Small Business Alert: What You Need to Know About the Corporate Transparency Act and How to Avoid Costly Mistakes

The CTA does not apply to certain larger companies and regulated entities. To qualify for the Large Company Exemption, the entity must meet all three of the following conditions:

• More than 20 full-time employees in the U.S.
• A physical office located in the U.S.
• The company’s most recent U.S. tax filing reported annual revenue of $5 million or more

Entities controlled by large companies also qualify for an exemption if the parent company meets the Large Company criteria.

One of the most confusing aspects of the Corporate Transparency Act (CTA) for small business owners is determining who controls the company. The CTA requires businesses to report both direct and indirect beneficial owners who exercise control over the entity directly or through other means. For many small businesses, this can be unclear, particularly when control is exercised through voting rights, agreements, or even informal arrangements.

The CTA specifically seeks to identify those who have substantial control over the business, which can include individuals who:

• Have the ability to appoint or remove officers or directors
• Hold a significant percentage of the voting rights, even if they do not own a majority share
• Can influence key decisions about the company’s operations

This ambiguity in defining control often confuses small business owners, especially since the CTA requires the disclosure of indirect ownership, which means that someone who may not appear to have control on the surface but exercises influence through other means still needs to be identified. Small business owners may struggle to identify and report all relevant individuals who fall into these categories without clear guidance. This is one reason businesses hesitate to comply or delay filing until regulators clarify.

While the CTA aims to increase transparency and combat money laundering, recent legal challenges have confused small business owners.

In March 2024, the U.S. District Court for the District of Alabama ruled the CTA unconstitutional in National Small Business Association v. Yellen, temporarily halting enforcement for businesses involved in the lawsuit. This decision was a temporary victory for the 65,000-member NSBA. While FinCEN has since announced it will not enforce the CTA’s requirements for the plaintiffs during the appeal process, the case is expected to go to the Supreme Court.

For businesses formed after December 31, 2023, filing the Beneficial Ownership Information (BOI) form within 90 days of formation is recommended. For those in existence before 2024, it’s best to wait until late November 2024 for more legal clarity.

Failure to comply with the CTA can result in significant penalties. Companies that do not file or submit inaccurate Beneficial Ownership Information (BOI) may face civil penalties of up to $500 per day. The total fine for a continuing violation can reach up to $10,000. For willfully failing to comply or submitting false information, businesses and individuals could face criminal penalties, including fines of up to $500,000 and possible imprisonment for up to two years.

These penalties highlight the importance of staying informed and filing on time.

Despite the CTA’s impact on small businesses, its adoption has been slow. FinCEN initially anticipated that the CTA would result in 36 million new registrations, but as of recent reports, only 2 million filings have been submitted— far below expectations.

This slow adoption may be due to a few factors:

• The complex nature of the reporting requirements and a lack of clear guidance on critical issues such as indirect ownership and attribution
• Legal uncertainties, especially following a recent court ruling that temporarily halted the CTA’s enforcement for certain plaintiffs
• Some businesses may await final legal clarity before complying with the regulations

Small businesses, particularly those formed before 2024, should be aware of the deadline for filing—by late November 2024—to avoid penalties once the law is fully enforced.

As businesses navigate the complexities of the CTA, new scams have emerged, often exploiting confusion and the urgency to comply. For example, fraudulent entities may send phony communications claiming to be from FinCEN or other government agencies. These scams may involve fake letters with QR codes or official-looking notices demanding payment for assistance filing required forms.

Verifying any communication that seems suspicious or demands an immediate response is essential. Always contact the IRS or FinCEN directly via official channels to confirm the legitimacy of any requests. While the government assures that your Beneficial Ownership Information will be securely stored in the BOSS database, it’s important to consider who has access to this sensitive data. According to recent releases, the following entities have authorized access:

• Federal law enforcement, including security and intelligence agencies
• State and local enforcement, including prosecutors and judges
• Financial institutions and their regulators worldwide
• Foreign law enforcement and prosecutors
• Casinos and money service businesses (i.e., Check Cashing Company)

Given the sensitive nature of the information required under the CTA, business owners should be aware that while access is intended to be restricted, the wide range of authorized users still raises concerns about privacy and security.

Given the complexities of the Corporate Transparency Act, small business owners must stay informed about their obligations and ensure compliance. The law aims to increase transparency and fight illicit financial activity. While it’s essential to be proactive in meeting filing requirements, businesses must also remain vigilant against scams and identity theft attempts.

Suppose you’re unsure about the requirements or need assistance filing your Beneficial Ownership Information (BOI). In that case, it’s wise to consult with a legal or tax professional who can help you navigate the complexities of the CTA and ensure compliance.

For more information, visit the official FinCEN website, which provides helpful resources and answers to frequently asked questions.

Krumm & Associates