Corporate Transparency Act for Startups
Overview
The Corporate Transparency Act (CTA) will negatively impact most startups by requiring them, starting in 2024, to disclose and upload certain personal information of their “beneficial owners” to the Financial Crimes Enforcement Network (“FinCEN” – part of the Treasury Department). The penalties for noncompliance are over-the-top excessive (up to $10K and 2 years in prison).
The CTA aims to fight terrorist financing, money laundering, and other illicit activities. Congress felt the U.S. made it too easy for these bad actors to hide behind corporations and other business entities and passed the CTA. So, they now want to know who owns, controls and manages all small companies and entities. If your revenue was less than $5M in 2023, you are a “reporting company” and subject to this law. 30-40 million businesses throughout the U.S. will need to file in 2024. Potential impacts to startups, as a result of the CTA, include increased compliance costs, delays in formation, and increased risk of fraud.
Startups incorporated before 2024, have until December 31, 2024 to file their initial report. Startups incorporated in 2024 have 90 days after incorporation to file their report. FinCEN is developing an online system, the Beneficial Ownership Secure System (“BOSS”), to electronically upload the report and data – this will be the only filing method available. The report and personal information of the beneficial owners that is uploaded will be available to law enforcement, banks and bank regulators.
Who is a Beneficial Owner?
It is the responsibility of the startup to report its Beneficial Owners to FinCEN. It is not the responsibility of the Beneficial Owner to self-report.
The following are Beneficial Owners:
- 25% and greater shareholders on a fully diluted basis
- Officers of the startup – CEO, President, COO, CFO, etc.
- Board of Directors (probably)
- Any individual with substantial control over the startup (a catch-all)
What information is needed?
The following information is required for the startup’s report:
- Company:
- Legal name
- trade name, if any
- current address
- state incorporated
- EIN
- Beneficial Owners:
- full legal name
- date of birth
- current residential address
- an “identifying number” and “image” from one of the following:
- U.S. passport
- U.S. driver’s license
- U.S. identification card
- if no U.S.-issued document is available, a foreign passport
Startups now have an additional reporting obligation to the U.S. Government. The initial report is due by December 31, 2024 for entities established prior to 2024. Any changes to the aforementioned information, requires an update report to FinCEN within 30 days! It’s important for founders and officers of the startup to carefully consider this new ruling and take steps to ensure compliance.