It’s Here! The Corporate Transparency Act
The Corporate Transparency Act (CTA), effective from January 1, 2024, is a significant legislative development aimed at enhancing transparency in entity structures and ownership to combat illicit activities such as money laundering, tax fraud, and terrorism financing. Here's an in-depth look at the key aspects of the CTA:
Who Needs to File Under the CTA
The CTA requires both domestic and foreign entities operating in the U.S. to submit Beneficial Ownership Information (BOI) to the Financial Crimes Enforcement Network (FinCEN). This includes:
Domestic entities formed by filing a document with a secretary of state or similar office under the law of a state or Indian tribe.
Foreign entities formed under the law of a foreign country and registered to do business in the U.S.
Entities like corporations, limited liability companies, limited liability partnerships, business trusts, and most limited partnerships fall under this category. However, sole proprietorships without a single-member LLC and partnerships are not considered reporting companies.
Exemptions
There are specific exemptions under the CTA. Entities that are exempt include:
Banks, domestic governmental authorities, insurance companies, and issuers of securities.
Entities considered inactive before January 1, 2020.
Highly regulated businesses such as large operating companies that meet certain employee and revenue thresholds, publicly traded companies, and tax-exempt entities.
What are “large operating companies”?
A “large operating company” is any entity that: (1) employs more than 20 full time employees in the United States; (2) has an operating presence at a physical office in the U.S. that is physically distinct from the place of business of any other unaffiliated entity; and (3) filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales from sources inside the United States. The employee headcount must be calculated on a company- by-company basis - FinCEN does not permit an entity to include employees of its affiliates, such as subsidiaries. A result of the employee count rule is that a top-tier or parent holding company with no employees may be a reporting company while its operating subsidiary or subsidiaries are exempt.
Unlike the employee headcount rules, an entity may utilize affiliate information for the gross receipts/sales test if the entity is part of an affiliated group of corporations as defined in the Internal Revenue Code (specifically, 26 U.S.C. § 1504) that filed a consolidated return.
The large operating company exemption is not available to new companies that have yet to file a tax return (the tax return is the only permitted way to demonstrate gross receipts or sales above $5,000,000).
Required Information for Reporting
Reporting entities must disclose for beneficial owners and company applicants: Name, date of birth, address, and a unique identifier number (like a driver’s license or passport number).
The term “beneficial owner,” with respect to a reporting company, means any individual who, directly or indirectly, either (1) either exercises “substantial control” over such reporting company, whether as a senior officer or otherwise, or (2) owns or controls at least 25% of the “ownership interests” of such reporting company.
A “company applicant” is (1) the individual who directly files the document that creates the domestic reporting company or files the document that first registers a foreign reporting company; and (2) the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.
A reporting company’s legal counsel or other advisers or service providers may be a company applicant if they meet this criteria. Reporting companies that existed prior to January 1, 2024 need not identify or report a company applicant.
To prepare to meet their reporting obligations when the CTA becomes effective in 2024, companies should (1) determine if they are reporting companies, and if they are reporting companies, (2) identify their beneficial owners, (3) develop systems and procedures for gathering, maintaining, and monitoring beneficial ownership information (and requiring beneficial owners to provide the same) and (4) gather beneficial ownership information from their beneficial owners and, if applicable, company applicants.
Continuing Reporting Requirements
The initial reporting requirements vary based on the date of establishment:
Entities formed or registered before January 1, 2024, have until January 1, 2025, to file their initial reports.
Entities formed or registered in 2024 have 90 days from the formation or registration date.
Entities formed or registered on or after January 1, 2025, have 30 days to file.
Reporting companies must monitor the information regarding the companies themselves and their owners and management and timely update that information with FinCEN when it becomes inaccurate. Willful failure to comply with reporting obligations can result in severe penalties. Ongoing obligations include updating the report within 30 days for any change in the provided information. This can include changes in beneficial ownership, operational changes, or changes in the information of beneficial owners, like a change of address or legal name.
Penalties for Non-Compliance
Non-compliance with the CTA can result in substantial civil fines. Entities that fail to report the required information about their beneficial owners, or report incorrect or incomplete information, face fines up to $500 per day until the violation is corrected. These fines can accumulate quickly, leading to a significant financial burden.
In cases where non-compliance is found to be willful or accompanied by fraudulent intent, criminal penalties may be imposed. This includes scenarios where false or misleading information is knowingly submitted. Violators can face fines of up to $10,000 and imprisonment for up to two years. The severity of these penalties underlines the seriousness with which the government views compliance with the CTA.
Access to Reports
FinCEN will maintain this information in a confidential database, not accessible to the public. Specific federal agencies, law enforcement, and financial institutions (with consent) can access this information for national security, investigations, or compliance purposes.
Planning for Compliance
Businesses should prepare for these changes by incorporating compliance policies into their governance structures. This includes gathering beneficial ownership information and updating it as necessary. Businesses should also seek counsel from business lawyers to ensure compliance.
In conclusion, the CTA introduces significant reporting obligations for a wide range of entities. It requires careful consideration and preparation, especially in terms of data collection and ongoing compliance monitoring. Contact us to discuss how we can help ensure your entity’s compliance.
