Business Solutions

Corporate Transparency Act

Corporate Transparency Act: Part 1

Sep 6, 2023
7 min read

What You Need to Know

On January 1, 2021, Congress passed a new law called the Corporate Transparency Act. The purpose of the Act is to prevent people from using shell companies to evade anti-money laundering rules or hide other illegal activities. The Act requires certain private corporations, LLCs, and trusts to disclose information about their “beneficial owners” – the people who have ownership rights in the property the company owns. The rules for implementing the Act did not become final until early 2023, which is why most people are not hearing about the Act until now.

If you are an owner or manager of a small private corporation or an LLC, or the trustee of a noncharitable trust, the Act probably pertains to you.

Why This Is Important

The Act is the first time the United States government has mandated this type of collection of personally identifying information about owners of private companies. The ostensible purpose of the Act is to prevent crooks from exploiting United States law to set up corporations, LLCs and other entities to commit crimes.

The Act is designed to help federal and state law enforcement agencies detect, prevent, and punish money laundering, drug trafficking, terrorist activity, tax fraud, and other white collar crimes.

However, ostensible purpose aside, the Act will make examination of personal information of private business owners easier for both federal and state government agencies. The possibility of obtaining and disseminating personal information – whether by government officials for improper purposes or by illegal users committing identity theft – will increase, simply because there will be a new, massive federal database of personal information collected in one place.

Whom the Act is Designed to Identify

The Act creates the concept of a “reporting company.” A Reporting Company must disclose to the U.S. Treasury Department’s Financial Crimes Enforcement Network (the “FinCen”) certain personally identifying information about the company itself, the person who is reporting about the company to FinCen, and the owners of the company.

A Reporting Company is a company set up under state law. For example, a limited liability company registered under Ohio law with the Ohio Secretary of State is a Reporting Company.

The Act addresses two categories of people: (1) people who own private entities, and (2) people who run or control private entities. If the person either exercises substantial control over the Reporting Company or owns or controls at least 25% of it, the person must submit personally identifying information to FinCen.

Reporting Companies Owned in Trust

A Reporting Company is a corporation or an LLC. A trust itself is not a Reporting Company. However, to the extent a trust owns a Reporting Company, the trust will be involved in disclosing information about its beneficiaries.
(See more on this below.)

What Must be Reported?

A Reporting Company must disclose both information about itself and information about two types of people:

  • people who submit information to the government on behalf of the company itself (“Company Applicants”) and
  • people who own, run, or control the company (“Beneficial Owners”).

All this information comes under the heading of “Beneficial Owner Information” (“BOI”).

The company itself must disclose its full legal name, any names under which it does business, its principal business address, the state where it was formed, and its taxpayer ID number.

Each Beneficial Owner must disclose his or her full legal name, current residential address for tax residency purposes, date of birth, and driver’s license or passport number.

Who is Exempt from Reporting?

The following people or entities do not need to report their BOI:

  • Owners of companies that employ at least 20 full-time workers and have annual sales of at least $5 million (including sales from subsidiaries) (the so-called “Large Company”)
  • People who are solely employees of the company and don’t own or control anything
  • People acting as custodian or agent on behalf of some other person
  • Minor children
  • People whose only interest in the company is through an inheritance in the future (rather than right now)
  • Tax-exempt 501(c) entities (for example, private foundations)
  • Charitable trusts (for example, a charitable remainder trust or a charitable lead trust)
  • Companies that operate in certain highly regulated industries that already submit their information some other way (banks, registered investment advisors, insurance companies, public accounting firms, public utilities)
  • Companies that were set up at least a year ago and have not engaged in any active business since being set up
  • Wholly-owned subsidiaries of exempt entities

If you or your entity does not fit under one of these exceptions, your entity is likely a Reporting Company and its owners will need to submit their personally identifying information.

The “Large Company” Exemption

For most families, the most prominent exemption from the Act is the exemption for a “Large Company.” If you own a Large Company, you do not need to report your personal information. To qualify as a Large Company, your company must meet both an employee threshold and a revenue threshold.

  • You must have more than 20 full-time employees (the employee threshold)
  • and you must have more than $5 million in gross receipts (the revenue threshold).

If your company meets both these thresholds, it is exempt.
If it meets only one, it is not exempt.
And of course, if it meets neither, it is not exempt.

We expect the overwhelming majority of privately owned companies will be Reporting Companies and will not be exempt.

Who Must Report?

The following people associated with Reporting Companies do need to report their BOI:

  1. Company Applicants
  • You apply to a state government to form a Reporting Company, or
  • You direct or control the act of filing.
  1. Beneficial Owners
  • You exercise substantial control over the company, or you own or control at least 25% of the ownership interests, or
  • You have authority over the appointment or removal of any senior officer of the company or a majority of the board of directors or governing body, or
  • You direct, determine, or have substantial influence over important decisions of the company, or
  • With regard to a trust, you are a trustee, you have authority to control or dispose of trust assets, you are the sole beneficiary, you have the right to demand a distribution or withdraw the assets from the trust, or you are a grantor who can revoke the trust.

Read Part 2 where we further break down the Corporate Transparency Act & describe:

  • What does it mean to be an “applicant” for a company?
  • Who is an “owner” and who is not?
  • And business scenarios and situations along with, as always, solutions.

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