What You Need to Know About the Corporate Transparency Act

A major part of growing your business is staying in compliance with all relevant laws and regulations, and effective January 1, 2024, a new law will affect your business – the Corporate Transparency Act. This new law basically requires all businesses to share ownership information in a federal government database.

You may be surprised to hear that the government doesn’t already know who owns each business in the U.S. In most states, ownership is recorded and maintained within the business itself, not within a state or federal register. Now, new and existing businesses will be required to disclose all their beneficial owners.

Here’s an overview of what’s included in the Corporate Transparency Act and what you’ll need to do to comply.

What is the Corporate Transparency Act?

The Corporate Transparency Act is intended to help combat tax avoidance and identify money launderers and criminals who hide behind anonymous business ownership in the U.S. by collecting more business ownership information for U.S.-based businesses.

If your business meets the criteria to qualify as a Beneficial Owner, you’re required to submit a Beneficial Ownership Information report (BOIR) to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The report will include details about the individuals that are associated with your business.

Before this law went into effect, the U.S. government didn’t have extensive insight into business owners throughout the country, and that makes it difficult to prevent those with bad intentions from hiding behind business ownership.

While your ownership information is included on your business’s Form K-1s or, if you’re a sole proprietor, when you file a Schedule C, that information is still limited. In recent history, some business owners have created layers of holding companies and nominee owners that hide their actual interest in an operating company.

This is something you see more with large businesses that are trying to cut their tax liabilities, but it also happens with small businesses. For example, the operating owners of brick-and-mortar businesses often create a separate “management LLC” to hold their ownership and certain copyrights. This also separates them from passive investors in the business.

Of course, this is not always done with bad intentions. There are legitimate reasons for creating separate entities, but bad actors could easily take advantage of these options before this law went into effect.

Who qualifies as a Beneficial Owner?

Beneficial owners are the real people who own a business. They must be blood-flowing human beings or an exempt organization (like a not-for-profit). If your business is owned by a holding company, that means all the people who own the parent company are the true beneficial owners. With the Corporate Transparency Act in effect, you’ll need to submit information on all the real people who control your business and benefit from its commercial activities.

Fulfilling your new responsibilities under the Corporate Transparency Act

As of January 1, 2024, all businesses in the U.S. are required to complete a Beneficial Ownership Information Report filing with FinCEN, the department of the US Treasury handling these filings. If your business was established before January 1, 2024, the deadline to complete a filing is January 1, 2025.

Those that started after  January 1, 2024, must submit their filing 90 days after forming the business. Whenever your beneficial ownership or basic information about your business changes, you’ll need to submit an update within 30 days. There are very few exemptions from reporting, so be sure to submit your filing by the relevant deadline.

What information is needed for the Beneficial Ownership Information Report Filing?

The required form starts with basic questions about the legal name of your business, state of formation, and your business’s Federal Employer Identification Number (EIN).

Then, you’ll share information about all the beneficial owners in the business with more than 25% ownership or those who have direct control over the business. You’ll upload a copy of each person’s passport, driver’s license, or other government ID. This includes everyone who directly owns, or owns companies that own the business making the filing, regardless of their location. It may also include non-owner senior level officers or managers.

Here’s an example where it can get tricky: a business in New York is owned by a holding company in Singapore. That business needs to include information on all the individuals who own the Singaporean parent company who have more than 25% beneficial ownership in the New York-based business.

If your business has multiple levels of parent companies and affiliated entities, compliance with this rule can be complicated. However, ultimately the 25% rule guarantees that there will never be more than four beneficial owners that need to be registered.

With an existing business, you still have until the end of 2024 to catch up on these filings. After that, the penalties for “willfully” failing to file are steep: $500 per day and/or potential criminal proceedings.

You can start your BOIR filing through the FinCEN website, which also includes a help section that can walk you through the process.

How does the Corporate Transparency Act impact government loans and contracts?

Because this rule is still new, there haven’t been process changes for government-issued or -guaranteed loans, or government contracts, but it’s likely to be a requirement for all of them in the future.

With government-guaranteed loan programs, like those from the U.S. Small Business Administration (SBA), a BOIR filing transcript could become an important part of the underwriting process. SBA loans already require all individuals who own more than 20% of a business and/or those who have “control” in a business to be guarantors for that loan.

Right now, SBA lenders determine who these people are through a combination of attestations by the applicant and reviewing the business’s tax return and bank statements identifying capital injection sources. While these measures offer some details about the business’s owners, a BOIR transcript can complement loan applications with information that’s more challenging to gather.

Using the BOIR database

The Treasury Department has authorized six specific cases in which BOIR data can be accessed and used. This includes:

  • national security agencies
  • domestic law enforcement agencies
  • foreign law enforcement agencies
  • financial institutions doing due diligence
  • regulators
  • the treasury department

Financial institutions may be able to access BOIR information if your business gives consent, and it can only be used for verifying beneficial ownership. Most countries in the world maintain a register of beneficial ownership for businesses located in their territory, and until recently the U.S. was an exception to the rule. This change marks a big change in the confidentiality of ownership information for all American small businesses.

Pursuit is here to support your growing business

While you’ve got many advisors to keep your business in compliance, you can count on Pursuit for support when your business needs financing for your next opportunity. With more than 15 business loan programs, you’ll find options for nearly any business need with Pursuit, plus advisory services to keep your business growing. Reach out to us today to learn more.

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