All You Need to Know About Corporate Transparency Act Compliance

Corporate Transparency Act compliance will have a sizable impact on thousands of businesses across the United States. Thoroughly understanding the law’s requirements is crucial to avoiding strict government penalties.

Last Updated: March 7, 2024

Corporate Transparency Act Compliance - preview

Table of Contents

Introduction to Corporate Transparency Act Compliance

The Corporate Transparency Act (CTA) is a United States federal law that requires certain businesses, known as non-exempt reporting companies, to report their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). The act has been proposed many times over the years in an effort to prevent terrorist financing, money-laundering, or illegal activity that may often be hidden through shell company structures. The CTA was finally enacted on January 1, 2021 as part of the National Defense Authorization Act for Fiscal Year 2021.

History of the Corporate Transparency Act

Proposed bipartisan legislation requiring incorporation transparency—that is, requiring disclosure of beneficial owners at the time of incorporation—and making such information available to law enforcement has existed in the United States since 2008, and has since then been introduced multiple times in Congress. Additionally, the increasing media coverage of the issue has only raised the pressure on the American Congress to act. This media coverage has been led by massive media leaks – the Panama Papers, Paradise Papers, and most recently the Pandora Papers. These data leaks have highlighted the loopholes that exist in the tax systems and the need for beneficial ownership transparency.

In 2012, FinCEN issued a proposed rule that would have required companies to disclose their beneficial owners. The rule was never finalized, but it sparked a debate about the need for greater corporate transparency.

In 2015, the Obama administration issued an executive order that required financial institutions to collect and report information about the beneficial owners of accounts that hold more than $3 million. The executive order was challenged in court, and it was ultimately blocked by a federal judge.

In 2019, Congress introduced the Corporate Transparency Act, which was designed to address the shortcomings of the FinCEN rule and the executive order. The bill was considered more likely to pass the Senate than previous beneficial ownership reporting bills. However, the bill did not pass the Senate before the end of the 116th Congress.

In December 2020, Congress passed the National Defense Authorization Act for Fiscal Year 2021, which included the Corporate Transparency Act. The bill was vetoed by President Trump, but Congress overrode the veto in January 2021, making the CTA law.

Corporate Transparency Act compliance - timeline

Corporate Transparency Act Compliance Requirements

A reporting company must provide key pieces of identifying information about itself, its beneficial owners and members with substantial control, and, only in the case of entities created after January 1, 2024, the applicants that submitted the incorporation filing of the reporting company (“company applicants”). This information will be submitted to FinCEN through Beneficial Ownership Information Reports (BOIRs) on FinCEN’s BOI E-Filing System (formerly known as BOSS). To ensure Corporate Transparency Act compliance, the following information is required:

From Reporting Companies

  • Legal name
  • Trade name
  • Business address
  • Jurisdiction
  • An EIN, TIN, or foreign TIN

From Each Beneficial Owner

  • Full legal name
  • Date of birth
  • Street or business address at time of report delivery
  • A unique identifying number from one of the following documents:
    • Nonexpired US passport
    • Nonexpired State ID or one distributed by an Indian Tribe
    • Nonexpired state driver’s license
    • FinCEN identifier
    • If the beneficial owner has none of the above, they may submit a nonexpired passport of a foreign government
  • An image of one the above documents

Exempt reporting companies need to keep track of their exemption status in case their qualifying information changes and they are no longer exempt. If a reporting company loses its exemption status, they will need to report beneficial owner information to FinCEN within 30 days. Refer to Exemptions for more details about exemptions.

Timeline for Corporate Transparency Act Compliance

On January 1, 2024, the CTA came into effect.  Reporting companies registered before the effective date have until January 1, 2025 to submit initial beneficial owner information reports (BOIRs). Reporting companies established between January 1, 2024 and January 1, 2025 will have up to 90 days to file their beneficial owner information reports. Any entities formed after January 1, 2025 will have 30 days to file their initial BOIRs.

The countdown for your deadline begins from the time the company receives notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier. Should a reporting company need to amend a previous report, due to changes or mistakes in the initial filing, they will have 30 days to report the change from the date the change occurred.

