Almost all small businesses—including corporations, partnerships, and limited liability companies—will be impacted by the Corporate Transparency Act on Jan. 1, 2024. The process will require disclosure of certain information to the Department of Treasury’s Financial Crimes Enforcement Network. Owners and operators of small businesses (or anyone establishing legal entities for other purposes, such as owning real estate investments) should take measures to prepare.

The Corporate Transparency Act is a federal anti-money laundering law passed in 2021 as part of the National Defense Authorization Act. Congress has been concerned for decades about the use of “shell companies” to facilitate criminal activity, tax evasion, terrorist financing, and—more recently—human trafficking.

The CTA directs FinCEN to develop a process for the reporting of beneficial ownership and company applicant information by “reporting companies.” Since the CTA’s enactment, FinCEN has moved forward with implementation of this directive, in anticipation of the reporting requirements becoming operative on the effective date.

As with many federal regulatory regimes, Congress has cast a very wide net. Reporting companies are defined broadly and can include both new and existing entities as well as domestic and foreign entities. Essentially, any legal entity will be considered a reporting company.

However, the CTA exempts 23 categories of companies. Unfortunately for small companies, most of the exemptions apply to larger entities that already make similar beneficial ownership disclosures. For example, the “Large Operating Company” exemption applies to companies that employ more than 20 full-time employees in the US, have a prior-year tax return showing more than $5 million in gross receipts or sales, and have an operating presence in a physical office in the US.

Who Is Exempt?

The first step in preparing for compliance in the new year is to identify whether an exemption could apply. For companies that are part of a larger organizational structure made up of multiple layers of entities, each entity will need to be analyzed on a case-by-case basis.

If an exemption is unavailable, there’s a handful of essential steps that companies can take now to make the compliance process less painful come Jan. 1:

• Identify: For your existing entities, determine your “beneficial owners” and “company applicants.” In general, a beneficial owner is anyone who either owns, directly or indirectly, more than 25% of the interests in your entity, or exercises substantial control over the entity (including for example, senior officers, or a person that has approval over major decisions). A company applicant includes the person who formed the entity and persons who are primarily responsible for directing or controlling the applicable entity formation filing.
• Collect: Begin to gather the beneficial owner and company applicant information that must be provided to FinCEN. This data includes each such person’s (a) full legal name, (b) date of birth, (c) business—and for beneficial owners, residential—address, and (d) unique, non-expired identifying number, such as from a driver’s license or passport—an image of this document is also required. Alternatively, beneficial owners and company applicants can apply for a unique identifier number from FinCEN.
• Establish: Develop internal protocols to ensure timely compliance with the CTA’s reporting requirements. Entities created prior to the effective date must file their initial reports with FinCEN by Jan. 1, 2025. Entities created on or after the effective date must file their initial reports within 30 days. Any corrections or updates must be made within 30 days.
• Review: Consider updating your entity’s governing documents to include (or, for documents still being negotiated, consider including) provisions that obligate partners and investors to provide management with their necessary beneficial ownership information.
• Protect: Consider changes to your privacy policy that contemplate compliance with the CTA.
• Train: Identify company applicants, and ensure they have the knowledge and resources to comply with ongoing reporting requirements.
• Budget: Include appropriate monetary and time resources to comply with the beneficial ownership reporting requirements in your budgeting and planning for 2024. FinCEN cost estimates per report range from $85 for companies with a simple ownership structure to almost $2,200 for more complex companies. In addition, initial reports are estimated to take up to 650 minutes to complete. These projections, in our estimation, are dreadfully low.

The CTA is one of the most significant and impactful pieces of legislation of this century that will affect nearly all small business and real estate owners and operators. Compliance can seem daunting, but with proper planning, companies can set themselves up for success and avoid unnecessary fire drills beginning in the new year.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Matthew Flower is a partner in the corporate, funds and M&A practices at Morris, Manning & Martin, where he represents clients in a broad range of transactional matters, including mergers and acquisitions, joint ventures, reorganizations, private securities offerings, fund formations, strategic investments, and general corporate matters.

Matthew Peurach is a partner in Morris, Manning & Martin’s corporate, funds and tax practices, where he focuses his practice on structuring commercial real estate transactions, negotiating and drafting partnership agreements and LLC agreements documenting equity investments, and structuring private equity funds and other joint venture-related entities.

Lili Martin-Mashburn is an attorney in the funds and tax practices at Morris, Manning & Martin. She has a comprehensive background in structuring and consummating commercial real estate transactions, including private equity funds and joint venture arrangements.

Write for Us: Author Guidelines