Small Business Owners: Here’s How to Prepare for the Corporate Transparency Act

By Published On: December 11, 2023Categories: Business Ownership5.4 min read

New reporting rules under the Corporate Transparency Act (CTA) will go into effect January 1, 2024, affecting millions of small businesses across the United States.

While many business owners say they aren’t prepared for the new law to go live, still more are unaware of the stringent reporting requirements coming their way. Unfortunately, failing to comply with these regulations could result in hefty fines and possibly even jail time.

If you’re one of the myriad small business owners impacted by the CTA, it’s crucial to understand your responsibilities to avoid potentially costly missteps and legal ramifications. To help point you in the right direction, we’ve summarized the new reporting requirements below and offer practical tips for readying your business accordingly.

Understanding the Corporate Transparency Act

Congress enacted the Corporate Transparency Act (CTA) in 2021 in an effort to reduce money laundering. The act specifically targets businesses with less than $5 million in annual sales and fewer than 20 employees.

The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is charged with creating a registry of these small businesses. While the aim is to identify shell companies used for illegal transactions, the CTA creates a significant administrative burden for legitimate small businesses.

In fact, FinCEN expects to collect 32 million new reports in 2024 and millions each year thereafter, according to a recent Wall Street Journal article. This level of data collection is largely unprecedented outside of the U.S. Tax Code.

Reporting Companies

The new reporting rules only affect “reporting companies.” These include:

  • Domestic reporting companies: Corporations, LLPs, or any other entity created by filing a document with a secretary of state or similar office under the law of a state, territory, or Indian tribe.
  • Foreign reporting companies: Any non-US entity that is registered to do business with any U.S. state, territory, or Indian tribe.

However, 23 entities are exempt from these reporting requirements, including:

  • Banks and other bank-type entities, such as regulated private trust companies.
  • Large operating companies, or companies that have a physical office in the U.S., have more than 20 full-time U.S. employees, and reported more than $5 million in gross receipts on a U.S. federal income tax return in the previous year.
  • Publicly traded companies registered under the Securities Exchange Act of 1934.
  • Tax-exempt entities, such as 501(c) and 501(a) organizations.
  • Sole proprietorships that don’t operate as a single-member LLC.

CTA Reporting Requirements

On September 30, 2022, the US Department of the Treasury issued final regulations for reporting to the Financial Crimes Enforcement Network (FinCEN). These include:

  • Reporting Company Information. This includes the company’s legal name, trade name, address, jurisdiction of formation, and Employer Identification Number (EIN). Foreign companies must provide a foreign tax ID if they lack an EIN.
  • Beneficial Ownership Information (BOI). Companies must identify their beneficial owners, defined as individuals who either exercise substantial control over the company or own/control at least 25% of the ownership interests.
  • Company Applicants. For companies formed after January 1, 2024, up to two individuals involved in the company’s formation must be reported. This includes the person who files the formation documents and the individual primarily responsible for directing or controlling the filing.
  • Required Individual Information. For each beneficial owner and company applicant, the report must include full legal name, date of birth, current residential (or business) address, and an identifying number and image from an identification document like a passport or driver’s license.

Reporting companies may also use a FinCEN identifier—a unique number issued by FinCEN— for easier reporting and added privacy. Individuals can request a FinCEN identifier on or after January 1, 2024, by completing an online form or by checking a box on the beneficial ownership report upon submission.

Penalties for Non-Compliance

Reporting companies in existence as of January 1, 2024 have one year to file their initial beneficial ownership reports. Companies that are formed after the effective date must file an initial report within 30 days of receiving official notice of their registration. In addition, businesses are generally required to report changes in company information or BOI within 30 days of the change.

Non-compliance with the CTA isn’t an option. The act imposes severe penalties, including fines of up to $10,000 and potential jail time of up to two years, for willfully failing to report or update a company’s BOI and/or providing false information.

Concerns and Challenges

The introduction of the CTA hasn’t been without controversy. In November 2022, the National Small Business Association filed a lawsuit in an Alabama federal court challenging the CTA on the grounds that the law violates state sovereignty and due process.

Meanwhile, in a recent letter to Congress, 69 groups representing millions of small business owners said neither they nor FinCEN are prepared for the regulations to take effect on January 1, 2024. Arguing that the requirements are overly burdensome, the letter asked Congress to delay the statute for one year.

Here’s What Small Business Owners Need to Know and Do

Although the CTA’s path forward remains unclear, beneficial owners of reporting companies would be wise to adhere to the current timeline and prepare accordingly. Here are a few steps you can take to avoid non-compliance:

  1. Educate Yourself. Familiarize yourself with the specifics of the CTA. Understanding who qualifies as a “beneficial owner” and what information needs to be reported is crucial.
  2. Prepare Your Documentation. Start gathering necessary documents and information about beneficial owners in your business. This proactive approach will save you time and stress as the deadline approaches.
  3. Implement Compliance Systems. If you haven’t already, set up systems within your business to regularly collect and update the required information. This will make ongoing compliance more manageable.
  4. Seek Professional Advice: Consider consulting with a legal or financial expert who specializes in small business regulations. You can also reach out to a CornerCap Wealth Advisor for personalized guidance.
  5. Stay Informed. Keep a close eye on any developments or changes related to the CTA, including potential delays or amendments. Staying informed will help you adapt quickly to any changes and ensure compliance with the law.

CornerCap Is Here to Help

These regulations no doubt present significant administrative hurdles for many small businesses. However, by proactively preparing and implementing the right systems in your business, you can avoid costly penalties and other setbacks.

CornerCap is here to help. If you have any questions or concerns regarding these changes, please don’t hesitate to contact a member of our team. For more information, you can also visit FinCEN’s FAQ page.

Share this Story

"Higher for Longer" Starting to Bite
Navigating Roth IRA Contributions and Conversions: A Guide for Near-Retirees

Let us work to help your assets and life appreciate together.

Go to Top