KHVPF Insight

The Corporate Transparency Act: What Business Owners Need to Know

The Corporate Transparency Act (“CTA”), which took effect January 1 of this year, requires most privately held corporations, LLCs, and other businesses registered in the United States (“Reporting Companies”) to report identifying information about their beneficial owners and the people who filed the entity’s formation documents to the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). The law is extraordinarily broad in its coverage. While there are 23 exemptions— mostly covering entities already subject to oversight, like publicly-traded companies, insurance companies, and banks—there is no exemption for small businesses. That is by design: the CTA is intended to make it difficult for bad actors to use shell companies or other anonymous ownership structures for the purposes of money laundering, fraud, financing for terrorism, and similar illegal activities.

Under the CTA, Reporting Companies must submit a Beneficial Ownership Information (“BOI”) Report to FinCEN. A “Beneficial Owner” is anyone with a significant ownership stake in a company, meaning that the person owns at least 25% of the company’s shares or exercises “substantial control” over the company. A person has “substantial control” if, among other things, they are a senior officer, hold the authority to appoint or remove officers, or are an “important decision-maker” for the company. The CTA also requires Reporting Companies to file updates when a beneficial owner’s identifying information changes, including obtaining a new address, a new driver’s license, changes due to marriage or divorce, and changes in the operations or duties within the company.

The practical effect of the CTA—with its application to nearly every small business formed in America, and its demand for personally- identifying information—will be to dramatically increase regulatory requirements and potentially infringe on privacy rights. One group of small businesses has obtained a permanent injunction in an Alabama federal district court (National Small Business United v. Yellen) on the theory that the CTA unconstitutionally exceeded the Congress’s powers. This injunction, however, applies only to the specific plaintiffs in that case, and it is widely expected that the Alabama court’s decision will be overturned on appeal.

For everyone else, the law is currently in effect. Entities that formed prior to January 1, 2024 are required to submit their initial Beneficial Ownership Information Report by December 31, 2024. Any new entities formed after January 1, 2024 are required to file a BOI within 90 days of formation—meaning, for some newer entities formed in the first quarter of this year, they may already be in violation of the reporting requirements. Given the substantial civil and criminal penalties for willful failure to report, all businesses must take steps to ensure compliance.