Navigating the CTA: Key Takeaways and Compliance Guidelines

A new federal law, the Corporate Transparency Act (CTA), will affect a range of legal entities, possibly including entities in which you may be an owner, officer or manager.is a  regulation designed to enhance transparency in corporate structures and combat money laundering, terrorist financing, and other illicit activities. This article overviews the CTA, including reporting requirements, exemptions, and penalties, to assist businesses in understanding and navigating this regulatory landscape.

Key Takeaways

  • The CTA, which becomes effective January 1, 2024, mandates that many, but not all, legal entities incorporated, organized, or authorized to do business in any state to disclose certain information relating to its owners, officers, and controlling persons to the US Department of Treasury’s Financial Crime Enforcement Network (FinCEN).
  •  The CTA is intended to increase the information available to law enforcement to prevent the use of U.S. entities to enable money laundering, terrorist financing, and other illicit activities.
  • Generally, reporting companies must provide information on the company itself, its “beneficial owners”, and for those entities formed after January 1, 2024, its “company applicants.”
  • Entities that exist or are registered to do business prior to January 1, 2024, will have one year to file their initial reports.
  • Entities created or registered to do business on or after January 1, 2024, will have ninety (90) days after creation or registering to do business to file the requisite initial report.
  • Entities that fail to meet reporting requirements and individuals who knowingly provide false or fraudulent information in connection with beneficial ownership reports may face criminal and financial penalties.

Who Is Required to File a Report with FinCEN?

  • The CTA provides that all “reporting companies” must file information on its respective “beneficial owners” and “company applicants.”

Who Are “Reporting Companies”

  • “Reporting companies” include domestic or foreign privately held entities including any corporation, LLC, limited partnership, or similar entity created by the filing of a document with any state, territory, or Indian tribe. A “foreign privately held entity” is any non-US entity that registers to do business with any state, territory, or Indian tribe. Trusts (other than trusts created by a filing, such as a statutory or business trust) are themselves not reporting companies.
  • Each reporting company is required to provide the reporting company’s legal name, trade name or “doing business” name, current address, the company’s jurisdiction of formation (or for foreign reporting companies, the state, territory, or tribal jurisdiction where it first registers) and the company’s EIN. Foreign reporting companies must provide a foreign tax identification number if they do not have an EIN.

Beneficial Ownership Information (BOI) and Company Applicants

  • Reporting companies must identify each of their “beneficial owners.” Under the CTA, the term “ownership interests” is broadly defined. A beneficial owner is any individual who directly or indirectly exercises “substantial control” over the reporting company OR who “owns” or “controls at least 25% of the “ownership interests” in the reporting company. The regulations provide guidance on what constitutes “substantial control” and “owns or controls.”
  • For reporting companies formed on or after January 1, 2024, up to two “company applicants” must also be identified. The two company applicants include (1) the individual who directly files the document to create or register the reporting company, and (2) the individual who is primarily responsible for directing or controlling such filing (if multiple parties participate in the filing).
  • Each beneficial owner and company applicant must report their full legal name, date of birth, current residential address (or business address for a company applicant in the business of forming entities), and an identifying number and “image” from a document, such as a US passport, US driver’s license, US ID card, or if no US issued documents are available, a foreign passport.
  • Generally, changes in a reporting company’s information, beneficial owners or exempt status, regarding a reporting company or its beneficial owners must be reported within 30 days.

Exemptions

  • The CTA identifies 23 types of entities that are exempt from the definition of a “reporting company.” Many exemptions focus on highly regulated businesses, such as banks, publicly traded companies, insurance companies, tax-exempt entities, and subsidiaries of exempt entities.
  • However, the most significant exemption is for “large operating companies” that meet all three of the following criteria – (i) has more than twenty (20) full-time employees in the US; (ii) has filed a federal US tax return for the prior year showing more than $5 million in gross domestic receipts or sales; and (iii) maintains a physical office presence in the United States.
  • Entities that initially qualify for the “large operating company” exemption but subsequently no longer meet the applicable criteria will be required to file a beneficial owner’s report. If an entity is initially determined to be a “reporting company” but later qualifies under the “large operating company”, the entity is required to file an updated report acknowledging the change in status.

Penalties

  • The CTA provides civil and criminal penalties for willfully (i) failing to report or update a reporting company’s BOI, and (ii) providing false or fraudulent BOI. Civil penalties include a daily $500 fine for continuing violations, up to a maximum of $10,000, and criminal penalties include up to two years’ imprisonment. The CTA does not provide for non-willful or negligence penalties.

The Corporate Transparency Act introduces a significant shift in corporate reporting requirements, aiming to curb financial crimes. Staying informed and preparing for the upcoming changes will be crucial in ensuring a smooth transition while avoiding potential penalties. If you have questions regarding CTA, whether or not your business is impacted,  or other corporate governance matters, please contact your lawyer at Stall Legal for assistance.