January 1, 2024
The Corporate Transparency Act (CTA) is now in effect, and that may trigger significant action for many American entities. Enacted in December 2020 as part of the National Defense Authorization Act (NDAA), the CTA is a landmark piece of legislation aimed at enhancing transparency in the corporate landscape, and it represents a sizable shift in the federal government’s approach to financial crimes, money laundering, and other illicit activities spurred by anonymous shell companies. In the process of advancing that goal, however, the CTA establishes rigorous reporting requirements for a wide array of companies in the United States, and enforces stiff penalties – both civil and criminal – for failure to comply.
The CTA centers on a government-maintained registry for beneficial ownership information (BOI) and the reporting of said information to the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department. Organizations formed on or after January 1, 2024, have a 90-day reporting deadline, whereas those formed prior to the 2024 calendar year will have until January 1, 2025, to submit their BOI reports.
This legislation has the potential to be very burdensome on American entities, and with the harsh penalties for non-compliance, it must be a central part of your planning for 2024 and beyond. However, although we know the basics of the CTA, the details on how it will functionally operate remain somewhat unclear, and we’re working closely with a number of experts to help sort through it. Here’s what we do know.
Who does the CTA effect?
The CTA impacts any corporation, LLC, or other similar entity that is (a) created by the filing of a document with a Secretary of State or with a similar office under the law of a State or Indian Tribe, or (b) formed under the laws of a foreign country registered to do business in the U.S. Many partnerships are also considered reporting entities under the Act, since they typically form through a filing with an office stipulated in (a) above. Entities formed outside of these elements, such as sole proprietorships and certain types of trusts and general partnerships, may fall outside the CTA’s reporting definition, although that remains to be seen.
Critically, although untraditional for regulatory schemes, the CTA is aimed primarily at – and will be felt most acutely by – small businesses.
Who is exempted from the CTA?
The CTA targets industries which are historically outside other federal regulatory frameworks. As such, exempt companies include public companies, credit unions, banks, insurance companies and producers, SEC-regulated entities, registered investment advisors and investment companies, VC fund advisers, public accounting firms, tax-exempt structured entities, certain pooled investment vehicles, and several others.
Most notably – and the reason the CTA seems aimed primarily at small businesses – the Act will exempt large private companies, so long as they:
- Have more than 20 full-time employees;
- Report gross receipts or sales of more than $5 million in the prior year’s tax returns (including subsidiaries and operating affiliates); AND
- Have a physical presence in the U.S.
What is a beneficial owner?
The CTA defines an entity’s beneficial owners as any individuals who (a) directly or indirectly exercise “substantial control” over the entity, or (b) own or control not less than 25% of the “ownership interests” of the entity.
Notably, then, the definition does not require an individual to own any equity in the reporting company. Because the CTA includes substantial control in its elements, a beneficial owner may be any individual serving as a senior officer – including C-suite members, as well as those without a senior title who nonetheless exercise a similar level of control.
All individuals who meet the beneficial ownership definition must be reported.
What information is required to report?
Reporting companies must disclose:
- Full legal name of the reporting company, including trade names, d/b/a names, or t/a names;
- Current street address for the principal place of business for a domestic company, or the primary location where a foreign company conducts business;
- State, tribal, or foreign formation jurisdiction; AND
- The IRS TIN and EIN. Foreign reporting companies may provide a tax identification number issued by a foreign jurisdiction, as well as the name of said jurisdiction, if they have not been issued a TIN.
All beneficial owners and company applicants must also disclose:
- Full legal name
- Date of birth
- Current address
- Unique identification number from an unexpired passport, driver’s license, or other acceptable identification document, AND
- An image of the identification document from which the unique identification number was obtained.
Reporting companies and beneficial owners may also opt for a FinCEN identifying number, which should help streamline the process after the initial filing, although information on this is still forthcoming.
What is the reporting timeline requirement?
If information about the reporting company or its beneficial owners changes, an updated report must be filed within 30 days. There is no materiality threshold for the obligation to report or update, meaning that even if the change is small or seemingly insignificant, the CTA does not create a distinction or exemption. All changes must be reported, unless the change is due to the company’s dissolution or certain instances of termination.
What liability exists?
Consequences for non-compliance are steep, including both civil and criminal penalties. The civil penalty may be up to $500 for each day a violation exists. The criminal penalty consists of a fine up to $10,000 and/or possible imprisonment for up to two years.
What should you do?
Non-compliance with the CTA is extremely costly and should not be ignored. The attorneys at Messerli Kramer can help guide you through your reporting thresholds, requirements, and obligations.