The Corporate Transparency Act Mandates New Requirements for Business Owners | Schwab Center for Financial Research

The Corporate Transparency Act Mandates New Requirements for Business Owners | Schwab Center for Financial Research

As you prepare to meet with your CPA this year, you may have some new reporting requirements about your business. Here is some information on the new Corporate Transparency Act from Schwab Center for Financial Research’s Austin Jarvis.


The Corporate Transparency Act (CTA) was passed as part of the National Defense Authorization Act for Fiscal Year 2021. The CTA mandates the creation of a database of “Beneficial Ownership Information” (BOI) and the filing of beneficial information effective January 1, 2024. New entities created after January 1, 2024, are required to file a report within 30 calendar days of their creation, and existing entities as of January 1, 2024, have until January 1, 2025, to file a report. Any changes after the initial report is filed (due to sales, minor children reaching majority, death, etc.) are required to be reported within 30 days of the change occurring.

The stated purpose of the law is to combat money laundering and the concealment of illicit money using shell companies in the United States. However good the intentions may be, the regulations have been written so broadly that nearly every small business in the United States could be required to make informational filings or incur penalties of $500 a day (up to $10,000) and up to two years in prison.

The following is a broad overview of the CTA to help build awareness of the new rules. Due to the complexities and nuances of the rules, it is important to discuss your unique circumstances with your professional team to ensure you remain fully compliant with the law.

Who is required to report?

The CTA requires certain reporting companies to disclose the identities of their beneficial owners to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

What qualifies as a reporting company?

Under the CTA, a reporting company is a corporation, limited liability company (LLC), or other similar entity created by filing a document with the Secretary of State (or a foreign entity registered to do business in the state). Entities that are highly regulated, such as banks, insurance companies, and accounting firms, are exempt from the reporting requirements. Charitable entities and large operating companies (defined as having more than 20 full-time employees, $5 million in gross receipts or sales, and a physical office in the U.S.) are also exempt from reporting.

Are trusts reporting companies? Generally, trusts are not reporting companies because they are not formed by filing a document with the Secretary of State.

Who is a beneficial owner?

The law defines beneficial owners as individuals who directly or indirectly:

1) exercise substantial control over the reporting company, or

2) own or control at least 25% or more ownership interest in the reporting company.

Substantial control could mean that the individual serves as a senior officer, has authority to appoint or remove senior officers, or has influence over important decisions made by the reporting company or a majority of the board of directors.

Furthermore, individuals may exercise substantial control, directly or indirectly, through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control.

Indirect ownership, or control of a company or its ownership interests, may include:

    • Joint ownership with one or more other persons
    • Ownership through another individual acting as a nominee, intermediary, custodian, or agent
    • Ownership as trustee, grantor/settlor, or beneficiary of a trust
    • Ownership or control of one or more intermediary entities that separately or collectively own or control ownership interests of the reporting company

Can a trust be a beneficial owner? If a trust owns 25% or more or a reporting company, or has significant control over it, the trust is a beneficial owner. However, because the law states that a beneficial owner must be an individual, the trust document will have to be reviewed to determine whether the grantor, trustee, or beneficiaries are considered beneficial owners, given the facts and circumstances.

Who is not considered a beneficial owner?

    • Minor children. However, the reporting company must report information regarding the minor child’s parent or legal guardian. Once the minor attains the age of majority, an updated report must be filed with FinCEN within 30 days.
    • An individual whose only interest in a reporting company is a future interest through a right of inheritance.
    • A creditor of a reporting company.
    • Agents, nominees, intermediaries, or custodians acting on behalf of another person.

What information must be provided to FinCEN?

Reporting companies (as defined above) must file with FinCEN: the business name, current address, state of formation, and the Employer Identification Number (EIN) of each entity, as well as the name, birthdate, address, and government issued photo ID (driver’s license or passport) of every direct or indirect beneficial owner of the entity.

What is the impact on business operations?

The CTA may have an impact on small business operations as the owners will now have to incur the administrative costs associated with compliance. Some business owners claim the law will affect their privacy and confidentiality, because their personal information will be disclosed to FinCEN.

