In the world of business, regulatory compliance is no stranger to most companies. However, the Corporate Transparency Act (CTA) has introduced new rules that may catch many small businesses off guard. To be honest, we should all be prepared for this, as the CTA was passed in 2021 and fully coming into effect now. Due to a relatively poor communication rollout around the requirements, many business owners feel caught off guard. Additionally, its complexity has left many businesses scrambling to understand if they need to report and what they need to do to comply—and time is running out.
In this comprehensive article, we’ll explore the key details of the CTA, explain why it was enacted, who it affects, what businesses need to report, the deadlines for compliance, and the penalties for non-compliance. More importantly, we’ll guide you through how to get started and ensure your business is on the right track.
Why the Corporate Transparency Act Was Enacted
The CTA was passed to address serious concerns about money laundering, fraud, and terrorist financing in the U.S. The Financial Crimes Enforcement Network (FinCEN), which is responsible for enforcing the CTA, estimates that about $300 billion is laundered through the U.S. financial system each year. Large financial institutions have long been required to report suspicious activities, but many smaller businesses, particularly shell companies, have flown under the radar.
To close this gap, the CTA requires small businesses to disclose their beneficial owners—the individuals who actually own or control the business. While the law’s primary focus is enhancing transparency and deterring criminals from using small businesses as cover for illegal activities, it also extends to law-abiding companies that must comply or face penalties.
For small business owners, the CTA is now part of a growing list of compliance obligations. Yet, many are unaware of these new requirements or mistakenly believe they are exempt.
Who Is Subject to the CTA?
If you are a small business owner, it’s crucial to understand whether your company is required to comply with the CTA. The law applies to various businesses, including LLCs, S-corps, C-corps, limited partnerships, and other similar entities.
The basic test for whether your business is subject to the CTA is straightforward but strict. There are three key criteria:
- Registration with a State: If your business is registered with the Secretary of State or the equivalent office in your state (e.g., LLCs, corporations), you may be subject to the CTA.
- Gross Receipts: If your business has $5 million or less in gross receipts, it falls under the reporting requirements of the CTA.
- Number of Employees: Businesses with 20 or fewer employees must comply.
If you meet all three of these criteria, your business is required to report under the CTA. Sole proprietorships and general partnerships are typically exempt, but most other small businesses are not. If you’re reading this, there’s a good chance the CTA applies to you.
What Needs to Be Reported?
Once you determine that your business is subject to the CTA, the next question is: what exactly do you need to report?
The CTA requires businesses to disclose information about their beneficial owners. A beneficial owner is defined as any individual who meets one or both of the following criteria:
- Owns 25% or More of the Company: Any person who owns at least a 25% stake in the company must be reported.
- Has Substantial Control Over the Company: This includes individuals who serve in significant roles, such as Presidents, CEOs, CFOs, COOS, and GCs, individuals with the power to appoint or remove C-suite officers or a majority of the board of directors, and any who can make key financial or operational decisions.
The information that must be reported includes:
- Full legal name
- Date of birth
- Residential address
- A unique identifying number (such as a driver’s license or passport number), and
- A copy of the corresponding passport or state or locally-issued identification
For new businesses formed after January 1, 2024, an additional reporting requirement includes disclosing information about the company applicant or the individual responsible for registering the company with the Secretary of State.
Deadlines You Can’t-Miss
The CTA compliance deadlines are fast approaching, and understanding them is essential for avoiding penalties.
- Businesses Registered Before January 1, 2024: If your business was registered before this date, you have until January 1, 2025, to file your initial CTA report. While this might seem like ample time, it’s recommended that you act well before this deadline to avoid rushing at the last minute.
- Businesses Registered After January 1, 2024: If your business is formed after this date, you must file your CTA report within 90 days of registration with the Secretary of State.
- Ongoing Reporting Obligations: From January 1, 2025, and onward, any changes to your company’s beneficial ownership must be reported within 30 days. This includes changes to the reporting company’s information, changes in ownership, changes in senior officers, changes in company structure, or updates to the personal information of the beneficial owners.
Penalties for Non-Compliance
The penalties for failing to comply with the CTA are severe and should not be taken lightly. Depending on the nature of the violation, non-compliance can lead to both civil and criminal penalties.
- Civil Penalties: Failure to file a report or submitting incorrect information can result in fines of up to $591 per day per person involved including each senior officer and each willfully noncompliant beneficial owner. These fines can accumulate quickly, putting businesses at risk of substantial financial penalties.
- Criminal Penalties: In cases of willful non-compliance, businesses and their owners could face criminal charges, including fines of up to $10,000 and possible imprisonment for up to two years.
These penalties underscore the importance of filing accurate reports promptly. Even an honest mistake, such as an outdated address or a typo in a name, could result in fines if not corrected within the allowed grace period.
Why CPAs and Attorneys Aren’t Handling CTA Filings
One of the biggest surprises for business owners is that CPAs and attorneys are largely staying away from CTA filings. The complexity of the law, combined with the risk of liability for giving incorrect advice, has caused many professionals to refuse these engagements. Additionally, there is concern about the unauthorized practice of law when making certain determinations about beneficial ownership.
For example, determining ownership in community property states or handling situations involving trusts or wills could require legal expertise. As a result, many CPAs and attorneys hesitate to take on these cases due to the potential exposure.
How to Ensure Compliance: The Role of Third-Party Providers
Given the challenges in interpreting and complying with the CTA, many small businesses are turning to third-party service providers like CTASafe to handle their filings. Third-party providers offer technological solutions and consulting services to ensure that your business meets all the reporting requirements under the law.
CTASafe, for instance, provides a secure cloud-based platform on which businesses can gather and upload the required information from beneficial owners. It also offers consulting services to help businesses navigate complex ownership structures and ensure they remain compliant. Once filed, CTASafe provides a monitoring solution to help companies stay compliant.
Their services significantly reduce the time it takes to complete a CTA report, streamlining the process so business owners can focus on running their companies rather than worrying about legal compliance.
The clock is ticking on CTA compliance, and the consequences of ignoring this new regulation can be costly. As the deadline for initial filings approaches, small businesses need to take action now. You can avoid hefty fines and legal trouble by understanding whether the CTA applies to you, gathering the necessary information on beneficial owners, and filing accurate reports on time.
If you’re feeling overwhelmed by the complexity of the CTA, remember that third-party providers like CTASafe are here to help. They offer the expertise and tools you need to comply with this new law, giving you peace of mind that your business is on the right side of the law.
Don’t wait until the last minute—start your CTA compliance process today.
