New Reporting Requirements for Small Businesses Under the Corporate Transparency Act

A new law affecting almost every small business, The Corporate Transparency Act (CTA), was passed in January 2021. New provisions will take effect later this year and require information disclosures for non-public corporations, including tax-exempt corporations.

The CTA seeks to curb corporate funding of terrorism, trafficking, money laundering, and other illegal activity. Specifically, the new law is intended to unveil anonymous shell corporations, businesses without significant assets often misused for tax evasion purposes and other illegitimate business activity. It is uncertain whether unmasking the owners of such malignant corporations will decrease illegal activity. One common criminal activity engaged in by shell corporations is the artificial price inflation of real estate. Critics argue the removal of anonymity does not directly disincentivize criminal behavior. Regardless of the law’s purpose, the CTA is set to increase the reporting burden of small businesses across the United States. Businesses of all sizes can remain optimistic that increased information disclosure generally reduces crime.

Who is exempt from reporting requirements?

The new law does not apply to companies with more than $5 million in revenue and over 20 full-time employees.[1]

Who is required to report?

Under the new law, “beneficial owners” must be identified and disclosed. Beneficial owners include any owner of at least 25% of the company and any individual who maintains “substantial control” of the company.[2] Substantial control varies and depends on the number of owners and the nature of membership duties. While it is still being defined, substantial control includes those members with responsibilities that include “directing, determining, or substantially influencing important matters of a reporting company.”[3]

Annual Filings

Small Businesses and Corporations will be required to report the following information annually to the U.S. Treasury Department through the Financial Crimes Enforcement Network (FinCEN): the full name of the reporting company; trade names and ‘doing business as’ names of the reporting company; business street address; State or Tribal nation of formation; and Taxpayer Identification Number.[4] Additionally, each required beneficial owner will need to report the following: name, birthdate, address, and ID number (such as Passport or Driver’s License) with an Official ID image.[5]

Strict Reporting Deadlines and Penalties

Entities formed after the effective date will have only 14 days to report the required information initially.[1] There is a 30-day deadline for changes in the required information, changes in exempt status, and death of a deceased beneficial owner.[2] Existing entities will have one year from the effective date, which is estimated to be in September 2022, to report the required information initially.[3]

Under penalty of perjury, willfully failing to report the required information or willfully reporting incorrect/incomplete information comes with a hefty penalty of $500 a day and a criminal fine of $10,000 and up to 2 years in prison.[4]

Privacy Concerns

The increased reporting burden would help prevent crime by alleviating a previous lack of disclosure. However, the sensitive nature of the required information raises serious privacy concerns. Fortunately, small businesses can take steps to protect this sensitive information. Even though all beneficial owners must be reported to FinCEN, a nominee officer or director can represent a business in the public record. Additionally, ‘beneficial owners’ does not include minor children, creditors, employees without membership interest, inheritors, or nominees.[5]

Some businesses may be concerned about hacking personally identifying information belonging to their members. The hacking of CTA information comes with the steep cost of a $250,000 fine with criminal charges of up to 5 years in prison.[6] Additionally, the reported disclosures are not released to the general public but only to the US government. Who exactly can access the data is still being addressed legally, but so far, federal intelligence agencies and regulators (including the IRS) will have access to the data without a court order.[7]

How Best to Prepare?

Some unknowns remain about the CTA, but small businesses should pre-emptively identify owners and members who maintain substantial control of the entity and prepare to disclose this soon-to-be-required information. 

The S.J.S. Law Firm can help your small business comply with the upcoming reporting requirements of the Corporate Transparency Act. For a complimentary consultation, please contact us at (202) 505-5309.

[1] Proposed 31 CFR 1010.380(c)(xxi).

[2]  31 U.S.C. 5336(a)(3)(A).

[3] Proposed 31 CFR 1010.380(d)(1).

[4] Proposed 31 CFR 1010.380(b)(1)(i) 

[5] 31 U.S.C. 5336(b)(2).

[6] Proposed 31 CFR 1010.380(a)(1)(i).

[7] Proposed 31 CFR 1010.380(a)(1)(iv).

[8] 31 U.S.C. 5336(b)(1)(D).

[9] 31 U.S.C. 5336(h).

[10]  Proposed 31 CFR 1010.380(d).

[11] 31 U.S.C. 5336(h).

[12] Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 69920 (Dec. 8, 2021)(NPRM), https://www.federalregister.gov/documents/2021/12/08/2021-26548/beneficial-ownership-information-reporting-requirement