In addition, the CTA may have implications for mergers and acquisitions. Potential buyers may require access to the beneficial ownership information as part of their due diligence process. This could make it difficult to attract buyers or negotiate favorable terms.

What is the impact on estate planning?

The CTA is likely to have a chilling effect on the use of LLCs, which have become popular in estate planning over the last decade. Individuals who value privacy are likely to forgo the use of LLCs in favor of other structures that still allow for some level of anonymity, such as irrevocable trusts. Individuals who continue to use LLCs despite the loss of privacy will likely face the added compliance costs of reporting to FinCEN, maintaining accurate records, and updating reports whenever membership shares are transferred.

Bottom line

The CTA is a new law with the goal of preventing certain financial crimes. The requirements of the law put new burdens on certain businesses and entities that carry stiff penalties if ignored. Anyone who owns more than 25% of a business or has substantial control over a business should consult with their attorney, CPA, and other professionals to determine whether they are required to comply with the CTA.

Austin Jarvis, JD

As Director of Estate, Trust, and HNW Tax for the Schwab Center for Financial Research, Austin provides analysis and insights on topics including complex estate, gift, and trust planning, advanced charitable strategies, business succession, and executive compensation.

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Understanding Equity: What Employees Need to Know Before Asking for Ownership

Understanding Equity: What Employees Need to Know Before Asking for Ownership

In the dynamic landscape of boutique professional service firms, the prospect of equity ownership often entices employees to envision themselves as stakeholders in the firm’s success. However, the allure of equity can sometimes cloud the understanding of its implications. Many employees, when faced with the reality of what it truly means to be an equity holder, reconsider their initial desire for ownership. In this blog post, we’ll delve into eight critical aspects of equity that employees should grasp before pursuing ownership in their firms.

8 Things Employees Should Know About Equity:

    1. Personal Guarantee of Obligations: As an equity holder, you’re not just an investor; you’re a co-signer. This means personally guaranteeing all obligations of the firm. For instance, banks often require “jointly and severably liable” agreements, holding all equity holders accountable in case of default. When an employee becomes an equity holder in a firm, they risk everything they have with a personal guarantee.
    2. Fiduciary Responsibility: Equity ownership involves accepting fiduciary responsibility, particularly in government scrutinized events such as payroll and sales taxes. In case of tax issues, the IRS will pursue all equity holders, emphasizing a shared liability that many employees find discomforting. With equity comes accepting the risk of the tax man coming after you.
    3. Salary Cuts During Slow Times: In lean periods, equity holders may need to slash their salaries, sometimes even down to zero, to sustain the firm. This level of financial sacrifice may not be feasible for many employees who rely on consistent income streams. Equity holders ride the wave up, and down.
    4. Loan Obligations During Crises: During crises, equity holders may be required to loan the firm money to meet its obligations. However, employees often lack the financial means to provide such loans, let alone the comfort level to do so. Partners in the firm carry another title: banker. If you do not want to loan the firm money, don’t ask for equity in the firm.
    5. Stricter Non-compete Clauses: Equity holders are subjected to more stringent and enduring non-compete clauses, often extending up to five years. This contrasts with employees who typically sign shorter, less restrictive agreements, allowing them more flexibility in career choices. For example, an employee can quit, wait 12 months for a non-compete to run out, and start a competing firm. An equity holder can do the same but after ~5 years. The difference is similar to the difference between dating and getting married.
    6. Personal Credit Tied to Firm’s Credit: An equity holder’s personal credit becomes intertwined with the firm’s credit. For example, a firm’s bankruptcy can result in personal bankruptcy for the equity holder, a risk many employees are unwilling to accept.
    7. Spousal Involvement in Equity: Equity holders will need their significant others to sign documents regarding the valuation and payment terms in the event of a divorce. This intertwining of professional and personal relationships can create discomfort for employees who prefer to keep these spheres separate. An ownership stake in a private company is an asset. In a divorce, the assets get divided up, including the equity stake in the firm. This means when you become an equity holder so does your spouse. To avoid this messy situation, you can ask your spouse to sign a post-nuptial agreement that excludes the equity stake in the firm, or, you can ask the firm to include your spouse in the partnership agreement. A post nuptial agreement and/or a modified partnership agreement is often a deal killer.
    8. Financial Obligation to Acquire Shares: Unlike receiving stock options, becoming an equity holder often requires purchasing shares. Many employees may lack the financial resources to afford such acquisitions.

