The Corporate Transparency Act: What you need to know

As of Jan. 1, 2024, most small businesses will be required to file Beneficial Ownership Information (BOI) reports with the federal government under the Corporate Transparency Act. The act is intended to help law enforcement combat the use of shell companies for money laundering, terrorism, and other illegal activities.

Unless they are exempt from the act, corporations, limited liability companies, and other reporting companies must provide the government with information about their beneficial owners—the people who own or control the company. New businesses are also required to provide information about the people who prepared and filed business formation documents. Reporting companies could face civil and criminal penalties if they don't file the required report.

While the Corporate Transparency Act sounds like a law aimed at big corporations, it's actually most likely to apply to small businesses, including a limited liability company with just one or two owners. Here's what small business owners need to know to stay in compliance with the new law.

Beneficial ownership information reporting

The Corporate Transparency Act (CTA) is the product of more than a decade of Congressional efforts to enact legislation cracking down on anonymous shell companies. Shell companies often have legitimate purposes, but they are also commonly used to shield money laundering, tax fraud, and other criminal activity. The act seeks to increase transparency regarding business ownership as a means to curb the use of U.S. business entities for illegal activity.

Under the Corporate Transparency Act, new and existing businesses that meet the definition of a reporting company must file a BOI Report with the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN). The report provides information about the identities of the beneficial owners of the business. A beneficial owner is anyone who directly or indirectly exercises substantial control over the business entity, or who owns 25% or more of the business. Businesses formed on or after Jan. 1, 2024, must also provide "company applicant information" about individuals filing business formation or registration paperwork.

Information contained in the BOI reports will be stored in a highly secure database within FinCEN. The database will not be accessible to the public. FinCEN will only disclose beneficial ownership information in limited circumstances. Those circumstances include requests from federal agencies to further national security, intelligence, or law enforcement activity; a court-authorized request from Tribal or state law enforcement agencies for a criminal or civil investigation; and a request from a federal agency on behalf of certain foreign law enforcement. Financial institutions and their regulators may also have access to information in certain situations, with the consent of the reporting company.

Definition of a reporting company

The Corporate Transparency Act requires reporting companies to file beneficial owner information reports unless they qualify for one of the exemptions listed in the act.

Domestic reporting companies are corporations, LLCs, limited partnerships, and other business entities created by filing documents with the state secretary of state or similar office, or with a Native American tribe. Foreign reporting companies are businesses formed in a foreign country that have registered to do business in any state or with a Native American tribe.

A sole proprietorship or informal business partnership is not considered a reporting company and does not have any reporting requirements under the Corporate Transparency Act.

Common exemptions under the Corporate Transparency Act

Limited liability companies, corporations, and limited partnerships are reporting companies that must file beneficial owner information unless they fall within one of the 23 exemptions listed in the act. Most of the exemptions apply to larger companies and specific regulated industries, so small businesses will usually need to file a BOI Report.

Here are some of the most common types of exempt entities:

• Large operating companies. To qualify for this exemption, a business must meet several criteria:
  • Have an operating presence at a physical location in the United States
  • Have more than 20 full-time employees in the U.S.
  • Filed a tax return last year reporting more than $5 million in gross receipts or sales (not including foreign receipts or sales)
• Publicly traded companies. Companies registered under Section 12 of the Securities and Exchange Act of 1934 are exempt. Also exempt are entities that are required to file supplemental and periodic information under section 15(d) of the 1934 Act.
• Nonprofits. This exemption covers certain tax-exempt entities described in Section 501(c) of the Internal Revenue Code, as well as political organizations under Section 527(e)(1) of the Code, and trusts described in paragraph (1) or (2) of Section 4947(a) of the Code. Certain entities that advise tax-exempt entities are also exempt.
• Inactive businesses. To qualify for this exemption, a business must have existed prior to 2020, must not be conducting active business, cannot have any foreign owners, must not have had an ownership change in the last 12 months, must not have sent or received more than $1,000 in the past 12 months, and must not have any assets.

