Small Business Owners Need to Register Under The Federal Corporate Transparency Act

Most small business owners in the US need to register with the Government due to the Corporate Transparency Act (CTA).  Any company that is or was created by filing with the Department of State or similar governmental agency is a “reporting company” that is covered by the CTA.  That will cover just about all corporations, LLC’s, LP’s, LLP’s and many non-profit corporations in Pennsylvania.

Under the CTA, the “beneficial owners” of these “reporting companies” need to provide the following information to the government:

• Name;
• Date of birth;
• Address; and
• Copy of either a non-expired U.S. driver’s license, a non-expired U.S. passport, or a non-expired identification document issued by a State.

Here are some frequently asked questions about the CTA as it relates to small businesses.

What is the Corporate Transparency Act?

The CTA was passed in early 2021. We discussed this topic at that time. It was intended to curb money laundering and “illicit finance.” For many companies in the United States, the people who actually own the company – and are responsible for the finances of the company – are hidden behind layers of ownership, holding companies, limited partnerships, fictitious names and similar legal entities. The CTA was intended to cut through those layers. The CTA requires the “beneficial owners” of most companies to register their names and identities with federal government.  The Financial Crimes Enforcement Network, or “FinCEN” the agency that enforces the CTA, says:

The purpose of this law is to make it more difficult for smaller business entities to engage in money laundering by requiring these entities to provide information about the natural persons who directly or indirectly own or operate the entity.

How does the CTA affect small businesses?

Unfortunately, the CTA casts a very wide net. It applies to any type of legal entity that has any state registration. That includes corporations, LLC’s, Limited Partnerships, Business Trusts, etc. Any entity that filed with the Department of State is subject to the registration requirements.

Are there any exemptions?

There is a list of 23 kinds of entities that are exempt from registration.  Most of these are entities that have to file with other governmental agencies.  That includes banks, credit unions, securities services, investment advisors, public accounting firms, and insurance companies.

There is also an exemption for “large operating companies.”  Companies are exempt if they have more than 20 employees or has more than $5 million in gross receipts annually.

There is an exemption for tax-exempt entities that are qualified under Section 501(c) or 527(e)(1) of the Internal Revenue Code. This does not necessarily include all non-profit corporations formed under state law.  For example, condominium and homeowners’ associations are non-profit organizations under state law, but this exception does not apply. Community associations are generally subject to Section 528 of the Internal Revenue Code. They usually do not meet the requirements of a charitable organization under Section 501(c).

Who has to register their personal information?

The CTA requires “beneficial owners.”  A “beneficial owner” is defined as someone who either owns at least 25 percent of the entity or someone who “exercises substantial control over the entity.”  FinCEN has published a “Small Entity Compliance Guide” that helps with  CTA and especially who is a  “beneficial owners” who must register.

Ownership interests are defined very broadly. Any of the following may be an ownership interest: equity, stock, or voting rights; a capital or profit interest; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership.

An individual exercises substantial control if the individual meets any of four general criteria: (1) the individual is a senior officer; (2) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company; (3) the individual is an important decision-maker; or (4) the individual has any other form of substantial control over the reporting company.

When is registration required?

For entities that existed before January 1, 2024, the beneficial owners need to register before the end of the year. New entities have to register within 90 days after being formed.

Entities also need to update their registration within 30 days of any changes. This includes every time a beneficial owner changes their driver’s license.

How do we register?

Entities are required to report online with FinCEN. For existing reporting companies, anyone can fill out the form.  For entities formed after January 1, 2024, the registration must be completed by a “company applicant.”  The “company applicant” who fills out the registration needs to have an account with FinCEN to file reports. A company applicant can be the entity itself, or someone like a law firm or accountant. RKG Law is a registered company applicant. We are completing registrations for many companies and can register any community association that requires a registration. That includes sending out reminders before elections so that the registration can be updated.

What happens if we do not register?

The penalties under the CTA are quite serious. From the FinCEN website:

a person who willfully violates the … reporting requirements may be subject to civil penalties of up to $500+ for each day that the violation continues. That person may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000. Potential violations include willfully failing to file a beneficial ownership information report, willfully filing false beneficial ownership information, or willfully failing to correct or update previously reported beneficial ownership information.

What happens to my personal information?

Small business owners are nervous about providing personal information required by the CTA. FinCEN says that this information is just stored in a database and is only accessible by their agency. My personal opinion is that the government already has my name, address and driver’s license and passport. So, I am not giving up any privacy by filling out this registration.

Small business owners should be concerned about who they give information to in order to register with FinCEN. We have already seen an increase in cottage industries of people offering to make registrations. Some of these may be legitimate, but I am sure that some are shams, just waiting to steal information.  For law firms, that information will be confidential client information. Firms like RKG Law – and many others – are used to handling private, personal information, and have security measures like encryption to make sure personal information is not disclosed.

At the end of the day, the CTA is fairly simple. Most small business owners and directors and board members of other entities will need to provide their name, birthdate, address and driver’s license to FinCEN. That registration needs to be updated every time information changes. Complying with the CTA is a matter of providing the initial filing and then being diligent with updates after elections.