The CTA - What You Need To Know!
/As of January 1, 2024, a new reporting requirement surfaced, affecting 32.6 million companies. The legislation, known as the Corporate Transparency Act (CTA), has been making big waves across the business landscape. Marking a significant shift towards increasing corporate transparency, the CTA requires companies to report information about their “owners” and, additionally for companies founded in 2024 and thereafter, information about those involved in its formation process. Non-exempt companies are required by law to file Beneficial Ownership Information Reports (BOIRs) with the Financial Crimes Enforcement Network (FinCEN) before their applicable deadline. The main idea behind the CTA is to crack down on financial crimes by making it clearer who's pulling the strings behind the proverbial “corporate veil”.
It's important to note, though, that while the CTA seeks to "uncover" this information, it will not be freely available to the public. Only specific groups can see this information. These groups include certain federal government agencies, state or local law enforcement, financial institutions (and their regulators), along with foreign law enforcement, and the Department of the Treasury. Each of these parties is required to follow strict rules and conditions to access this information. For example, to access the data of a company, banks are required to obtain written permission from the company before they can access the data submitted by the company to FinCEN. On the other hand, law enforcement does not need permission, but they do need to prove that they have a legitimate reason to access the information.
Wondering if your Company Needs to Report?
So, who needs to pay attention to the CTA’s reporting requirements? This act mainly targets what are called “reporting companies.” These entities include all sorts of domestic businesses like corporations, LLCs, and trusts that are set up through state filings. If a company is formed by filing paperwork with a state's secretary of state or a similar tribal office, it falls into this category and must report.
If you're running a sole proprietorship, certain trusts, or a general partnership, you may be able to breathe a sigh of relief here because forming these kinds of entities usually doesn't involve the kind of formal paperwork that corporations or LLCs do. This means you could be off the hook when it comes to filing under the CTA.
The CTA isn’t only applicable to U.S. companies though. In fact, if a foreign company files similar paperwork that results in them being able to do business in the U.S, they need to comply as well. This rule ensures that both domestic and international entities engaging in business within the U.S. adhere to the same transparency standards.
You may be thinking about whether there is any other way you could be exempt from these requirements... Well, the CTA lists 23 types of businesses that don't need to follow these new reporting rules. These exemptions cover a variety of specialized business structures which are less common. So, if you're part of a standard business set-up, chances are high that you’ll need to file a BOIR. In fact, it’s expected that about 89% of entities will need to comply in 2024.
Are you an Individual that Needs to be Reported?
Beneficial Owners
As the title of the new report leads, reporting companies must provide information about their beneficial owners. These are the individuals who either have ‘ownership interest’ or ‘substantial control’.
Those with Ownership Interest are individuals who hold at least 25% of the company's ownership interests, directly or indirectly. Ownership can be through equity, stocks, voting rights, or even interests in the profits or capital of the company. It’s straightforward - these are the people who have a significant financial interest in the company.
Those with Substantial Control are individuals in senior officer positions, those with the authority to appoint or remove these senior officers, or those with significant influence over company decisions and operations. Identifying these individuals can be a bit trickier than pinpointing those with ownership interest since “substantial” isn’t exactly self-explanatory. So, let’s expand on the 3 ways an individual can exert substantial control over a reporting company.
Senior Officers
These are the C-suites. We're talking the President, the CFO, the CEO, the COO, and others with high-ranking, decision-making roles. Whether they’re called "Vice President" or some unique title, if they’re calling the shots in major areas, they count.
Appointment or Removal Authority
For this category, think about those who can hire or fire senior officers or most of the Board of Directors.
Important Decision-Maker
An important decision-maker is someone who can direct, determine, or significantly influence certain decisions in the company. These powers can be seen across various areas of the company, which may include (but are not limited to):
· Business Operations: Deciding on the start or end of business ventures or changes in operational location
· Financial Management: Making entry or exit calls on big-ticket items like sales, purchases, investments, or loans
· Officer Compensation: Setting compensation schemes and incentive programs for officers
· Structural Changes: Calling the shots on mergers, reorganizations, dissolutions, or changes to foundational company documents.
