The Corporate Transparency Act
Welcome to 2024! You probably now have yet another reporting requirement in The Corporate Transparency Act. Under this law, which went into effect on January 1, 2024, many businesses will find that they must register the names of their beneficial owners and corporate applicants in a database maintained by the United States Department of Treasury’s Financial Crimes Enforcement Network, otherwise known as FinCen. In this article, you will learn about your specific requirements under the Act.
The Corporate Transparency Act - An Overview
The Corporate Transparency Act (CTA) – passed in 2021 – was enacted to reduce money laundering and fraud. Additionally, CTA also enhances transparency in ownership and entity structures. In summary, CTA requires many businesses to add information about some owners into a database maintained by FinCen. Ostensibly, CTA will help combat various financial crimes, including money laundering and tax evasion.
As enacted, CTA requires any company created by filing a document with a secretary of state office or similar organization or Indian tribe to disclose specific information about its ownership structure. Thus, most corporations, LLCs, LLPs, and business trusts are subject to the provisions of CTA. Although the law is effective as of January 1, 2024, organizations subject to the filing requirements have until December 31, 2024 to make their initial filing.
Who Is Exempt From Filing?
Although many businesses will experience a filing requirement under CTA, many others will not. For example, most sole proprietors will likely not need to file. Likewise, publicly traded companies, not-for-profit entities, and governmental organizations do not need to file. Further, many entities in regulated environments and investment companies operated by investment advisors also do not need to file. Of note, public accounting firms registered under Section 102 of the Sarbanes-Oxley Act also do not need to file. You can see a complete list of all exemptions by clicking here.
What Are The Filing Requirements?
Fortunately, the filing requirements are relatively simple for most businesses. First, “standard” information, such as the company’s legal name and any related DBA name, is required. Additionally, filers must include other information such as address Taxpayer Identification (TIN) and Employer Identification Numbers (EIN).
Requirements For Beneficial Owners
Perhaps the most controversial provision of the CTA requirements relates to those owners deemed “beneficial owners.” Under the Act, companies must report information owners who directly or indirectly own or control 25% or more of the ownership interests of a reporting company or exercise “substantial control” over a company. The term “substantial control” includes the following persons.
1. An individual who serves as a senior officer of a reporting company,
2. Has authority to appoint or remove any senior officer or a majority of the directors of the reporting company,
3. Directs, determines, and or has substantial influence over decisions of the reporting company (including decisions regarding the sale, lease, mortgage, or other transfer of assets, significant expenditures or investments, compensation arrangements for senior officers, or the entry into or amendment of significant contracts or governance documents)
4. Has any other form of substantial control over the reporting company.
When And How Do I File?
For any reporting company existing as of January 1, 2024, an initial report must be filed on or before January 1, 2025. For companies formed on or after January 1, 2024, an initial report must be filed within 30 days of formation or receipt of a notice to file. All filings are completed by entering information into a database maintained by FinCen.
Not surprisingly, the penalties for not complying with CTA can be significant. For example, any person found guilty of not complying with the law may be liable for penalties of up to $500 per day, not exceeding $10,000. Further, in some cases, criminal penalties might be applicable; in those cases, violators could face up to two years in prison.
Summary
Many businesses and their owners will experience a filing requirement under CTA, yet many of those same persons are unaware of this requirement. Given the severity of the penalties, act promptly to determine whether you (or your clients) have a reporting requirement. And, if you find that filing is necessary, ensure you do so before January 1, 2025, to avoid any penalties.
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