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The Corporate Transparency Act (CTA) was enacted January 1, 2021, as part of the National Defense Authorization Act. The Corporate Transparency Act requires certain entities (primarily small and medium-size businesses) to report “beneficial ownership” information to the Financial Crimes Enforcement Network (FinCEN). FinCEN implemented these new reporting requirements for Limited Liability Corporations (LLCs) under the Corporate Transparency Act (CTA) on January 1, 2024.  

Here is a breakdown of some of the essential things business owners need to know about The Corporate Transparency Act and Beneficial Ownership reporting requirements.  

What is the Corporate Transparency Act (CTA)? 

The CTA was enacted in 2021 as part of the National Defense Authorization Act as part of a broader effort to help fight illegal financial activities such as tax fraud, money laundering, and financing for terrorism. The CTA does this by requiring businesses to report details about their beneficial owners—individuals who own or control the company—to FinCEN. 

What Does “Beneficial Ownership” Mean? 

Under the CTA, beneficial ownership refers to people who meet any of these requirements: 

• own or control a company, either directly or indirectly  

• own 25% or more of the company’s ownership interests 

• exercises “substantial control” of the company  

Since beneficial owners include individuals who exercise control directly or indirectly, beneficial owners may include board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control.  

What Does “Substantial Control“ Mean? 

CTA regulations provide a much more expansive definition of “substantial control” than in the traditional tax sense. An individual exercises “substantial control” if the individual:   

• serves as a senior officer of the company 

• has authority over the appointment or removal of any senior officer or a majority of the board 

• directs, determines, or has substantial influence over important decisions made by the Reporting Company 

This means beneficial owners can be senior officers, board members, or other key individuals, even if they are not listed in official record or have no equity interest in the company. 

What Businesses Need to Know 

Who Needs to File  

Most LLCs, corporations, and similar business structures that are created by a filing with a Secretary of State (SOS) or equivalent official will need to file a beneficial ownership report to FinCEN. It is also important to note that the CTA also applies to non-U.S. companies that register to do business in the U.S. through a filing with a SOS or equivalent official. Since the definition of a domestic entity under the CTA is extremely broad, additional entity types could be subject to CTA reporting requirements based on individual state law formation practices. 

Some businesses are exempt from FinCEN’s requirements, such as publicly traded companies or certain highly regulated businesses. Large operating companies can also avoid these requirements if they meet all of these conditions: 

• They employ over 20 full-time employees in the U.S. 

• They earn over $5 million in gross revenue or sales based on the previous year’s tax return 

• They operate from a physical office in the U.S. 

What Needs to Be Reported 

The report needs to include details about the beneficial owners, such as: 

• Full legal name 

• Date of birth 

• Address 

• Social Security number (if applicable) 

• Driver’s license number (or other identification) 

• Nature and percentage of ownership interest 

When to File  

The deadline for filing the initial report depends on when your LLC was formed: 

• For LLCs formed before January 1, 2024: You have until have until January 1, 2025, to file your initial report. 

• For LLCs formed between January 1, 2024, and January 1, 2025: You need to file within 90 days of formation. 

• For LLCs formed on or after January 1, 2025: The filing deadline is 30 days after formation. 

• Corrections: Additionally, any changes to the beneficial ownership information need to be reported to FinCEN within 30 days. 

What Happens If You Don’t File 

Failing to file a report or filing inaccurate information could result in penalties, including fines of up to $591 per day, up to $10,000 per filing, or even imprisonment for up to two years. 

How to Prepare for Compliance with CTA 

1. Determine Whether Your Business Is Required to Comply 

Check if your business needs to file a beneficial ownership information report based on FinCEN’s rules. It may be helpful to consult with legal and business advisors to understand your reporting obligations. 

2. Determine Beneficial Owners 

If your company is not exempt identify any individuals who meet FinCEN’s definition of beneficial owners. To determine who your beneficial owners are: 

• Calculate percentages of “ownership interests”: In many companies with simple capital structures, the answer will be obvious who meets the 25% thereshold. However, if your company has as complicated capital structures (given the expansive definition of “ownership interest”), or you have companies in which some ownership interests are held indirectly—for example, through upper-tier investment entities, holding companies, or trusts then the answer may be less clear and require legal and business guidance. 

• Identify those who have who exercise “substantial control” over the company: There may well be multiple people who qualify, given the expansiveness (and vagueness) of the “substantial control” definition. To identify these individuals, we recommend consulting legal and business advisors.

3. Review Your Operating Agreement 

You may need to update your company’s operating agreement to meet FinCEN’s requirements. Consider adding clauses such as representations, covenants, indemnifications, and consent clauses. For example, the operating agreement may require:  

• A representation by each shareholder, member or partner, as applicable, that it will be in compliance with or exempt from the CTA;  

• A covenant by each shareholder, member or partner, as applicable, requiring continued compliance with and disclosure under the CTA or to provide evidence of exemption from its requirements;  

• An indemnification by each shareholder, member or partner, as applicable, to the company and its other shareholders, members or partners, as applicable, for its failure to comply with the CTA or for providing false information; and 

• A consent by each disclosing party for the company to disclose identifying information to FinCEN, to the extent required by law. 

The agreement should also hold beneficial owners liable for not complying.  

What’s Next 

FinCEN’s beneficial ownership requirements are now active, with the first major reporting deadline set for January 1, 2025. Work with your legal and business advisory professional to understand how these new requirements affect you to ensure that you are in compliance and avoid any potential penalties. 

Questions 

Have questions about CTA and FinCEN’s beneficial ownership reporting requirements or if and how they affect your business? Our team of business advisory experts is here to help. Contact Us.