This process is really all about figuring out who has their hands on the wheel - whether because they own a significant part of the entity or because they’re in the driver’s seat making decisions. Accurately identifying these individuals may require you to consult a professional. But don’t worry, you’re not the only one that will need to make these big decisions - there are millions of business owners in the same position as you, and Freidel & Associates stands ready to assist.
Company Applicants
It was previously mentioned that companies would have to report those involved in its formation process too. These individuals are called “company applicants.” Only companies established on or after January 1, 2024, need to report them. If you formed your company prior to 2024 and you don’t plan to create any others, you can skip this section.
Simply put, a company applicant is the person (or people) elbow-deep in the entity formation paperwork. There are two types:
1. The person who actually files the formation documents with a secretary of state, tribal jurisdiction, or a similar office.
2. The person who is primarily directing how these documents are filled out and submitted, even if they don’t do the legwork themselves.
The CTA lets you list up to two company applicants on the BOIR, but you need to include at least one. If more than two people could be considered company applicants, you just pick the two who were most crucial to the process. Let’s visualize with some scenarios:
Scenario 1: Imagine an attorney setting up a new company. They prepare all the paperwork and file it themselves (done online or in-person) with the state or a Tribal office. Here, the attorney is the only company applicant needed on the report.
Scenario 2: Now, take the same attorney, but this time they pass the baton to a paralegal to do the actual filing. Both the attorney, who orchestrated the whole thing, and the paralegal, who physically submitted the documents, are considered company applicants.
Scenario 3: Consider you used a service, such as LegalZoom or Rocket Lawyer, for the preparation and filing of your entity's documents. In such a case, you would typically be the only company applicant listed on the BOIR.
For a lot of business owners, determining the company applicant could be as straightforward as communicating with the attorney that helped you form the entity. Generally, they would know who at their firm would need to be reported on your BOIR. Alternatively, if you were the one who dealt directly with the document submission, especially using an online service, then you’d list yourself.
Information You Need to Report
Once it’s been determined that your company needs to file a report and the beneficial owners and company applicant(s) have been identified, it will be important to understand what specific information needs to be reported.
Reporting Company Information
1. Full Legal Name
2. All Trade Names or “Doing Business As” Names
3. Business Street Address
4. State of Formation
5. IRS Taxpayer Identification Number (TIN/EIN)
Beneficial Owner and Company Applicant Information
1. Full Legal Name
2. Date of Birth
3. Current Residential or Business Street Address*
4. Unique Identifying Number from a Passport, Driver's License, or a State Issued ID.
5. Image of the Chosen Identification Document
*Beneficial owners should provide their residential address. Company applicants involved in corporate formation activities can provide their business address instead.
What is my Deadline and What Happens if I Don’t File?
Companies formed in 2024 have 90 days from their formation date to submit their initial reports. For those created in 2025 and onward, the submission period is 30 days. Companies that were established before January 1, 2024, must submit their initial reports by December 31, 2024.
Notice how up until this point we’ve been discussing deadlines for ‘initial reports.’ Reporting companies also need to keep their information up to date with FinCEN. This means that when any information about the company or its beneficial owners changes, the company has 30 days to file an ‘updated report’ with FinCEN with the new information. Also with a 30-day deadline, is the filing of any ‘corrected reports.’ These types of reports result from becoming aware that previously filed information was incorrect.
The stakes for compliance are high, with potential penalties including fines up to $591 per day for non-reporting and criminal charges that may result in up to $10,000 in fines and two years of imprisonment. Timely and accurate reporting is critical to avoid these penalties.
Have more questions than answers? It’s understandable.
Reach out to us at cta@freidel.tax to get in touch with the only team of experts that doesn’t leave you with more questions than answers.