Legal: The Corporate Transparency Act

In 2021, the U.S. Congress passed (and it was subsequently signed into law) the Corporate Transparency Act in an effort to combat unlawful activities such as money laundering and fraudulent tax reporting. I am finding that many folks have never heard of this act, or its requirements.  All small businesses must have a solid understanding of the Corporate Transparency Act as this Act went into effect on January 1, 2024.

The law’s stated goal is to cut down on the misuse of corporate entities by individuals, both foreign and domestic, that are benefitting from and/or hiding behind these corporate shields.  For example, it’s not uncommon to see a corporation being owned by other corporations, which in turn are owned by limited liability companies.  In other words, you have no idea who actually owns and/or is profiting from the company.

As the government has documented in support of this bill, several foreign entities are reaping huge benefits from shielded U.S. companies that the government simply does not have the time or resources to track down.  Therefore, we get the enacted Corporate Transparency Act, which places a potentially onerous burden on the 99% of people doing nothing wrong in an effort to thwart illegal activities being conducted by individuals camouflaging as a lawful business entity.

Who does the act cover?

The Corporate Transparency Act applies to all corporate entities, including limited liability companies, professional companies, or any other entity created by filing with the Secretary of State in any one of the 50 states in the United States, or any foreign company operating in the U.S.  That is a lot of companies and businesses – and the law is meant to be widespread to avoid people looking for entity types to sidestep the reporting requirements.

Who is exempt?

While there are 23 exemptions to the Corporate Transparency Act, they apply to very specific entities. For example, insurance companies are exempt, as are utility companies, banks, and governmental entities.  In other words, the exemptions will not help most individuals.

What do I have to do?

The law requires registration through a newly created website operated by the Financial Crimes Enforcement Network, given the friendlier acronym, FinCen. Registration with FinCen is primarily based on identifying the “beneficial owners” of the company.  Beneficial owners, as defined by FinCen, are anyone who has any control over and/or profit from, the reporting company. Each beneficial owner will have to provide identification information (such as state issued ID, passport, or foreign ID), and other information as determined by FinCen. The information you report will NOT be publicly available to the general public, but FinCen can report to other governmental agencies (such as the IRS and federal law enforcement agencies) the persons behind the corporate names. 

When is the deadline to file your report?

For any entity created before January 1, 2024, you have until January 1, 2025, to file your report.  For any new entities that are created in the calendar year 2024, you must register with FinCen within 90 days of creation.  Starting in 2025, registration is required for new entities within 30 days of creation.

What happens to those that do not report?

The Act carries with it some heavy penalties for those that do not report timely, or report inaccurately.  A civil penalty of up to $5000.00 per violation, and a potential criminal penalty of up to 5 years in federal prison.

Conclusion

While the reporting of personal information related to the beneficial ownership of corporate entities may seem quite burdensome and even intrusive to some, it is a reality that is not likely to go away anytime soon.  There are going to be a number of businesses that will pop up advertising that they will handle the process/registration for a fee, but the process for the online registration does not seem particularly difficult.  That being said, if you have questions about what to input, or the information required, reach out to a legal professional to ensure compliance and avoid any unnecessary headaches or penalties.