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What is the Corporate Transparency Act and who it will impact?

32 million businesses across the U.S. will need to prepare for this upcoming change

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June 16, 2023

There’s no denying that business law can be complicated and difficult to understand, but at the same time has the potential to strongly impact business entities at both the state and federal levels.

Given the possible complexity and importance of any given law, it is important to track and understand changes in the law as they occur.

The Corporate Transparency Act is an example of such a law every U.S. business – including small and closely-held businesses – should be tracking right now.

The Corporate Transparency Act is the product of an anti-money laundering effort at the federal level and has been touted as a pivotal move toward greater clarity and accountability in business practices.

The act is designed to prevent financial crimes, such as money laundering, terrorism financing, corruption and fraud.

According to the Corporate Transparency Act, starting Jan. 1, 2024, more than 32 million organizations nationwide will be required to begin reporting personal information about the individuals and other entities involved in the formation, structure and management of their businesses.

This means businesses will be required to create and maintain a level of transparency regarding their owners and senior officers.

These new reporting requirements apply to almost all privately-held businesses with fewer than 20 employees and less than $5 million in annual revenue.

Under the act, these businesses will be required to report information about their senior officers and owners (specifically, those who directly or indirectly control 25% or more of the ownership interests or voting rights of the business), to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department.

Information reported to FinCEN will be stored in a confidential database accessible only to law enforcement and other financial institutions and includes names, dates of birth, addresses and passports or ID numbers.

Any changes to the beneficial owners or their information will need to be reported within 30 days of such change. 

Noncompliance penalties
Business owners who choose not to comply with the act’s reporting requirements can expect to face civil and criminal penalties, including fines up to $500 for each day of noncompliance – up to a maximum of $10,000 – and imprisonment for up to two years.

Time to prepare
With plenty of lead time, existing businesses should be ready to report information about their owners and senior officers sometime in 2024.

Entities formed prior to Jan. 1, 2024, will have one year to comply with the new rules with a Jan. 1, 2025, deadline.
Entities formed in 2024 or later, will have 30 days to report the necessary information.

To reiterate, reporting requirements will apply to all businesses regardless of whether they are formed before or after the act becomes effective.

While these additional reporting requirements may place significant obligations on the to-do lists of many small business owners, ultimately, the purpose of the new law is to minimize the impact of illegal activity by enhancing understanding of where businesses overlap. With these disclosures, the government hopes to track business ownership and control across individuals, therefore becoming better positioned to recognize and address financial crimes.

Questions, concerns
Even with the months of preparation time, this new reporting requirement may still raise questions and concerns for small business owners.

To avoid unwanted penalties, it’s important business owners have a solid understanding of how the new law affects their business.

Business owners should plan to consult with their legal team as soon as possible to create a game plan for complying with the Corporate Transparency Act in 2024, which will likely include the use of internal procedures to ensure continued compliance as changes in ownership or leadership occur over the life of the business.

In an upcoming column, I will go into more detail about reporting requirements, what information will need to be reported and potential exemptions that may apply.

To learn more about the Corporate Transparency Act, you can find the complete rule at federalregister.gov/d/2022-21020

Sadie Dupont is a business law attorney at McCarty Law LLP.

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