Startup and small business owners should brace themselves for a new federal filing requirement under the Corporate Transparency Act. Starting with January 1, 2024, this key legislation, aimed at enhancing transparency and combating financial crimes, mandates companies with fewer than 20 full-time employees and gross annual sales under $5 million to report their beneficial owners to the U.S. Treasury Department.
Purpose and Scope
The primary objective of the Act is to unveil the identities behind anonymous shell companies often used for money laundering, financing terrorism, and other illicit activities. This reporting requirement is estimated to apply to approximately 30 million entities and will be managed by the Treasury’s Financial Crimes Enforcement Network (FinCEN) in a confidential database accessible to law enforcement.
The U.S. has been under scrutiny for financial secrecy, with the 2022 Financial Secrecy Index ranking it as “the most secretive financial jurisdiction in the world.” These new rules aim to improve this standing, aligning the U.S. with other countries that have similar information-gathering practices.
Reporting Requirements
Key aspects of the reporting requirements include:
- Newly formed companies in 2024 must report within 90 days, while existing ones have until January 1, 2025.
- Reporting of beneficial owners, defined as individuals with substantial control or at least 25% ownership.
- Provision of detailed personal information for each beneficial owner, including name, birth date, address, and identification documents.
Non-compliance can result in significant penalties, including a $500 daily fine and criminal sentences of up to two years. However, the focus is on willful violations rather than unintentional errors or efforts to comply.
Anticipated Challenges
The Act’s unique requirement for filing updates within 30 days of any changes poses significant challenges. Businesses must remain vigilant about changes in ownership, addresses, or financial status to avoid non-compliance.
As the Corporate Transparency Act rolls out, it is expected to be a learning curve for many, with potential adjustments and clarifications by regulators. Businesses must stay informed and prepared for these new reporting obligations to avoid penalties and contribute to a more transparent financial environment.
