It Is Time to Make Sure Your Business Is Ready for the Corporate Transparency Act
The U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) estimates that over 32 million entities will be subject to the new reporting requirements of the Corporate Transparency Act (CTA) starting on January 1, 2024. The CTA will impose significant reporting obligations on entities that are subject to the new law.
Is your business prepared for the CTA?
What is the Corporate Transparency Act?
The CTA became law in January 2021 as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act for Fiscal Year 2021. The policy objectives of the CTA are to strengthen the anti-money laundering regime and combat financial crimes by increasing transparency and requiring business entities to report key information about the entity.
The reporting obligations take effect on January 1, 2024, and will require business entities in the United States to disclose detailed information to FinCEN. Information that is reported in response to the CTA will be maintained in a centralized database accessible to federal and state law enforcement agencies, as well as financial institutions subject to anti-money laundering regulations.
Will my business be impacted?
Reports must be filed by domestic and foreign "reporting companies," which is a term that is broadly defined to include any entity that is a corporation, a limited liability company, or is otherwise created or registered by the filing of a document with a secretary of state or similar government office (e.g., limited liability partnerships, limited liability limited partnerships, business trusts, or limited partnerships).
The CTA includes 23 categories of entities that are exempt from these reporting obligations. The exemptions are generally intended to apply to entities that are already subject to robust reporting requirements, such as publicly traded companies, lending institutions, and insurance companies, as well as other categories, such as large operating companies, public utilities, and certain tax-exempt entities.
Some of the more notable exemptions are as follows:
- Entities that have over 20 full-time employees in the United States (employees of a subsidiary company do not count toward the total full-time employee threshold), maintain a physical office in the country, and generate more than $5 million in gross receipts or sales on their federal income tax return (excluding from sources outside the U.S.)
- Companies with securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (Exchange Act) (i.e., public companies)
- Public accounting firms
- Certain highly regulated financial services companies, such as banks, credit unions, bank holding companies, registered securities broker dealers and exchange or clearing agencies
- Governmental agencies
- Tax-exempt entities (e.g., nonprofits under 501(c) and entities exempt under 501(a)) and certain entities that operate exclusively to provide financial assistance to or governance rights over tax-exempt entities
- Subsidiaries of certain exempt entities
- Inactive entities that existed before January 1, 2020, which are not engaged in active business, are not owned by a foreign person, have not had a change in ownership in the last 12 months, have not sent or received funds greater than $1,000 in the last 12 months, and do not hold any assets
If a reporting company no longer meets the exemption criteria in the future, it must file a report within 30 days from the date the change occurred. If a reporting company later again becomes eligible for an exemption, an updated report must be filed.
If my business is a reporting company, what do I need to report?
Each reporting company will need to file a beneficial ownership information report that identifies the individuals designated as its "beneficial owners," and if the reporting company is created or becomes a foreign reporting company on or after January 1, 2024, the report will also need to identify the reporting company's "company applicant(s)."
The term beneficial owner refers to individuals (natural persons) who exercise "substantial control" over the reporting company or who, directly or indirectly, own or control 25% or more ownership interests of the reporting company.
Individuals who exercise substantial control include senior officers of the entity, such as a chief executive officer, chief operating officer, chief financial officer, and general counsel, as well as individuals who have authority over appointing or removing senior officers or a majority of the board, or who exert substantial influence over important decisions made by the reporting company.
The CTA defines "ownership interest" broadly to include a range of different interests, including equity interests (e.g., shares of stock, membership interests, etc., whether voting or non-voting), capital and profit interests, convertible securities, put and call rights, options and various other instruments used to establish ownership. Debt instruments are also considered ownership interests if the holder has authority to exercise the same rights as an equity holder or has authority to convert the debt instrument into an equity interest.
In order to comply with the CTA, each individual that is designated as a "beneficial owner" of a reporting company must be identified in the reporting company's beneficial ownership information report. The information required to be in the report includes the following:
- Full legal name
- Date of birth
- A unique identifying number from a state-issued driver's license, passport or other government issued document and a photograph of the official identification document
- Residential address (not a P.O. box or mailing address), which must be the individual's actual place of residence
If an entity qualifies as a reporting company, it is responsible for collecting and maintaining this beneficial owner information and providing the information in its beneficial ownership report. Each reporting company bears responsibility for managing and keeping its information current.
Each reporting company is also required to report the following information about itself:
- Full legal name of the entity
- All trade names and DBAs (whether or not registered)
- Full current address of its principal U.S. place of business
- Jurisdiction of the company's formation
- For each foreign reporting company, the state or tribal jurisdiction where it first registered in the United States
- IRS taxpayer identification number (TIN), including an employer identification number (EIN)
If the reporting company is created or becomes a foreign reporting company on or after January 1, 2024, the reporting company must also identify its company applicant or applicants in its beneficial ownership report. A company applicant is an individual who either files the instrument to form the reporting company, registers the foreign entity in the United States, or is primarily responsible for such actions if more than one individual is involved in the formation.
When do the reporting obligations begin?
After the CTA goes into effect, the deadline to report depends on when the reporting company was created. If the reporting company was formed on or after January 1, 2024, but before January 1, 2025, then the initial report is due within 90 calendar days from the date of formation with respect to a domestic reporting company or the date registered to do business with respect to a foreign reporting company. If the reporting company was formed on or after January 1, 2025, then the initial report is due within 30 calendar days from the date of formation or registration. If the reporting company was formed before January 1, 2024, then the initial report is due no later than January 1, 2025.
If there is a change in beneficial ownership information after a report has been filed, the reporting company has 30 days from the date of the change to update its report.
How do I file?
FinCEN is designing and building a new information technology platform called the Beneficial Ownership Secure System, which will be used to receive and maintain the beneficial ownership reports. This system is not yet available, and reports will not be accepted prior to January 1, 2024.
What happens if I do not report?
Failing to comply with the regulations, submitting false or fraudulent reports, or willfully neglecting to comply can lead to significant penalties. Civil penalties for non-compliance may result in fines of $500 per day for the duration of the inaccurate report. Criminal penalties can also apply, including fines of up to $10,000 or imprisonment for up to two years. The above penalties apply to non-compliance regardless of the reporting company's size.
In the event of an inadvertent mistake or the unintentional submission of a false report, there is a safe harbor provision. The safe harbor only applies if a corrected report is promptly and proactively filed within 90 days after the submission of the inaccurate report.