Understanding the Corporate Transparency Act: What Small and Mid-Sized Businesses Need to Know
Written by: Lingyi Katz, MBA, MLS
The Corporate Transparency Act (CTA) is a new regulation aimed at enhancing transparency in business ownership to combat money laundering, tax evasion, and other financial crimes. Many U.S. businesses, especially small and mid-sized entities, are now required to disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). Here’s a breakdown of what this means for your business and how to stay compliant.
Key Compliance Deadlines
For Existing Companies: If your business was created before January 1, 2024, you must submit beneficial ownership information to FinCEN by January 1, 2025.
For New Companies: Entities formed on or after January 1, 2024, must report their beneficial ownership details within 30 days of formation.
These deadlines mean that businesses need to start preparing now, especially if they were established before 2024 and are unfamiliar with the new reporting obligations.
Who Needs to Report?
The CTA applies to most small and mid-sized entities, including LLCs, corporations, and similar companies. Large corporations are generally exempt from the CTA requirements because they are already subject to substantial regulatory oversight and reporting obligations. Here are some exceptions:
Large operating companies with more than 20 full-time employees, over $5 million in gross receipts or sales, and a physical office in the U.S.
Regulated entities, like banks and credit unions, which already provide beneficial ownership information to federal regulators.
Inactive companies that meet specific criteria.
If your business falls outside of these exceptions, it’s likely that you will need to comply with the CTA.
What Information Must Be Reported?
Businesses subject to the CTA must provide FinCEN with details about their beneficial owners, defined as individuals who own or control at least 25% of the company. Required information includes:
Full legal name
Date of birth
Residential address
Unique identification number (e.g., from a passport, driver’s license, or other government-issued document)
This information must be accurate and current, as any changes will also need to be reported.
Consequences of Non-Compliance
Failure to comply with the CTA carries significant penalties. Businesses that don’t report, or provide false or outdated information, may face:
Civil penalties of up to $500 per day for each day the violation continues.
Criminal penalties including fines up to $10,000 and imprisonment for up to 2 years.
With these penalties in mind, it’s critical for businesses to take their CTA obligations seriously and ensure all information is accurate and submitted on time.
Steps to Prepare for CTA Compliance
To avoid penalties and ensure compliance with the CTA, small and mid-sized businesses should:
Identify Beneficial Owners: Determine who in your organization meets the 25% ownership or control threshold.
Collect Necessary Documentation: Gather the required information (full name, birth date, address, and identification) for each beneficial owner.
Prepare for Reporting: Establish a timeline to ensure information is ready to submit to FinCEN by the applicable deadline.
Why the CTA Matters
The CTA represents a major shift in transparency requirements for small and mid-sized businesses, as it brings a new level of scrutiny to beneficial ownership information. By understanding and meeting these requirements, your business can avoid costly penalties and contribute to a more transparent business environment.
Disclaimer: This article provides a general overview of the Corporate Transparency Act (CTA) requirements and is intended for informational purposes only. While every effort has been made to ensure the accuracy of the information, businesses should consult the official guidance from the Financial Crimes Enforcement Network (FinCEN) or seek professional legal advice to ensure full compliance with the CTA. For the latest updates and specific details, please refer to FinCEN’s Corporate Transparency Act page.
Update: On Tuesday, December 3, 2024, a US federal district court has issued a nationwide preliminary injunction against the enforcement of reporting requirements under the Corporate Transparency Act (CTA) and has therefore stayed the January 1, 2025, compliance deadline. At this time, companies are not required to file beneficial ownership reports with the Financial Crimes Enforcement Network. However, they should continue to monitor for updates or additional guidance.