Other Corporate Transparency Act exemptions

Additional Corporate Transparency Act exemptions apply to businesses in certain sectors:

• Banks and related industries. There are exemptions for banks, credit unions, bank or savings and loan holding companies, and money-transmitting businesses.
• Securities-related businesses that have registered with the Securities and Exchange Commission. These include securities brokers and dealers, securities exchanges and clearing agencies, other exchange-act registered agencies, investment companies, investment advisers, and venture capital fund advisers.
• Insurance companies. State-licensed insurance producers that maintain a physical office in the U.S. are also exempt.
• Commodity exchange-act registered companies
• Public utilities
• A financial market utility
• A pooled investment vehicle
• Entities that exercise governmental authority

Exempt entities will need to file a BOI Report if there are changes to the business in the future that cause them to lose their exemption.

Reporting companies' reporting obligations

LegalZoom can help you with filing your Beneficial Ownership Information Report. BOI reports also can be filed with FinCEN electronically through FinCEN's website. The obligations are as follows:

• Reporting companies formed or registered before Jan. 1, 2024, have until Jan. 1, 2025, to file their initial BOI Report.
• A reporting company formed or registered during 2024 must report beneficial owner information within 90 days of receiving actual or public notice that the company was formed or registered.
• Reporting companies formed or registered on or after Jan. 1, 2025, must file their initial BOI within 30 days of receiving actual or public notice that the company was formed or registered.

There is no fee to file the report. If you have questions or need guidance on completing the report, consult with an attorney from LegalZoom's independent network; an outside attorney; or an accounting firm.

FinCEN's website cautions businesses to avoid BOI Report filing scams. Scam letters and emails may have titles like "Important Compliance Notice" and solicit businesses to pay a fee or click on a link or QR code to file the report. FinCEN itself does not send unsolicited requests.

The Corporate Transparency Act imposes severe civil and criminal penalties for willfully failing to file a BOI Report. Civil penalties include daily fines of $500 for continuing violations, up to a maximum of $10,000. Criminal penalties may include up to two years of imprisonment.

Beneficial Ownership Information: Who to include

All non-exempt reporting companies must include information about their beneficial owners in their BOI Report. Reporting companies formed or registered on or after Jan. 1, 2024, must also provide company applicant information about the individuals who filed formation or registration documents with the state.

Beneficial owners

A beneficial owner is someone who owns 25% or more of the business or who exercises substantial control over the business. In a corporation, ownership interests are commonly determined by shares of stock. In an LLC, ownership interests may be divided into "membership interests" or "membership units."

While determining percentage ownership interests may be fairly straightforward, it can be harder to identify who has substantial control over the business. FinCEN identifies four types of individuals who exercise substantial control:

1. A senior officer of the company, such as president, chief executive officer, chief operating officer, chief financial officer, general counsel, or other person serving in a similar office or function.
2. A person who has the authority to appoint or remove officers or a majority of the board of directors or other governing board.
3. An important decision-maker. Important decision-makers have the authority to make major choices about the business, including the nature and scope of the business, major contracts, significant financial matters, and the structure of the business.
4. Any other form of substantial control over the reporting company.

Exceptions

There are a few exceptions where someone who would otherwise be a beneficial owner is exempt from reporting. These include minors and employees carrying out their employment duties.

FinCEN's BOI Reporting Requirements Small Business Compliance Guide has flow charts and examples to help you determine who is a beneficial owner of your business.

Company applicants

Domestic reporting companies formed in 2024 or later, and foreign businesses that registered to do business in a state in 2024 or later must also include company applicant information in their beneficial owner information report.

There are two types of company applicants, and your business may have only one, or both. The person who actually submits business formation or registration paperwork for filing with the state is known as the "direct filer." All reporting companies will have a direct filer.

If a person other than the direct filer was responsible for directing or controlling the filing with the state, that person must also be listed as a company applicant on the BOI Report.

Preparing the BOI

The BOI Report can be filed electronically through the FinCEN website. Here's the information you'll need to gather about your company and its beneficial owners and company applicants before you file.

