In 2021, the Corporate Transparency Act (CTA) was enacted to combat money laundering, tax fraud, and other illicit activities through private entities. This legislation was passed to enhance transparency in ownership and entities, ensuring above-board practice and legal operations. The CTA takes effect on January 1, 2024, and companies should begin preparing accordingly.
Who Does it Cover?
The CTA requires reporting of Beneficial Ownership Information by corporations, limited liability companies, or any other entity that is:
(1) formed by filing documents with the Secretary of State or similar office of the State or Indian tribe; or
(2) formed under the law of a foreign country and registered to operate and do business within the United States.
Entities under this category formed prior to January 1, 2024, require that the Beneficial Ownership Information Reports be filed no later than January 1, 2025.
Any entity formed after January 1, 2024, requires a report to be filed within thirty (30) calendar days of when it receives actual notice that its creation has become effective, or by which the Secretary of State provides public notice of formation--whichever should occur first.
Reporting Requirements
The Beneficial Ownership Information Report must be submitted to the Financial Crimes Enforcement Network and contain the following:
The entity's full legal name as registered with the Department of State (DOS)
Any trade names or d/b/a associated with the entity
A complete and current address of the physical entity or registered address as applicable
The jurisdiction formed, or in the case of a foreign company the jurisdiction for which it first registered
IRS TIN & EIN
The full legal name, date of birth, current residential or business address, and an identification number of "each Beneficial Owner"
The identification number for purposes of reporting may include a passport, driver’s license, or state-issued ID.
"Beneficial Owner"
The CTA defines "Beneficial Owner" as an individual who directly or indirectly, exercises substantial control over the company or owns or controls at least twenty-five percent (25%) of the ownership interests of the company.
An individual exhibits substantial control over an entity if the individual:
serves as a senior officer,
has the authority over the appointment or removal of a senior officer or a majority of the board of directors, or
directs, determines, or has substantial influence over important business decisions.
These business decisions fall outside of the realm of day-to-day operational decisions that might be within the power of a manager.
Reports are also required to be updated within thirty (30) days of a change to the Beneficial Ownership which includes the sale of the company, merger, acquisition, or death of potential individual reporters.
Likewise, if an individual or company becomes aware of the filing of inaccurate information, there must be an updated report provided within thirty (30) days of notice.
Penalties for Failure to Report
Penalties for failure to comply with the CTA reporting requirements include a maximum civil penalty of fines of $500 per day up to $10,000 and the possibility of imprisonment for up to two (2) years.
The Financial Crimes Enforcement Network (FinCEN)--the governmental entity for which reporting shall be filed-- only considers reports that contain false, fraudulent, or incomplete information a violation if the false, fraudulent, or incomplete information was a willful act on the part of the reporting individual.
Who is Exempt?
Under the CTA the following types of entities are not required to file a report:
Publicly Traded Companies
Securities Brokers
Entities that employ more than twenty (20) employees, operate at a physical office in the US and filed federal tax returns demonstrating more than $5 million in gross receipts or sales
Public Utility Companies
Venture Capital Fund Advisors
Tax-exempt entities including not for profits, and certain political organizations and trusts
Inactive entities which are not owned by a foreign individual or company
Subsidiaries of exempt entities
Pooled investment vehicles
Accounting Firms
Insurance Companies operating in the United States
Governmental entities
Banks and Credit Unions
The Future is Transparent
This push for continued transparency makes it of utmost importance to ensure compliance in any newly or previously formed entity. While any reports registered with the FinCEN will not be accessible through a public database or FOIL request, those wishing to remain anonymous in transactions should consider the implications of the Act and how it may affect future business transactions.
Existing entities should begin preparing ownership information and should consider incorporating compliance policies in already existing governing documents to help ensure future compliance.
This policy will also likely be incorporated into Agreements between entities, and a necessary step as part of the due diligence process to ensure ongoing compliance and protect from any future liabilities.