The federal Corporate Transparency Act (CTA), formed under the National Defense Authorization Act, establishes new disclosure obligations for millions of companies operating in the United States and abroad including beneficial ownership information reporting. While the U.S. Treasury Department has stated that it intends to use the Corporate Transparency Act to, “disrupt financial anonymity that enables crimes such as corruption, drug trafficking, and terrorism,” the CTA is extremely broad in scope, and companies and individuals that fail to comply can face steep penalties.

As a result, virtually all company owners must assess whether they need to comply with the Corporate Transparency Act. The CTA took effect on January 1, 2024, and some companies may have already passed the deadline for timely compliance. As discussed below, while the CTA includes a laundry list of exceptions, these exceptions largely apply to companies that have pre-existing federal reporting obligations.

“The Corporate Transparency Act took effect on January 1, 2024 with relatively little fanfare. However, it is unique in many respects, and it presents major risks for company owners who fail to comply. To avoid potential exposure to civil—or even criminal—penalties, company owners should consult with their counsel to determine if compliance is necessary.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

So, what do company owners in the U.S. and abroad need to know about complying with the Corporate Transparency Act in 2024 (and beyond)? Here are some of the highlights:

Non-Compliance with the Corporate Transparency Act Can Trigger Civil or Criminal Penalties

We’ll cover the headline figures first. Despite the statute’s breadth and the extremely small percentage of covered entities that are likely to be of actual concern to the U.S. Treasury Department, the Corporate Transparency Act imposes substantial penalties for non-compliance. This includes not only civil penalties, but criminal penalties as well.

In civil enforcement cases, the U.S. Treasury Department can impose monetary penalties of $500 per day for non-compliance—with companies continuing to incur penalties until they file all required Beneficial Ownership Information (BOI) reports with the Financial Crimes Enforcement Network (FinCEN). In criminal enforcement cases involving knowing and willful violations, defendants can face up to a $10,000 fine and two years of federal imprisonment.

The Definition of “Reporting Companies” Under the CTA is Extremely Broad

Under the Corporate Transparency Act, all “reporting companies” must submit BOI reports to FinCEN (we’ll explain the CTA’s reporting requirements in detail shortly). The statute’s definition of a “reporting company” is extremely broad:

“The term ‘reporting company’ . . . means a corporation, limited liability company, or other similar entity that is—(i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or, (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe . . . .”

The CTA then goes on to list 24 categories of entities that are excluded from the definition of a “reporting company.” However, rather than excluding small businesses and companies with low annual revenue, as is often the case with federal statutes and regulations, the CTA largely excludes business entities that already have federal disclosure obligations. Some examples include:

• Securities issuers registered under the Securities Exchange Act of 1934
• Other entities registered with the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC)
• Public accounting firms registered under the Sarbanes-Oxley Act of 2002
• Banks, credit unions, savings and loan holding companies, and registered money transmitting businesses
• Insurance companies (as defined in the Investment Company Act of 1940)
• Public utilities and financial market utilities
• Pooled investment vehicles
• Subsidiaries of excluded entities

Also excluded are companies that have 20 or more full-time employees and a physical office in the United States, and that filed a federal tax return in the previous year showing more than $5 million in gross revenue. While this relieves many companies of the obligation to comply with the CTA, it still leaves most small businesses in the position of needing to manage CTA compliance on an ongoing basis. Notably, the CTA also allows the U.S. Treasury Department to exempt additional entities in the future if enforcing compliance with respect to these entities “would not serve the public interest . . . and . . . would not be highly useful in . . . efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes.” It will be interesting to see if the U.S. Treasury Department uses this provision to relieve domestic small businesses of their compliance obligations in the future.

Complying with the CTA Involves Reporting Beneficial Owners to FinCEN

To comply with the Corporate Transparency Act, reporting companies must file Beneficial Ownership Information (BOI) reports with the Financial Crimes Enforcement Network (FinCEN). The statute defines a “beneficial owner” as:

“[A]n individual who directly or indirectly . . . (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.”

The term “substantial control” is defined in 31 C.F.R. Section 1010.380, which provides that an individual exercises substantial control over a reporting company if the individual:

• “Serves as a senior officer of the reporting company;
• “Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);
• “Directs, determines, or has substantial influence over important decisions made by the reporting company . . . ; or
• “Has any other form of substantial control over the reporting company.”

Just as the statute exempts certain entities from reporting, it also exempts certain beneficial owners from the Beneficial Ownership reports. But, here too, the exemptions are fairly limited in scope. Under the Corporate Transparency Act, beneficial owners who do not need to report beneficial ownership information include minor children (if the child’s parent or guardian is reported); nominees, intermediaries, custodians, and agents; individuals acting solely as employees and whose economic benefits from the entity are derived solely from their employment status; individuals whose only interest is through a right of inheritance; and, creditors of reporting companies, unless they exercise substantial control or control not less than 25 percent of the company’s ownership interests.

Varying Deadlines Apply Until January 1, 2025 (and Ongoing Deadlines May Apply as Well)

Beginning on January 1, 2025, all reporting companies newly formed in the United States or newly registered to do business in the United States will need to file their initial BOI reports within 30 days of formation or registration. However, in 2024, different deadlines apply to existing and newly formed (or newly registered) entities. The deadlines for Corporate Transparency Act compliance in 2024 are as follows:

• For reporting companies formed or registered to do business in the United States before January 1, 2024, initial BOI reports are due no later than January 1, 2025.
• For reporting companies newly formed or newly registered to do business in the United States during 2024, initial BOI reports are due within 90 days of formation or registration.

Along with meeting these initial BOI filing requirements, reporting companies may need to file additional BOI reports in the future. Under the CTA, “ a reporting company shall, in a timely manner, and not later than 1 year after the date on which there is a change with respect to any information [concerning a beneficial owner], submit to FinCEN a report that updates the information relating to the change.” As explained in an article published in the American Bar Association’s Business Law Today, “[t]he requirement to report changes in reported beneficial ownership information (which includes a current address and an identifying number) poses a significant burden for reporting companies[, as t]here can easily be changes in the beneficial ownership information of indirect beneficial owners of which a reporting company is unaware.”

All Companies Should Assess Their Corporate Transparency Act Compliance Obligations

In light of the Corporate Transparency Act’s substantial breadth and the potential consequences of non-compliance, all companies should assess their compliance obligations in 2024. While determining whether compliance is required and identifying all beneficial owners will be relatively straightforward in some cases, in others it will prove much more challenging. This is especially true for companies that have “indirect” owners in the U.S. or abroad.

Going forward, reporting companies should incorporate Corporate Transparency Act compliance into their broader corporate compliance programs. Reporting companies should have mechanisms in place to ensure that they timely disclose all relevant changes to FinCEN, and some non-reporting companies may need to have triggers for implementing CTA compliance if their circumstances change in the future (i.e., if a company de-registers with the SEC or CFTC, conducts layoffs leaving it with less than 20 full-time employees, closes its U.S. office, or fails to report revenue in excess of $5 million). While the BOI reporting form is itself fairly simple, effectively managing Corporate Transparency Act compliance will be anything but simple for some reporting companies.