If you represent small businesses, you are likely aware of the Corporate Transparency Act (CTA) which went into effect on January 1, 2024. Understanding the intricacies of this Act and how it affects small businesses is crucial to your continued representation of these clients as failing to file or update the necessary report could result in civil or criminal penalties. Below are a few answers to FAQs to introduce the Act and its reporting requirements:

What is the Corporate Transparency Act?

The purpose of the CTA is to collect more ownership information for U.S. businesses as a means of combatting tax fraud, money laundering, and financing for terrorism. Enacted in 2021 but going into effect January 1, 2024, certain businesses must now submit a Beneficial Ownership Information (BOI) Report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), providing details about those individuals associated with the company.  

Companies required to file are referred to as “reporting companies.” The two types of reporting companies are:   

• Domestic reporting companies – These include corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
• Foreign reporting companies – These are entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.

Who is considered a beneficial owner of a company?

An individual is a beneficial owner for purposes of the CTA if they have a direct or indirect ownership stake in the company. Specifically, a beneficial owner has substantial influence on the company’s decisions or operations, owns a minimum of 25% of the company’s shares, or has a similar level of control over the company’s equity. For example, senior officers of the company, individuals with the authority to appoint or remove officers, and those with important decision making authority concerning the company’s business, finances, and structure are considered beneficial owners.

What information must be reported?

The details that companies need to include in the BOI report vary based on the date the business was established. If the company was registered or established after January 1, 2024, the business must provide the owners’ and applicants’ (if applicable) names, addresses, birthdays, and any identification numbers (such as a license of passport number), and the jurisdiction of the documents.

However, all reporting companies must provide their:

• Legal name
• Trademarks
• U.S. address
• Tax identification number
• Jurisdiction of formation or registration

When must the BOI report be filed?

For qualifying reporting companies established before January 1, 2024, the initial BOI reports must be filed by January 1, 2025. For companies established in 2024, the company has 90 days from its formation or public announcement (whichever comes first) to file the BOI report. After January 1, 2025, businesses have 30 days from notification or public announcement of their formation to submit their initial report.

No annual reporting requirement has been set. However, companies may be required to update their information after the initial filing. If circumstances change, such as the business address, legal name of one of the owners due to marriage or divorce, or changes to operations such that a new person now has substantial control of the business, companies could be required to update their filings in as little as 30 days after the event.

How do you report beneficial ownership information?

If a company is required to report beneficial ownership information to FinCEN, they will do so electronically through a secure filing system available via FinCEN’s website.

What does this mean for attorneys counseling businesses?

When counseling your clients concerning their duty to file the BOI report, you may be asked to advise them about whether a particular individual qualifies as a “beneficial owner.” Or, you may be asked to determine whether they are obligated to file at all. By performing such analysis, you are providing legal advice. Should you provide inaccurate legal advice, your client may file a malpractice claim against your firm for any potential damages incurred. As an AttPro insured, rest assured, your policy does not contain a specific exclusion that would preclude coverage for a negligent act, error, or omission by an insured providing legal services related to the Corporate Transparency Act. Of course, coverage for any claim depends on the facts and circumstances of the claim and the terms and conditions of the policy.