The Corporate Transparency Act (CTA) was passed into law in 2021, as a Congressional act overriding at least a portion of former President Trump’s veto of the National Defense Authorization Act. The Act is aimed at making it more difficult to own and operate an anonymous shell company, with the end goal of making life more difficult for money launderers, terrorists, and criminals who have used shell companies to shuffle money around to evade law enforcement. Previously, banks and financial institutions had to collect information about who actually owned companies, but the CTA will flip the burden onto the companies themselves and imposes penalties for noncompliance.
The CTA creates a couple terms that must be understood:
- Beneficial Owner – a natural person who directly or indirectly exercises substantial control over a corporation or LLC; owns 25% or more of the equity in the corporation or LLC; or receives “substantial economic benefits from the assets of a corporation or LLC.”
- Reporting Company – a corporation, LLC, or other similar entity that is created with the Secretary of State or similar office of a state or foreign country, registered to do business in the United States by filing a document with said secretary or office. There is a list of exempt organizations that are not “reporting companies,” but the only one particularly relevant to real estate agents is the exemption for a business that employs more than 20 employees on a full time basis [not independent contractors; employees], files income taxes in the US with gross receipts of sale in excess of $5 million, and has an operating presence at a physical office within the United States.
Under the CTA, anyone who applies to form a corporation or LLC in the United States [and presumably anyone with beneficial ownership of a corporation or LLC as of 2024] must file a report with the Financial Crime Enforcement Network of the Department of the Treasury (FinCEN). The report must identify each beneficial owner by full legal name, date of birth, current residential or business street address, and must provide a “unique identifying number from a non-expired passport issued by the United States, a non-expired personal identification card, or a non-expired driver’s license issued by a state.” Collectively, the submitted information is known as “Beneficial Ownership Information,” or “BOI.” If the applicant submitting the form to FinCEN is not the beneficial owner, the applicant must provide their version of BOI as well. Similarly, each year, beneficial owners must submit a report to FinCEN that outlines the current beneficial owner(s) and any changes in the beneficial ownership over the last year.
Knowingly providing false information on beneficial ownership or willfully failing to comply with the CTA requirements will result in up to $10,000 in civil penalties, and up to 3 years in prison. On the bright side, mere negligent failure to provide the required information will not result in civil or criminal penalties.
In March of 2024, National Small Business United sued the Department of the Treasury in the Northern District of Alabama and received a declaratory judgement that the Corporate Transparency Act exceeded congress’s powers and the court stopped the enforcement of the Corporate Transparency Act, but only against the plaintiffs in the case. The case was appealed on March 11, 2024 by the Department, but the appeal is ongoing and the court’s ruling still holds. Everyone other than Isaac Winkles, companies owned by Isaac Winkles, and members of the National Small Business Association (who were members on or before March 1, 2024), will still need to comply with the Corporate Transparency Act and report BOI to FinCEN.
Lastly, FinCEN has noted that there is a scam that has come about where fraudsters are impersonating FinCEN and asking for a payment to file BOI. FinCEN does not contact anyone and ask for payments, there is no fee to file BOI. If the correspondence asks you to click on a URL or scan a QR code, those are fraudulent. References to “Form 4022” are also fraudulent because FinCEN doesn’t have a Form 4022. If you get documents from the U.S. Business Regulations Department, those are fraudulent because no such department exists. In the early days of a regulation like this, be abundantly cautious because unethical actors regularly attempt to take advantage of the shifting landscape to bilk the honest and trusting.