The Corporate Transparency Act: New Federal Reporting Requirements for Founders and Entrepreneurs

This article was written by Patrick Ellis, Attorney, at Kuhn Rogers, a 20Fathoms Community Partner.

In the ever-evolving landscape of business regulations, the Corporate Transparency Act (CTA) stands out as a pivotal piece of legislation that startup founders and entrepreneurs should familiarize themselves with as new federal reporting requirements take effect in 2024. Compliance will allow you to not only avoid penalties, but will also aid in building trust with investors, streamlining business operations, and navigating international business deals.

While the CTA may seem complex and bureaucratic, its implications are profound for businesses at any stage of maturity. This article delves into the critical points of the CTA and underscores its significance for startup ecosystems.

Enacted in 2021 as part of the Anti-Money Laundering Act of 2020, the CTA is intended to assist law enforcement in combatting money laundering, tax fraud, financing of terrorism, and other illicit activity through anonymous shell and front companies. Broadly speaking, the CTA requires certain business entities (reporting companies) to:

FinCEN issued a final rule implementing the CTA’s BOI reporting provisions on September 29, 2022 (see press release). The rule provides that the BOI reporting requirements under the CTA take effect on January 1, 2024 (Effective Date).

Which Entities Must Report: The CTA requires reporting from both domestic and foreign entities that fit the definition of a “reporting company,” unless they qualify for specific exemptions. Domestic reporting companies include corporations, LLCs, and other entities formed under U.S. state or tribal laws. This encompasses entities created by filing with LARA or similar offices in other jurisdictions. While the CTA primarily targets corporations and LLCs, it is expected that limited liability partnerships, limited liability limited partnerships, and most limited partnerships will also be considered reporting companies.

The responsibility for filing beneficial ownership information rests with the reporting company itself. The CTA provides a limited list of exempt entities, which includes large operating companies, public companies, certain investment entities, and other regulated entities.

Which Individuals Must be Identified in Report: The CTA mandates that reporting companies identify their beneficial owners and, for companies created or becoming foreign reporting entities after January 1, 2024, their company applicants. A beneficial owner is defined as any individual who either exercises substantial control over the reporting company or owns or controls 25% or more of its ownership interests. “Substantial control” is broadly defined, encompassing senior officers of the company and individuals with significant influence over major company decisions. The ownership percentage can be direct or indirect, and the CTA provides specific methods for calculating these percentages. However, certain individuals, such as minors, certain employees, and specific creditors, are exempted from the definition of a beneficial owner.

When Report Must Be Filed: Companies existing or becoming foreign reporting entities before January 1, 2024 must file by January 1, 2025. Those created or registered on or after January 1, 2024 have 30 days from the earliest of receiving notice of their creation/registration or public notice of the same (this timeline may be extended to 90 days under a recently issued Notice of Proposed Rulemaking).

FinCEN will only accept BOI reports from January 1, 2024 onwards, submitted electronically via its website. Reporting companies must also update their BOI reports within 30 days for any changes in the reported information or to correct inaccuracies. There is no materiality threshold for reporting changes, but a safe harbor exists for inaccuracies corrected within 90 days of the initial filing. Companies are advised to establish compliance processes to ensure timely reporting.

On September 18, 2023, the FinCEN issued a press release announcing the publication of its Small Entity Compliance Guide. This guide is designed to aid the small business community in preparing for compliance with BOI requirements under the CTA. The guide offers a comprehensive overview of the BOI reporting rule’s provisions and answers to pivotal questions. It provides checklists and other essential tools to assist businesses in aligning with the CTA’s mandates. Additionally, FinCEN has indicated that further guidance on the submission of BOI will be released shortly.

Avoiding Penalties: The CTA is not just another piece of paperwork; it is a legal requirement. Non-compliance can result in significant fines and penalties. For startups operating on tight budgets, avoiding these unnecessary costs is crucial. By understanding and adhering to the CTA, startups can ensure they are on the right side of the law.

Building Trust with Investors: Transparency is not just about compliance; it is about building trust. By adhering to the CTA, startups can demonstrate their commitment to good governance and transparency, making them more attractive to potential investors.

Streamlining Business Operations: The process of gathering and reporting beneficial ownership information can be an opportunity for startups to review and understand their ownership and control dynamics better. This can lead to clearer decision-making processes, better-defined roles and responsibilities, and more efficient operations.

Navigating International Business Deals: For startups with an eye on international expansion or partnerships, compliance with the CTA can pave the way. Many countries are cracking down on financial crimes and demanding greater transparency from businesses. By being compliant with the CTA, startups can show international partners that they are trustworthy and transparent, potentially opening doors to global opportunities.

The Corporate Transparency Act is more than just another piece of business legislation; it represents a shift towards a more transparent and accountable corporate landscape. For startup founders and entrepreneurs, understanding the CTA is not just about compliance; it is an opportunity to embrace a culture of transparency that can drive business growth, foster trust, and pave the way for sustainable success.

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If you have any questions about the issues addressed in this article, or if you would like a copy of any of the materials mentioned in it, please do not hesitate to reach out to Patrick Ellis at Kuhn Rogers PLC via email or call 231-947-7900.