Understanding the Corporate Transparency Act: A Comprehensive Guide

The world of business and finance is set to change significantly come January 1, 2024, with the implementation of the Corporate Transparency Act (CTA). The CTA, a law aimed at curbing money laundering, terrorism financing, and other illicit activities, is set to have a significant impact on a broad spectrum of business entities. The Act demands that such entities report and maintain current information on their beneficial owners with the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. Let’s delve into the specifics of the CTA and what it means for your business.

CTA Reporting Requirements: Who is obligated?

The CTA demands that various domestic entities, which include but aren’t limited to limited liability companies, corporations, limited liability partnerships, business/statutory trusts, limited partnerships, and limited liability limited partnerships, report to the FinCEN. The obligation also extends to foreign entities that have registered to conduct business in the United States.

CTA Exemptions: Who gets a pass?

Not every business entity is required to report. The CTA has a list of 23 types of exempt entities, most of which already fall under state or federal supervision. These include public companies, banks, insurance companies, and large operating companies meeting certain criteria, such as having over 20 full-time employees in the United States, having a physical office in the United States, and having filed federal income tax returns in the U.S in the prior year reflecting over $5,000,000 in gross receipts or sales.

What Information is Required?

Reporting entities are required to disclose a range of information, including the full legal name of the company, any trade names, the business street address, the state or tribal jurisdiction where it is registered, and the U.S. or foreign tax identification number. Additionally, reporting entities must identify and disclose all individuals who are beneficial owners and, for entities formed on or after January 1, 2024, company applicants.

Who Qualifies as a Beneficial Owner?

Under the CTA, a “beneficial owner” is any individual who exerts substantial control over the reporting company or owns or controls at least 25% of the ownership interest of the said company. The Act also provides a non-exhaustive list of indicative factors of what qualifies as substantial control over a reporting company. However, there are certain individuals who do not qualify as a “beneficial owner,” including minor children, nominees, or other intermediaries.

Company Applicant: Who is it?

A company applicant is any individual who files the document that forms the entity or first registers the entity to do business. This can include family members, agents, employees, attorneys, and paralegals who file on behalf of other individuals.

Reporting Deadlines

For entities filing for formation or registration on or after January 1, 2024, they must submit their initial report to FinCEN within 30 calendar days of the date of formation or registration. For entities formed or registered prior to January 1, 2024, they have until January 1, 2025, to file an initial report with FinCEN.

What if the Reported Information Changes?

If any information is incorrect at the time of filing or changes after filing, the reporting company has 30 calendar days from the date it knew or should have known about the inaccuracy or change to correct or update the information with FinCEN.

Penalties for Non-Compliance

The CTA has stringent penalties for providing false information or willfully failing to report or update beneficial ownership information. Violators may incur a civil penalty of up to $500 for each day a violation continues without being remedied, up to $10,000 per violation, imprisonment for up to 2 years, or both.

Final Thoughts

The enactment of the CTA marks a significant shift in business transparency. Entities required to report under the CTA must begin gathering the necessary information to file initial reports with FinCEN. While the obligations may seem daunting, compliance is crucial to avoid severe penalties and promote a more transparent, accountable business environment.