What is the Corporate Transparency Act?

BIG CHANGES FOR SMALL BUSINESSES

REVISED MAY 30, 2023
AUTHOR: GRANT ISON
CO-AUTHOR: SOPHIA MILLER
The original form of this article, written by Grant Ison, first appeared on the Blog at https://ison.law/corporate-transparency-act/

An Estimated 32.5 Million Small Businesses Will be Burdened by the Corporate Transparency Act

The Corporate Transparency Act is the most robust anti-money laundering legislation since the Patriot Act, passed in 2001 in response to the terrorist attacks of 9/11. A congressional presidential veto override passed the Act into law on January 1, 2021. The primary objective of the Act is to create a national database of information identifying individuals who, directly or indirectly, own a substantial interest in or hold significant control over certain types of entities. The intent of the act and the rules and regulations implementing the Act is to “protect the U.S. financial system from illicit use.” If you are a small business owner, you must register with and continually update information in this database.

The United States Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued final rules on September 30, 2022, implementing Section 6403 of the Corporate Transparency Act, also called the Beneficial Ownership Information Rules (“BOI Rules”).

Beneficial Ownership Secure System

The Corporate Transparency Act Requires all existing and future entities filed with the secretary of state to personally inform a national database called the Beneficial Ownership Secure System (BOSS). Law enforcement agencies, taxing authorities, some lenders, and a few other potential users for specified purposes will have access to the national database upon request.

Reporting entities will submit their Beneficial Ownership Information Report (BOI Report) through the Beneficial Ownership Secure System being developed by FinCEN to receive, store, and maintain BOI. The Corporate Transparency Act authorizes FinCEN to collect that information and disclose it to authorized government authorities and financial institutions, subject to effective safeguards and controls. Notably, all reports submitted through the BOSS will be exempt from search and disclosure under the Freedom of Information Act.

Who is Affected by the New Regulations?

The new regulations affect three classifications of parties: Entities filing with the State; Beneficial Owners; and Company Applicants.

Entities Filing with the State: With a few exceptions, all existing and future corporations, limited liability companies, and other legal entities that are created by filing a document with the Secretary of State or a similar office under the law of the state.

Entities such as the following are exempted from this requirement:

· An issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934.
· Bank, credit union or depository institution.
· Money transmitting business registered with FinCEN.
· Broker or dealer in securities.
· Investment company or investment adviser.
· Insurance company.
· A futures commission merchant.
· Any public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act.
· Public utility.
· Pooled investment vehicle.
· Tax exempt entity that is described in section 501(c) of the Internal Revenue Code (“Code”).
· A political organization as defined in section 527(e)(1) of the Code.
· A trust described in paragraph (1) or (2) of section 4947(a) of the Code.

Beneficial Owners: Any individual who directly or indirectly exercises substantial control over a reporting company or owns or controls over 25 percent of ownership interest. Ownership interests include equity, capital or profits interests, convertible instruments, warrants, rights, options, privileges to acquire equity, capital, or other interests and arrangements.

What is Substantial Control?

The regulations indicate that Substantial Control considers all forms of substantial control over a reporting entity including but not limited to:

1. Individuals who provide service as a senior officer of a reporting company. This does not include individuals with ministerial functions such as a corporate secretary and treasurer;
2. Individuals who have the authority to appoint or remove senior officers or a majority of the board; and
3. Individuals who direct, determine, or have substantial influence over important decisions made by a reporting company.

Company Applicants: Any individual who files the document with the State (Ison Law generally serves as a company applicant for our clients).

When Must Reports be Filed?

The Corporate Transparency Act goes into effect on January 1, 2024. Any businesses filed after that date will have 30 days to register with the national database. Any companies filed before January 1, 2024, will have until the end of 2024 to register with the national database.

What Must Be Reported?

The following information must be provided for compliance with the Corporate Transparency Act:
1. The company’s full legal name and any other trade name or dba used by the company.
2. The principal place of business of the company.
3. The EIN for the company.
4. The full legal name of all Beneficial Owners.
5. The residential street address of the Beneficial Owners.
6. An identifying number from a passport, license, or state-issued ID card.
7. An image of the passport, license, or ID card.

If any of the above information changes during the company’s existence, the reporting company must update the national register.

What Happens if I Do Not Report?

Violation of the reporting requirements is subject to penalty. A civil penalty of up to $500 per day may be imposed for an individual’s reporting violation until the violation is remedied. A criminal fine of up to $10,000 and/or imprisonment of up to two years may also be imposed.

What Should I Do? A Year to Prepare

Knowing about the Corporate Transparency Act now allows us a year to prepare. There has yet to be an implementation of processes or infrastructure for compliance with the Corporate Transparency Act. We will continue to monitor and provide updates on when and how this affects our clients.

Please call us to discuss the Corporate Transparency Act and what it means for your situation.

Ison Law
10348 Sawmill Road, PO Box 1108
Powell, OH 43065
614.336.3083
dave@ison.law
grant@ison.law
Ison.law