What is the Corporate Transparency Act?
If you are a business owner this article is for you. Don’t ignore the new federal Corporate Transparency Act reporting requirement that has been enacted.
The Corporate Transparency Act was enacted in January 2021 and became effective for businesses on January 1, 2024. The purpose of this new reporting requirement focuses on transparency regarding the owner(s) of businesses in the hopes of reducing tax crimes, money laundering, and the financing of terrorism.
Know the Lingo for the Corporate Transparency Act
Here are a few keywords that we should review first:
Reporting Company: the underlying entity that was formed at the state level. This includes LLCs, PLLCs, Partnerships, and Corporations. Don’t be fooled by the name – “Corporate Transparency Act”. Simple, single-member LLCs are still required to report.
Beneficial Owner: the individual(s) who own(s) or who have(has) substantial control over the underlying entity. Substantial control is anything more than 25% ownership interest. This includes individual owners and trust owners. For trust owners, the beneficial owner could be the Grantor/Trustee who can dispose of trust property and/or the right to revoke the trust, or the beneficiary(ies) of the trust who have the right to receive distributions of income and principal.
Company Applicant: the individual who prepared and submitted the Articles of Organization or Articles of Incorporation for the underlying entity. This could be you or another employee of your business, or this could be your attorney or other business professional.
Reporting Deadlines
Businesses established before January 1, 2024: all businesses formed at the state level before January 1, 2024, must submit their report by January 1, 2025.
Businesses established after January 1, 2024: all businesses formed at the state level after January 1, 2024, must submit their report within 30 days of formation.
Next, let’s talk about what is required to be reported:
Businesses established before January 1, 2024:
- The full legal name of the entity
- Tax ID # for the entity
- Country and state of formation of the entity
- Address of the entity
- The full legal name of every Beneficial Owner
- Date of Birth of every Beneficial Owner
- Address of every Beneficial Owner
- Driver’s license # of every Beneficial Owner
- Photocopy of the driver’s license of every Beneficial Owner
Businesses established after January 1, 2024:
- The full legal name of the entity
- Tax ID # for the entity
- Country and state of formation of the entity
- Address of the entity
- The full legal name of the Company Applicant
- Date of Birth of the Company Applicant
- Address of the Company Applicant
- Driver’s license # of the Company Applicant
- Photocopy of the driver’s license of the Company Applicant
- The full legal name of every Beneficial Owner
- Date of Birth of every Beneficial Owner
- Address of every Beneficial Owner
- Driver’s license # of every Beneficial Owner
- Photocopy of the driver’s license of every Beneficial Owner
Filing Instructions
Next, let’s talk about how the reports are filed and how often you are required to report:
- The report can be filed electronically using the Beneficial Owner Information E-Filing System. There is also an option through this E-Filing System to download a PDF, fill it out, and then upload it to the E-Filing System.
- The entire report takes about 15 minutes to complete once you’ve gathered all the required information.
- The requirement is that every entity file an initial report. If there are any changes to the information that is initially reported, the Beneficial Owner is required to file an updated report within 30 days of the change(s).
Reporting Requirement Exemption
Next, I want to go over the reporting requirement exemptions. There are 23 different entities that are exempt from reporting and are not considered a “Reporting Company”. The exemptions are as follows:
- Securities reporting issuer
- Governmental authority
- Bank
- Credit union
- Depository institution holding company
- Money services business
- Broker or dealer in securities
- Securities exchange or clearing agency
- Other Exchange Act registered entity
- An investment company or investment adviser
- Venture capital fund adviser
- Insurance company
- State-licensed insurance producer
- Commodity Exchange Act registered entity
- Accounting firm
- Public utility
- Financial market utility
- Pooled investment vehicle
- Tax-exempt entity
- Entity assisting a tax-exempt entity
- Large operating company
- Subsidiary of certain exempt entities
- Inactive entity
To qualify as an “Inactive entity”, all six of the following criteria must apply to the entity:
- The entity was in existence on or before January 1, 2020
- The entity is not engaged in active business
- The entity is not owned by a foreign person
- The entity has not changed ownership in the preceding 12-month period
- The entity has not sent or received more than $1,000 in the preceding 12-month period
- The entity does not hold any assets
Penalties for Failing to Report
Finally, I want to explain the penalties for failing to report. If a Beneficial Owner fails to file their initial report by the deadline or fails to file an updated report within 30 days of changes, they will be subject to a $500/day penalty of up to $10,000 and are at risk of up to 2 years imprisonment.
Need Help?
If you are still unsure whether you qualify as a Reporting Company and are required to submit a report, please contact me to discuss this further. I am happy to submit the report for you on your behalf for a small fee.
Contact me today at (517) 708-2222 or email me at Katrina@CornerstoneLegalPLLC.com.