The Corporate Transparency Act lists 23 exemptions. Reporting companies that meet the conditions for any of the exemptions are not required to submit a BOIR to FinCEN. Our team of CTA subject matter experts has analyzed the CTA’s reporting company exemptions and have identified 3 of particular relevance. 

Large Operating Company

The Large Operating Company exemption covers many large businesses that may already submit detailed identifying information to government agencies. An entity is defined as a large operating company if it meets all of the following conditions:

  1. The entity employs more than 20 full-time employees. Full-time employee means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with an employer.
  2. The entity has an operating presence at a physical office within the United States. “Operating presence at a physical office within the United States” means that an entity regularly conducts its business at a physical location in the United States that the entity owns or leases and that is physically distinct from the place of business of any other unaffiliated entity.
  3. The entity filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales.
  4. The entity reported this greater-than-$5,000,000 amount as gross receipts or sales (net of returns and allowances) on the entity’s IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form.

Pooled Investment Vehicles

A  pooled investment vehicle (PIV) is an entity that invests money on behalf of its investors. Pooled investment vehicles can take many different forms, including mutual funds, hedge funds, private equity funds, and venture capital funds. Certain pooled investment vehicles are exempt from the CTA’s beneficial ownership reporting requirements. To be exempt from the CTA, a PIV must meet the following requirements:

  1. Operation or advice by certain financial institutions: The PIV must be operated or advised by a bank, credit union, registered broker-dealer, federally registered investment company or investment adviser, or venture capital fund adviser.
  2. The pooled investment vehicle is a “securities issuer” as defined in the Securities Act of 1933.
  3. The pooled investment vehicle is a “reporting company” under the Securities Exchange Act of 1934.
  4. The pooled investment vehicle is an investment company that is registered under the Investment Company Act of 1940.
  5. Form ADV: The PIV must be reported on the adviser’s Form ADV, a form investment advisers are required to file with the SEC.

Subsidiary of an Exempt Entity

If a subsidiary is wholly owned by an exempt entity, it is not required to report its beneficial ownership information to FinCEN. However, the subsidiary is still required to keep records of its beneficial ownership information.

To qualify for the exemption, a subsidiary must be wholly owned by an exempt entity. This means that the exempt entity must own 100% of the subsidiary’s ownership interests. The exempt entity can own the subsidiary directly or indirectly, which means that the ownership can be held through one or more intermediary entities.

This subsidiary exemption applies:

  • to all subsidiaries of an exempt entity, regardless of the subsidiary’s size or location.
  • to all types of subsidiaries, including corporations, limited liability companies, and partnerships.
  • to both domestic and foreign subsidiaries.

          Note: The exemption is not available to subsidiaries that are joint ventures.

Full List of CTA Exemptions

Corporate Transparency Act Compliance - Exemptions
Corporate Transparency Act Compliance

Penalties for Non-Compliance

Corporate Transparency Act compliance can require a lot of work identifying reporting companies, carrying out exemption analysis, identifying beneficial owners, those with substantial control and company applicants, and keeping track of ongoing information relating to the above for updated BOIRs. But the consequences for improper or missing submissions are worse than the time, effort, and expense of compliance.

Unlawfully submitting false beneficial ownership information or not producing a report at all for FinCEN will result in government penalties. Any person found guilty of either will face fines of up to $500 per day that the violation has not been remedied, up to $10,000 total. Violators could also face imprisonment up to 2 years, or a combination of both penalties.

If an entity makes a mistake on their filings, they will need to amend their report with the corrected information within 30 days of the submission of the initial report.

Effects of the Corporate Transparency Act

The Corporate Transparency Act sets new expectations for a higher level of corporate transparency. The Corporate Transparency Act’s compliance requirements mean that beneficial owners will be exposed to FinCEN and US law enforcement agencies who will have access to this information. However, this also means that complex company structures may be more expensive to upkeep due to reporting requirements and the expense may lead some companies to simplify their corporate structures to avoid the extra costs and responsibilities of keeping the extra entities compliant.

