Everything You Need to Know About the Corporate Transparency Act (CTA)

In an effort to crack down on financial crimes, the U.S. Congress passed the Corporate Transparency Act (CTA).

The CTA, which took effect on January 1, 2024, is the biggest regulatory change small business (SMB) owners should be aware of this year. It significantly changes reporting and documentation requirements that SMB owners must follow and brings with it some severe consequences for non-compliance.

Violations of the new law can bring some hefty penalties, including $10,000 fines and, in some cases, jail time. 

This new rule calls for more documentation, and ensuring compliance will take time and careful consideration. It's also important to grasp the details of the law so you can understand how it applies to your business.

Below, we’ll cover things you need to know about the Corporate Transparency Act, who is impacted by it, and how to maintain compliance.

The Context of the Corporate Transparency Act

The Corporate Transparency Act was originally passed as part of the National Defense Authorization Act for Fiscal Year 2021 and was enacted into law after Congress overrode a presidential veto.

The law is specifically aimed at combating illicit activities such as money laundering, terrorist financing, and other illegal acts facilitated through anonymous shell companies.

By requiring more transparency about the true owners of companies, the law is meant to curb the misuse of corporate structures by criminal elements.

The bureau responsible for implementing and enforcing the CTA is the Financial Crimes Enforcement Network (FinCEN). FinCEN is a part of the U.S. Department of the Treasury.

What the Corporate Transparency Act Does

Small business owners, subject to certain exceptions, are now mandated to disclose any “beneficial owners” to FinCEN.

A beneficial owner is defined as any individual who, directly or indirectly, exercises substantial control over the entity, or owns or controls at least 25% of the entity's ownership interests.

SMB owners must file a report with FinCEN providing identifying information about all the business’ beneficial owners, including:

• Full Legal Names
• Birth Dates
• Addresses
• Unique ID Numbers from passports, driver’s licenses, etc.

The above information must be provided directly to FinCEN, and they maintain an online portal to assist SMB owners with this.

Who Needs to Comply

The Corporate Transparency Act mainly applies to corporations, limited liability companies (LLCs), and similar entities created or registered to do business in the United States. Whether you’re a new or existing business in the U.S., you’ll most likely be required to comply with the Corporate Transparency Act.

However, there are notable exceptions.

Who is Exempt from the CTA

There are 6 ways that a company can be exempt from compliance with the CTA:

1. Entities Under Existing Regulations

Entities operating under extensive state or federal regulations are exempt from the CTA. Examples include:

• Banks
• Bank Holding Companies
• Federal or State Credit Unions
• Savings and Loan Holding Companies
• Registered Securities Exchanges
• Registered Public Accounting Firms
• Public Utilities
• Insurance Companies
• Public Companies

2. Large Entities with Physical Presence and Active Operations

To meet this exemption, companies must meet each of these three requirements:

1. They employ more than 20 full-time employees in the United States.
2. They’ve filed income tax returns in the United States, reporting more than $5 million in gross receipts or sales.
3. They maintain an operating presence at a physical office within the United States.

3. Certain Subsidiaries

Entities controlled or owned by an exempt entity also qualify for exemption. An example of this would be a subsidiary of a bank.

4. Inactive Entities

The law exempts companies that don’t engage in active business and were in existence on or before January 1, 2020. Examples of companies that could meet this exemption are those which:

• Not engaged in active business.
• Have not changed ownership or sent or received more than $1,000 in the last 12 months.
• Are not owned, directly or indirectly, by a foreign person.

5. Tax-Exempt Entities

501(c) organizations, including non-profits and charities, are exempt from the CTA, as are other tax-exempt entities.

6. Special Cases

Certain entities participating in cross-border trade and other specialized purposes can qualify for the special case exemption.

Resources

If you believe your company may be exempt from beneficial owner information (BOI) reporting requirements, check FinCEN’s website for official guidance. Given the complexities of the law and the potential for changes, it’s also recommended to consult with a legal expert before assuming exempt status.

The Penalties for Non-Compliance with the Corporate Transparency Act

The Corporate Transparency Act represents a major shift in the U.S. government’s approach to stopping financial crimes, and the severity of the penalties underscores this.

Failure to report, inaccurate reporting, and failure to update information are all considered non-compliance and will result in penalties such as:

Civil Penalties: Providing false or fraudulent information can result in fines of up to $500 per day if the violation continues.

Criminal Penalties: In cases of willful violations, the penalties can rise to $10,000 fines and/or up to two years of imprisonment.

How Long Are Businesses Given Before Penalties Begin?

Generally, FinCEN would send a formal notification of non-compliance, which would indicate the nature of the non-compliance and potentially offer a window for corrective action.

However, in the case of willful non-compliance or fraud, penalties could begin immediately upon discovery and verification.

How to Remain Compliant with the CTA

It’s imperative to report accurate Beneficial Owner Information (BOI) as soon as possible to secure compliance and continue with your business. To stay compliant, it’s recommended that you:

• Regularly review your BOI for potential updates that need to be reported.
• Include BOI as part of your internal compliance program.
• Consult with professionals during big changes to ensure you navigate BOI reporting requirements properly.

Rely on BBSI So You Can Remain Focused

In the early days of the new year, the Corporate Transparency Act will represent a major focus for SMB owners nationwide. While striving daily to properly run your business, it’s imperative that mistakes like non-compliance with changing laws and regulations don’t take the wind out of your sails.

BBSI offers assistance with professional services like HR, payroll, and workers’ compensation. We know the challenges of growing a small business and take pride in our ability to fit into organizations of all sizes and in every industry.

If you’re looking for a PEO partner ready to step in and lighten your load by taking on time-consuming HR tasks, contact BBSI today.