The Corporate Transparency Act (CTA), which was established in 2021 and is set to become law January 1, 2024, is the most far reaching set of reporting rules impacting small business owners, maybe ever. It is expected to impact millions of individuals each year who will be required to report certain personal information to the United States Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). However, the good news is that the CTA will not impact your Solo 401(k) plan. Nevertheless, it may impact other entities you own or have some management capacity in. Thus, it is important that everyone fully understands the impact the CTA will have on small business owners and managers.

FinCEN is a bureau of the U.S. Department of the Treasury. It estimates 32.6 million Reporting Companies will be subject to these reporting rules when they go into effect and an additional five million entities will become Reporting Companies each year thereafter.

What is the Corporate Transparency Act?

The Corporate Transparency Act will require certain companies (each, a “Reporting Company”) to (1) report specific beneficial ownership information (“BOI”) to FinCEN, (2) disclose information about who created the entity or registered it to do business in the United States, and (3) report any change to previously reported information within a specified time-period.

What is the Reason Behind the CTA?

The primary purpose behind the CTA is to help the US Treasury combat money laundering, as well as stop bad actors from using the US to fund their criminal activities, both inside and outside the US. 

Is my Entity a Reporting Company?

There are two types of Reporting Companies, domestic and foreign. An entity created by the filing of a document with a secretary of state or similar office under the laws of a US state is a “domestic reporting company,” unless it is exempt (see below). A “foreign reporting company” is an entity formed under the laws of a country other than the US but registered to do business with a secretary of state or similar office under the laws of a US state, unless it is exempt. The CTA rules encompasses nearly all entities (e.g. C corporations, S corporations, LLCs, LLPs, etc.) unless an exemption applies.

Is My Entity Exempt from the CTA?

Most entities operating in the US will be subject to the reporting requirements under the CTA. However, certain types of entities will be exempt from reporting requirements under the Act. Below is a list of the most common entity types that will be exempt from the CTA:

• Tax-exempt nonprofit entities
• tax-exempt trusts
• Trusts
• Certain entities already subject to regulatory oversight such as public companies, registered investment companies, and registered investment advisors.
• Large Operating Companies,” which are companies with more than twenty (20) full-time employees in the US, an operating presence at a physical office within the US, and more than $5 million in gross receipts or sales from sources inside the United States on its prior year federal tax return.

Who is a Beneficial Owner?

Under the CTA, the determination of whether one is a beneficial owner and, thus, subject to completing a beneficial ownership interest report under the CTA is based on one’s ownership percentage and level of control.

1. 25% or More Ownership

A beneficial owner is an individual who, directly or indirectly, through contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over an entity or owns or controls, directly or indirectly, 25% or more of the ownership interests in an entity. Rights to convert into an ownership interest, such as options, warrants, and convertible notes are treated as if exercised when calculating ownership.

•  “Substantial Control”

Any “senior officer,” defined as a person “exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer or any other officer, regardless of official title, who performs a similar function:

• any member of the board of directors
• any individual with authority to appoint or remove a majority of board of directors.
• any individual who “directs, determines, or has substantial influence over important decisions.
• any individual who exercises “any other form of substantial control.
• any individual exercising indirect control through ownership or control of a majority of the voting power; control over “one or more intermediary entities that … exercise substantial control over” the company; and “arrangements or financial or business relationships, whether formal or informal.

This list is not exhaustive and additional persons may be deemed to exercise “substantial control” depending on the circumstances.

What BOI must be Reported?

A Reporting Company must disclose the following information with regard to each individual beneficial owner to FinCEN via the BOI report:

1. full name.
2. date of birth.
3. complete current residential street address\.
4. ID number and jurisdiction of issuance for one of the following:
   • US passport,
   • state, local, or Indian tribal identification document, or
   • state-issued driver’s license; and
5. an image of the document from which the ID number was obtained. If the individual has none of the above listed documents, a passport issued to them by a foreign government will suffice.

When must a Report be Filed?

Any entity that was formed before January 1, 2024 and deemed a “Reporting Company” under the CTA must file a report with FinCEN not later than January 1, 2025. However, any “Reporting Company” under the CTA created after January 1, 2024 must be filed within thirty (30) calendar days after receipt of notice of creation (domestic Reporting Companies) or registration to do business in the U.S. (foreign Reporting Companies).

In the case of a “Reporting Company” that previously reported to FinCEN but has been subject to a change, such a change in ownership above 25%, replaced the LLC manager with a new individual, or changed its address, an updated report must be filed within thirty (30) days.

How Will the CTA Impact my Solo 401(k)?

Because a Solo 401(k) plan is deemed a “tax-exempt” trust, a 401(k) plan is exempt from the reporting requirements under the CTA. However, if a Solo 401(k) plan uses a “checkbook control” LLC to make an investment, the LLC will be deemed a “Reporting Company” under the CTA and a BOI report would be required to be filed with FinCEN. In the case of a Self-Directed Solo 401(k) LLC, the LLC is generally wholly owned by the Solo 401(k) and managed by the Solo 401(k) plan trustee. As a result, the BOI report will need to include the personal information of the Solo 401(k) plan individual trustee since the individual would be deemed to have “substantial control” over the LLC.

Penalties

FinCEN is not playing around with the requirements under the CTA. The CTA provides for civil and criminal penalties for such violations, including a civil penalty of up to $500 per day and, a fine of not more than $10,000 and/or imprisonment for up to two years.

Conclusion

The CTA will have an enormous impact on most American business owners and managers. The good news is that a Solo 401(k) plan will generally be exempt from the reach of the CTA. However, it is important to note that the CTA would apply to a plan that wholly owns an LLC. In such a case, the BOI report would be required to be filed with FinCEN and the personal information of the LLC manager, the Solo 401(k) plan participant, would need to be reported. If you have any questions, feel free to contact us.