With sensitive information being gathered by FinCEN for government use, beneficial owners and company members with significant control may also be concerned about data privacy. To mitigate the risk of having personal information compromised, beneficial owners may want to apply for FinCEN numbers instead, so they don’t have to disclose personal identifying information (PII) each time they submit a report.

The formation process for new businesses and entities is also not as simple or quick as it used to be. Because companies now need to gather information necessary for BOIRs long before official formation, this could push back companies’ goals and timelines.

Obstacles to Corporate Transparency Act Compliance

The speed at which a company is able to comply with the Corporate Transparency Act has a number of factors. In some situations, reporting companies may be slowed down by constraints outside their control. In other instances, the reporting company itself may be responsible for how long it takes them to be in compliance.

One of the first potential obstacles to compliance is FinCEN’s BOI E-Filing System and our lack of familiarity with it. Businesses formed between January 1, 2024, and January 1, 2025, have 90 days to submit initial BOIRs, and all businesses have 30 days to amend their filings if information changes. FinCEN estimates that 36 million entities qualify as reporting companies. Plus, an average of over 400,000 businesses are incorporated in the US every month. Unexpected delays or errors within the system may put a business at risk of noncompliance if a service outage occurs close to a deadline.

Data privacy is also a consistent concern that arguably has been a reason for opposition in the past. Reporting companies may run into resistance from beneficial owners that are hesitant to release their PII. The reluctance is understandable, given that many Americans are used to certain levels of privacy, but this reluctance may also hinder the operations of the company and pose future risks when updates of information are needed in a timely manner. Not only may individuals be displeased at having to disclose their personal information and ownership interests as a result of CTA compliance, but they are also entrusting the security of that data to FinCEN and potentially reporting companies as well  if they don’t manage their own information with their own FinCEN ID and account.

Whether due to beneficial owner reluctance, or due to a business’ overconfidence in the speed at which it can gather the information necessary for a BOIR, underestimating the impact of the CTA’s requirements is another potential opportunity where businesses may get in their own way. On the surface, the information that needs to be gathered from the reporting companies and beneficial owners is relatively simple and easy to obtain. However, people’s reluctance to providing the information and the way in which life can easily get in the way of seemingly small, insignificant administrative tasks means it could take a long time to gather this information, especially if you have a lot of BOs or a portfolio of several reporting companies for which to file. Business executives should remind themselves that preparing for compliance early is the best approach to ensure compliance.

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Reporting Company. Reporting Companies are all entities that are formed or registered to do business in the United States by the filing of a document with a secretary of state or similar office and all entities that are formed under the law of a foreign country and registered to do business in any state. Subject to several exemptions. 

Company Applicant. A company applicant is any individual who directly files the document that creates the reporting company as well as the individual primarily responsible for directing or controlling the filing. 

Beneficial Owner (BO). Any individual who, (1) directly or indirectly, exercises substantial control over a reporting company, and (2) any individual who, directly or indirectly, who owns or controls at least 25% of the ownership interests of a reporting company.

Large Operating Companies. Entities with more than 20 full-time US based employees, a US office (meaning the entity regularly conducts business at a physical location in the US that the entity owns or leases), and more than $5,000,000 in US source gross receipts or sales. Subsidiaries of Large Operating Companies may also be exempt.

Beneficial Owner Information Report (BOIR). Effective January 1, 2024, FinCEN requires non-exempt reporting companies to submit their beneficial owner information through BOIRs.

Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau of the U.S. Department of the Treasury that is responsible for overseeing the financial system and combatting money laundering and terrorist financing. Reporting companies are responsible for reporting their BOI to FinCEN using their submission platform, the BOI E-Filing System.

BOI E-Filing System. The BOI E-Filing System is FinCEN’s database where reporting companies should submit their BOIRs. During development, this was also referred to as the Beneficial Ownership Secure System (BOSS).

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Karen Redman, ACAMS

VP, International Services

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This blog provides general information and materials regarding the legal sector. The contents of this blog do not constitute legal advice. VPS Services, LLC d/b/a Agile Legal is not a law firm nor does it provide legal advice or practice law. You should contact an attorney to obtain advice with respect to any particular legal issues or questions.