Information about your business:

• Full legal name of the business.
• All trade names, fictitious business names, or dbas.
• Full business address of the company's principal place of business in the U.S. If the company does not have one, provide the complete address of the primary U.S. location where the company conducts business.
• The state, Tribal, or foreign jurisdiction where the business entity was formed.
• For companies formed in a foreign country, the state or Tribal jurisdiction where the company was first registered.
• The company's IRS taxpayer identification number. If a foreign company does not have a U.S. tax identification number, list a foreign tax ID number and the name of the jurisdiction that issued it.

Beneficial owner information and, if required, company applicant information:

• Full legal name
• Date of birth
• Current residential street address
• An image of the individual's unexpired U.S. passport, state driver's license, or ID card issued by a U.S. state or local government or Native American tribe. If the individual does not have any of these documents, an image of a foreign passport. You must also provide the document number and issuing jurisdiction.

FinCEN accepts business' beneficial ownership information reports.

Will I need to renew, update, or correct my BOI Report?

Although BOI reports don't expire or need to be renewed, they must be kept up to date. If a reporting company no longer qualifies for an exemption, it must file an initial BOI within 30 days of ceasing to qualify. If there is any change to the information reported in your BOI about your company or its beneficial owners, you must file an updated BOI within 30 days of the change. However, you don't have to update personal information about a company applicant.

This means you may have to update your beneficial owner information if you have a new chief executive officer or a new dba if an owner dies or leaves the company, if the business moves to a new location, or if one of the beneficial owners moves to a new address. If a beneficial owner moves and gets a new driver's license or other ID document as a result, you'll also need to upload an image of that document.

What if I made an error?

If you make a mistake on your BOI Report, you're required to file a corrected report within 30 days of learning of the inaccuracy.

Frequently asked questions

What is the Corporate Transparency Act that took effect Jan. 1, 2024?

The Corporate Transparency Act (CTA) is part of the Anti-Money Laundering Act of 2020, which is part of the National Defense Authorization Act for Fiscal Year 2021. The act imposes reporting requirements on businesses, which must disclose beneficial ownership information to the federal government. 

Prior to the effective date of the Corporate Transparency Act, it was up to financial institutions to collect beneficial ownership information at the time accounts were opened and maintain a database of that information. The Corporate Transparency Act shifts the burden of collecting beneficial owner information away from financial institutions and places it on business owners themselves.

The act is intended to help federal and state law enforcement agencies improve law enforcement efforts regarding money laundering, tax fraud, and other crimes that often involve the use of anonymous shell companies. Law enforcement agencies' enforcement efforts are often frustrated by an inability to trace a company's ownership or identify the individuals primarily responsible for the company's operations.

Who is exempt from the Corporate Transparency Act?

The act applies to "reporting companies," which include domestic business entities that were created by filing documents with a state or Native American tribe, as well as foreign business entities that have registered to do business in a state or tribe. It does not apply to sole proprietorships, general partnerships, and other businesses that have never filed business formation or registration paperwork.

The act contains many exemptions. Large businesses, publicly traded companies, nonprofits, and businesses that operate in the banking, insurance, and securities industries are the primary types of businesses that are exempt from the act. Also exempt are certain inactive businesses.

Most small business LLCs and corporations will not fall within an exemption and will be required to file a BOI Report.

What are the requirements for the Transparency Act?

The Corporate Transparency Act requires reporting companies to file a report with the government. The report lists information about the company and its beneficial owners—people who own 25% or more of the business, and people who exercise substantial control over the business.

The act applies to LLCs, corporations, and other types of business entities formed by filing documents with the secretary of state or similar office. It also includes U.S. business entities and foreign businesses that have registered to conduct business in a U.S. state. There are exceptions for large companies and businesses in the financial sector, but many small businesses will be required to file reports.

In addition to beneficial ownership information, a reporting company formed or registered in 2024 or later must report information about company applicants. Company applicants are individuals who file paperwork with the secretary of state or similar office to create or register a business, and individuals who direct the filing.

Existing entities created or registered before the effective date of the act, Jan. 1, 2024, must file an initial beneficial ownership information report before Jan. 1, 2025. Reporting companies created or registered during 2024 will have 90 days to file a report, and businesses formed in 2025 or later will have 30 days.

An initial BOI Report can be filed electronically at no charge on the FinCEN website. No further fillings are necessary unless there is a change in the information reported or a correction is needed.