What is the Corporate Transparency Act?

The Corporate Transparency Act was enacted in 2021 and went into effect on January 1, 2024 with the aim of improving business activity transparency. It seeks to combat tax fraud, money laundering, and financing for terrorism by providing FinCEN with beneficial ownership information for specific U.S. businesses. Critically, this legislation is a significant regulatory shift for small businesses and imposes a considerable burden when it comes to compliance. However, it’s crucial for business owners to be aware of their reporting obligations to avoid incurring penalties for non-compliance — which can include monetary fines and jail time.

Who is a Beneficial Owner of a Company?

Under the Corporate Transparency Act, an individual will qualify as a beneficial owner if they have a significant ownership stake in the company. Specifically, a beneficial owner is defined as any individual who directly or indirectly either exercises substantial control over a reporting company — or owns or controls 25 percent or more of the reporting company’s ownership interests. Ownership can also be shared among a group of individuals.

An individual exercises substantial control over a reporting company if they serve as a senior officer, or they have authority over the appointment or removal of any senior officer, or a majority of the board of directors. They may also have “substantial control” if they direct, determine, or have a major influence over essential decisions made in the company, including those regarding the transfer of principal assets, the reorganization or dissolution of the company, and major expenditures or investments. In addition, a beneficial owner may exercise substantial influence if they take part in the selection and termination of business ventures, compensation schemes, the entry into or termination of important contracts, and significant policies or procedures.

The beneficial owner’s control may be exercised through board representation, ownership or control of a majority of the voting power, and rights associated with any financing arrangement or interest in a company. They may also assert their control by having control over an intermediary entity that separately or collectively exercises substantial control over the reporting company. Ownership can include any capital or profit interest, equity, stock, or instrument that is convertible into any share.

Who is Not a Beneficial Owner?

Importantly, a beneficial owner does not include a minor child if the reporting company reports the required information of a legal guardian, or an individual whose only future interest would be attained through inheritance. It also does not include a creditor or an individual who is acting as a nominee, intermediary, custodian, or agent on behalf of someone else. Additionally, someone who acts solely as an employee is not considered a beneficial owner, as long as they are not a senior officer.

What Information Must Be Reported About Beneficial Owners?

Beneficial ownership information must be submitted only once, unless information needs to be updated or corrected. There are several pieces of information that must be provided by reporting companies, including the following:

• The beneficial owner’s name
• The beneficial owner’s date of birth
• The address of the beneficial owner
• Identifying number and issuer from a valid driver’s license, passport, or other identification document from a state government
• The company’s name and address

Companies that have been formed after January 1, 2024 are also required to submit information about the individuals who formed the company.

What are the Penalties for Non-Compliance?

Failure to comply with the Corporate Transparency Act can result in steep civil and monetary penalties. Under the Act, it is a violation for any person — including the reporting company or a responsible individual — to “willfully provide, or attempt to provide, false or fraudulent [information] . . . or to willfully fail to report complete or updated beneficial ownership information to FinCEN.” A daily fine of $500 can be imposed on anyone who provides false or fraudulent information within a report, up to a maximum of $10,000. The same penalty applies to those who willingly fail to file or update a report.

Willfully failing to file a report can also result in criminal penalties. While a reporting company is ultimately responsible for filing a report, an individual who causes noncompliance can face up to two years of imprisonment. It should be emphasized that the Act does not punish negligent mistakes or human error. The civil and criminal penalties only apply to conduct that is “willful.” Nevertheless, it’s best for companies to establish clearly defined procedures to ensure reports are filed correctly.

Contact an Experienced Michigan Business Law Attorney

The reporting requirements of the Corporate Transparency Act can be complex and it’s vital to have a skillful business law attorney who can best advise you regarding your obligations. With offices in East Lansing, Mt. Pleasant, Grand Rapids, and Detroit, The Gallagher Law Firm is dedicated to providing our corporate clients with professional and competent services for all their legal needs. To learn more about how we can assist you with your business matters, contact us online or call (517) 853-1500.