Beneficial ownership information reporting
Issue
The Corporate Transparency Act (CTA), enacted in 2021, requires the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) to collect beneficial ownership information (BOI) from millions of entities, mainly startups and small businesses.
The new Corporate Transparency Act requirements began January 1, 2024, and business entities subject to the rules now face significant new reporting and recordkeeping obligations.
Latest updates
In March 2024, a federal judge in Alabama ruled the CTA unconstitutional in response to a lawsuit brought by the National Small Business Association (NSBA). The Department of Justice has since appealed the decision, while FinCEN announced it is complying with the Alabama court decision and not enforcing the CTA against the plaintiffs of the lawsuit. This means that except for companies with membership in NSBA at the time the organization filed its lawsuit, all other new businesses formed in 2024 are still bound by the CTA and should plan to file with FinCEN until further notice. (NSBA had about 65,000 members as of March 2024.) Businesses should discuss their filing obligations with their legal counsel. Lawsuits to expand the class of companies protected from enforcement are likely to arise as more businesses and individuals in other jurisdictions file challenges.
State laws that mimic the federal CTA reporting requirements, such as the New York LLC Transparency Act, are not affected by the court’s decision. And proposed bills in some states, including California and Massachusetts, could also implement state-level beneficial ownership reporting requirements that would not be impacted by the federal court rulings.
To stay up-to-date with the CTA implementation and related court decisions, subscribe to Carta’s Policy Weekly newsletter.
Background
What is the Corporate Transparency Act?
The CTA is a law meant to aid the U.S. federal government’s law efforts to combat illicit financing and its ill effects by increasing transparency into the beneficial owners of certain corporate entities. The rules require companies to report their beneficial owners at the time of formation and periodically thereafter. Beneficial owners are the people who control a company or hold ownership in it, either individually or through a collective legal entity.
Beneficial ownership information (BOI) reporting requirements
Reporting companies: The CTA’s covered entities, or reporting companies, include certain domestic and foreign companies that are formed or registered to do business in the U.S., including corporations, limited liability companies (LLCs), and other legal entities.
Entities exempt from reporting
The BOI rules specifically provide a list of exemptions. Those exemptions include large operating companies that employ more than 20 people in the U.S., have revenue over $5 million, and have a physical office in the U.S., along with broker-dealers, issuers registered with the Securities and Exchange Commission (SEC), registered investment companies, SEC-registered investment advisers, and VCs who file with the SEC as exempt reporting advisers (ERAs), among others.
What they report: The reporting companies are required to report the name, birthdate, address, and provide an identification document (like a passport or driver’s license) for all “beneficial owners”— anyone that exercises substantial control over the reporting company, or who owns or controls at least 25% of it. In addition, each company must report those same details for its “company applicant,” the individual who is primarily responsible for registering the company to do business in the United States.
Corporate Transparency Act compliance dates
The timeline for CTA compliance depends on when a company was formed:
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Company formation date |
CTA compliance deadline |
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Before January 1, 2024 |
By January 1, 2025 |
|
In 2024 |
90 days from incorporation date |
|
On or after January 1, 2025 |
30 days from incorporation date |
Re-filing requirements
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After initial filings, companies have 30 days to file any updates, corrections, or changes to previously filed BOI reports.
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This includes any changes to an owner’s legal name, address, or other required details.
Penalties: The penalties for noncompliance include civil penalties up to $500 per day, and criminal penalties up to $10,000 and/or two years of imprisonment.
Corporate Transparency Act: Implications for startups and small businesses
The CTA aims to collect BOI from companies that aren’t already covered by an existing regulatory reporting regime. In effect, the CTA mandate and its reporting requirements have an immediate impact on the startup ecosystem because the law targets small businesses: Along with venture-backed startups, the law affects the majority of LLCs, partnerships, business trusts, and other non-public corporations.
Corporate Transparency Act compliance guidelines
FinCEN is continuing to work to implement the Corporate Transparency Act. The current rules are as follows:
BOI Reporting Requirements
BOI Access & Safeguards
BOI Collections
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Pending: Proposed Rule
Policy outlook
FinCEN representatives have testified that thirty-two million businesses are subject to the Corporate Transparency Act’s mandatory BOI reports through 2024, and approximately 5 million reports annually thereafter (comprised of new company and updated/corrected BOI reports).
Republicans have argued that the new filing requirements inflict excessive burdens on businesses and pose a risk to data security while Democrats have rallied behind the CTA compliance regime, urging additional funding for FinCEN to work on implementation and further development of guidance. Business, banking, and finance organizations have also testified in Congress about their concerns for small businesses.
Carta is here to help founders, startups, and other small businesses stay updated on the latest developments and explain how they impact the small business community. We are also helping the ecosystem painlessly navigate CTA compliance and filing.
Frequently asked questions
Q1. Can Carta help with the CTA filing?
A1. Carta is helping founders comply by offering a free CTA compliance solution, which became available when the new regulations went into effect on January 1, 2024.
Our CTA compliance solution is embedded in Carta’s free Launch plan, so startups (and their counsel) can use it even if the company has not raised any financing.
CTA compliance on Carta has been designed for ease-of-use, leveraging ownership data that’s already collected during the Launch onboarding process to populate the CTA filing. Carta’s KYC/AML technology allows for easy, secure collection of any additional pieces of data (e.g. photos of government IDs) that may be required from your company’s beneficial owners prior to submission. Read more here.
Q2. What happens if a reporting company does not file its BOI report with FinCEN or fails to update or correct the information within the required timeframe?
A2. If a person has reason to believe that a report filed with FinCEN contains inaccurate information and voluntarily submits a report correcting the information within 90 days of the deadline for the original report, then the CTA creates a safe harbor from penalty. However, should a person willfully fail to report complete or updated BOI to FinCEN as required under the law, FinCEN will determine the appropriate enforcement response. See the FinCEN compliance and enforcement FAQs here.
Q3. What are venture capital obligations under the CTA?
A3. Unless an exemption applies, entities formed or registered after January 1, 2024 will be required to disclose BOI to FinCEN within 90 days; existing entities will have to file an initial report by January 1, 2025. As described above, the CTA exempts 23 types of entities from BOI reporting, including
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SEC-registered investment advisers (RIAs)
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Venture capital fund advisers
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Pooled investment vehicles operated or advised by RIAs or venture capital fund advisers
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Large U.S. operating companies with 20+ full-time employees and $5 million in revenue
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Entities wholly owned or controlled by an exempt entity.
While many private funds appear to be exempted from the Corporate Transparency Act’s beneficial ownership reporting requirements, this may not be the case depending on the organizational structure of the firm and its regulatory reporting practices. Investment advisers should analyze their management structures and fund complexes to determine each entity’s CTA compliance obligations Read more on how the CTA impacts private funds here.
Q4. How do I know if my company is exempt from the reporting requirements?
A4. The CTA reporting rules exempt 23 specific types of entities from the reporting
requirements. An entity that qualifies for any of these exemptions is not
required to submit BOI reports to FinCEN. See the FinCEN Small Entity Compliance Guide for a checklist.
Get involved
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To learn more about how to get involved in Carta’s work to create public policy for tomorrow’s innovation economy, write us here.
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