If after reading these 8 items you do not want to become an equity holder, you are probably wondering if there are alternatives. And the good news is there are.

Alternatives to Equity

Here are two alternatives to equity that allow employees to participate in the upside of the firm without the downside.

    1. Exit Bonus for Executive Team Members: Executive team members can receive an exit bonus, a percentage of the purchase price in the event of a firm sale. This simplifies reward structures, offering incentives for successful exits without the complexities of equity ownership.
    2. Profit Sharing for Top Performers: Non-executive top performers can participate in a profit-sharing pool, earning a percentage of excess profits generated by the firm. This rewards individual contributions to the firm’s success without the legal and financial commitments of equity ownership.


Understanding the intricacies of equity ownership is crucial for employees considering ownership in boutique professional service firms. While the allure of equity may initially seem appealing, it’s essential to weigh the associated risks and responsibilities. For those seeking further guidance and insights on navigating the complexities of ownership structures, we encourage joining Collective 54’s mastermind community, where industry leaders share invaluable expertise and support in professional growth and development.

Eight Key Questions to Ask and Answer When Structuring Ownership: A Perspective from Three Co-Founders

Eight Key Questions to Ask and Answer When Structuring Ownership: A Perspective from Three Co-Founders

Starting a boutique professional service firm is an exciting journey. Here, we’ve distilled our collective experiences into eight key questions every founder team should ask and answer when structuring ownership:

    1. Who owns what percentage?

Answer: Ownership stakes reflect the value each founder brings. When deciding percentages, consider factors like capital investment, skills, connections, and previous experience. It is crucial to have candid discussions about these elements and recognize where each founder adds unique value. The ownership distribution should be based on a mix of these attributes and future commitments.

    1. Who is in control?

Answer: Control can be different from ownership percentage. In most firms, co-founders opt for a unanimous decision-making model for major decisions. This way, despite any differences in ownership percentages, each co-founder feels their voice is heard and respected.

    1. Who has contributed money, how much, and when?

Answer: Keeping transparent records is paramount. Document every monetary contribution and link it to specific milestones or business needs. This approach makes it easy to see who contributed, when, and why, fostering trust and clarity among co-founders.

    1. Who is going to contribute time, how much, and when?

Answer: Not every founder can commit full-time initially. Discuss your individual commitments, both present and future, and noted any anticipated changes (e.g., moving from part-time to full-time). Clear agreements prevent potential resentment or misunderstandings.

    1. What is the incentive compensation plan for each co-founder?

Answer: Besides equity, it’s essential to consider salaries or other compensation, especially if founders have varying levels of financial commitments outside of the business. Adopt a model where early salaries are modest but are combined with performance bonuses and future equity vesting.

    1. What happens when a co-founder quits?

Answer: A founder leaving can be unsettling. Agree that if a founder decides to quit, their shares would undergo a vesting schedule, allowing them to retain only a portion of their equity based on the time committed. This strategy ensures that founders are incentivized to stay and contribute to the firm’s growth.

    1. What happens when a co-founder is forced to leave?

Answer: This is a tough but necessary discussion. Establish a framework detailing specific scenarios where a founder could be asked to leave (e.g., misconduct, not meeting agreed-upon commitments). In such cases, a buyback clause at a predetermined valuation would be triggered.

    1. How is a “forgotten founder” handled?

Answer: “Forgotten founders” are individuals who may have contributed in the early stages but weren’t formalized as part of the founding team. Addressing this proactively, Agree to acknowledge any early contributors either with a smaller equity stake or a one-time compensation, ensuring they’re recognized but without long-term firm obligations.

In conclusion, structuring ownership isn’t just about equity distribution. It’s about crafting a relationship framework that will endure challenges and maximize collaboration. By confronting these questions head-on and forging transparent, fair agreements, will lay a strong foundation for your collective future.

If you find this article helpful, come join us at Collective 54. Apply here.