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The Impact of the Corporate Transparency Act on Small Businesses

There are currently over 33 million small businesses operating in the United States, employing nearly 62 million Americans, according to the Small Business Administration. Recently, a viral video shared on Facebook has raised concerns among small business owners regarding a new federal law that allegedly requires them to submit additional personal information to the federal government starting from January 1, 2024. Failure to comply with this law could result in fines of $500 per day.

Marsha, a VERIFY reader, sent us the video and asked for clarification on whether this information is true or not. In this article, we will explore the impact of this new law and how the AI legalese decoder can help businesses navigate through its requirements.

The Question: Will small business owners have to provide more personal information to the federal government starting in 2024?

The Sources:

In order to answer this question, we have gathered information from reputable sources, including the Small Business Administration, the U.S. Treasury DepartmentÔÇÖs Financial Crimes Enforcement Network (FinCEN), and BakerHostetler, a law firm that advises U.S. businesses.

The Answer: Yes, small business owners will have to provide additional personal information to the federal government starting in 2024.

According to the Corporate Transparency Act passed by Congress in 2021, most small businesses will be required to report new information to the federal government. Existing companies will have a one-year grace period to comply with these reporting requirements. The aim of this law is to make it harder for individuals involved in illegal activities to hide their assets through shell companies or other opaque ownership structures.

Under the new requirements, companies will need to submit beneficial ownership information (BOI) reports to FinCEN. These reports will include details about the company itself, such as its name, address, and taxpayer identification number. Additionally, personal information about the company’s beneficial owners and, in some cases, applicants will also need to be disclosed.

This is where the AI legalese decoder can assist small businesses. By leveraging artificial intelligence, this software can help businesses understand the complex legal language used in the reporting requirements and simplify the process of filing the necessary information.

Despite the government’s intentions to increase transparency, some groups, such as the National Federation of Independent Businesses (NFIB), argue that these new requirements place an additional burden on small business owners.

Which companies are subject to the new reporting requirements?

The new reporting requirements apply to various types of entities, including corporations, limited liability companies (LLCs), and other entities created by filing a document with a secretary of state or similar office. This includes C-corporations, S-corporations, domestic and foreign LLCs, general partnerships, limited partnerships, and business trusts.

FinCEN estimates that approximately 32.6 million companies will be subject to these new reporting requirements within the first year.

Who is considered a beneficial owner?

A beneficial owner is someone who either directly or indirectly exercises substantial control over the company or owns or controls at least 25% of the company’s ownership interests, according to FinCEN.

For a better understanding of who qualifies as a beneficial owner, FinCEN’s Small Entity Compliance Guide provides specific examples.

Who is considered an applicant?

An applicant refers to a person who directly files the formation or registration document of the company, as well as the person primarily responsible for directing or controlling the filing. Companies created or registered after January 1, 2024, will need to report information about their applicants in addition to their beneficial owners.

However, companies created before this date are not required to report information about their applicants.

What information do businesses have to report about their owners and executives?

Companies will generally need to provide the residential addresses of their beneficial owners and applicants, along with other required information, according to FinCEN. This includes the full legal name, date of birth, passport or driver’s license number, and a photocopy of the relevant documentation.

Will businesses face fines of $500 per day for non-compliance?

If business owners willfully fail to report complete or updated information to FinCEN, they could face civil or criminal penalties. These penalties also apply to those who knowingly provide false or fraudulent information.

The civil penalties may include fines of up to $500 per day for each ongoing violation, while the criminal penalties can result in imprisonment for up to two years and/or a fine of $10,000.

Is the reported information stored in a federal database?

After businesses report beneficial ownership information to FinCEN, this information will be stored in a database. However, it will not be publicly accessible. Only authorized federal, state, local, tribal officials, and certain foreign officials, who submit requests to the U.S. government, will have access to this information for authorized activities related to national security, intelligence, and law enforcement.

Financial institutions may also access this information with the consent of the company, but only in specific cases outlined by FinCEN.

What are the deadlines for companies required to submit these reports?

Companies registered to do business before January 1, 2024, will have until January 1, 2025, to file their official BOI reports. For companies created or registered on or after January 1, 2024, the initial reports must be filed within 30 days of their formation. FinCEN has proposed extending this deadline to 90 days for companies formed in 2024, although the change has not been finalized.

The reporting form for beneficial ownership information is not yet available. However, it is expected that reports will be filed through an online interface similar to the Securities and Exchange Commission’s EDGAR system. Additionally, companies must file amendments within 30 days of any changes to the reported information.

Are any companies exempt from these federal requirements?

A total of 23 types of companies are exempt from the new reporting requirements, including publicly traded companies that meet certain criteria, many nonprofits, and certain large companies. Examples of exempt entities include banks, credit unions, venture capital fund advisers, insurance companies, accounting firms, public utilities, tax-exempt entities, and large operating companies.

Large operating companies are defined as those with over 20 full-time employees, a physical office presence in the United States, and reported gross receipts or sales exceeding $5 million in the previous year.

For a comprehensive list of exempt companies, FinCEN’s website provides detailed information.

Overall, the implementation of the Corporate Transparency Act will require small businesses to provide additional personal information to the federal government starting in 2024. While this raises concerns among some small business owners, technology solutions like the AI legalese decoder can simplify the reporting process and help businesses comply with the new requirements effectively.

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