

Some common examples include:

• President
• Chief executive officer
• Chief financial officer
• General counsel
• Chief operating officer

FinCEN recognizes that these roles may not exist in all business structures, so it will consider individuals who perform similar functions to the above to have substantial control, regardless of their titles. There is an exception for non-officer employees who have control over the operation of the business only by virtue of their employment status. 

There is no need for business owners to specify whether individuals are 25% or more owners or exert substantial control or both. There is also no limit on the number of beneficial owners who must be reported. All individuals who meet these criteria must be disclosed.

Who Is a Company Applicant?

Company applicants are the individual or individuals (companies may list no more than two) responsible for filing the document which created the entity (e.g. in the case of a corporation, the person who filed the articles of incorporation with the secretary of state). FinCEN wants to know the names of both the direct filer and, if applicable, the individual “who directs or controls the filing actions.” Note, for entities formed before January 1, 2024, company applicant information is not required.

When Must Businesses Report This Information?

Compliance regulations went into effect on January 1, 2024, but reporting deadlines vary depending on when your company was created:

Entities Created Before January 1, 2024: Recognizing that many small business owners remain completely unaware of this ruling, FinCEN has extended the deadline for businesses created before January 1, 2024. These entities have until January 1, 2025 to file their initial BOI paperwork. 

Entities Created January 1, 2024 - December 31, 2024: Businesses created during this time period have a 90-day window to submit BOI paperwork – that is, they have 90 days from the time their business achieves official public recognition from the secretary of state’s office.

Entities Created January 1, 2025 and After: Businesses created on or after January 1, 2025 have a 30-day window to submit their initial BOI reports.  

What Happens to the Information Once It Is Submitted?

FinCEN will store the BOI reports it receives in a centralized database to be accessed only by authorized investigators. 

According to the Small Entity Compliance Guide mentioned above, this database “will use rigorous information security methods and controls typically used in the Federal government to protect non-classified yet sensitive information systems at the highest security level.”

Is There a Filing Fee? Is This an Annual Requirement?

There is no filing fee for the BOI report, and it is not an annual requirement. But the BOI report does require correcting or updating if information changes.

The Bottom Line

Creating more transparency should help the IRS capture some of the billions that slip through the cracks due to money laundering each year. But the Corporate Transparency Act won’t just punish the bad guys. As the saying goes, ignorance of the law is no excuse, and small business owners who fail to report may end up facing serious consequences. 

Fortunately, the Feds have extended the reporting deadline for most existing businesses to January 1, 2025. They have also released the comprehensive guide described above for small businesses to help clarify the regulation. 

Whether you’re a small business owner already or you’re looking to purchase a small business from DealStream’s online marketplace, being in the know could save you a bundle.