This post explains the federal Corporate Transparency Act (CTA), which will go into effect on January 1, 2024. This law imposes reporting requirements on millions of U.S. companies, including small firms. Failure to comply can result in civil and/or criminal penalties.
Overview of the Corporate Transparency Act
The Corporate Transparency Act requires certain business entities (defined as “reporting companies”) to file, in the absence of an exemption, information about their “beneficial owners” with the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of Treasury.
The CTA, which was passed with bipartisan support, is part of the Anti-Money Laundering Act of 2020, which was enacted to prevent money laundering, terrorist financing, and other illicit activities. The CTA aims to expand reporting requirements to prevent the exploitation of U.S. corporations and LLCs for criminal gain and to assist enforcement authorities in detecting criminal activity.
FinCEN will create a database of beneficial ownership information, whose purpose is to crack down on anonymous shell companies, long misused by money launderers, terrorists, and other criminals. These new reporting requirements essentially shift the burden of collecting beneficial ownership information from financial institutions to reporting companies themselves.
The law is remarkable for its sweep, embracing small companies, private funds, family offices, and angel investors that historically have not been required to make public disclosures of this sort. Under the CTA, virtually every legal entity incorporated, organized, or registered to do business in a state must disclose information relating to its owners, officers, and controlling persons.
Who is Required to Report?
Foreign and domestic entities are covered by the CTA. A domestic “reporting company” is a privately held company created by the filing of a document with the secretary of state or similar office under the law of a U.S. state. A foreign “reporting company” is an entity formed under the laws of a foreign country and registered to do business in the United States by the filing of a document with the secretary of state or similar office under the law of a U.S. state.
Reporting companies must file information on behalf of all beneficial owners. A beneficial owner is an individual who, directly or indirectly, exercises “substantial control” over a reporting company or who owns or controls at least 25 percent of the ownership interests of a reporting company. An individual exercises “substantial control” if he or she:
- Serves as a senior officer of the company;
- Has authority over the senior officers or majority of the board of a company;
- Has substantial influence over the company’s important decisions; or
- Exercises other types of substantial control over the company.
The CTA identifies numerous types of entities that are exempt from the definition of reporting companies. Importantly, a “large operating company” is exempt if the entity employs more than 20 employees on a full-time basis in the U.S., has filed a federal U.S. income tax return for the year prior showing more than $5 million in gross receipts or sales from U.S. sources, and operates from physical office premises in the U.S.
The CTA excludes from the definition of a reporting company a number of other entities, including publicly-traded companies; banks, credit unions, and other financial institutions; registered broker dealers and other entities registered with the Securities and Exchange Commission under the Exchange Act; registered public accounting firms; public utilities; insurance producers subject to state supervision; certain entities registered with the Commodity Futures Trading Commission under the Commodity Exchange Act; tax-exempt Section 501(c)(3) entities; and any entity or class of entities that the Secretary of the Treasury has determined by regulation, with the written concurrence of the Attorney General of the United States and the Secretary of Homeland Security, should be exempt.
Reporting Requirements
CTA imposes the following reporting requirements:
- Identifying information about the reporting company (e.g., legal name, trade name, and “doing business as” name; address of principal place of business; jurisdiction in which the entity was formed or first registered; and tax ID number).
- Identifying information about beneficial owners and company applicants (e.g., legal names, dates of birth, current addresses, ID number; and copy of passport or driver license).
- FinCEN identifier.
The information provided under CTA is not publicly available and not subject to the Freedom of Information Act. Such information can be disclosed only to the following governmental entities:
- Federal agencies engaged in national security, intelligence, and civil and criminal law enforcement;
- The Department of Treasury in connection with its official duties, including tax administration; and
- State and local law enforcement agencies in connection with criminal or civil investigations. FinCEN may also disclose information to financial institutions to assist in their anti-money laundering compliance activities.
Reporting Deadlines
Reporting companies have either thirty days or one year to comply with the CTA’s requirements, depending on when the entity was established. For reporting companies in existence prior to January 1, 2024, initial filings are due on January 1, 2025. Reporting companies created on or after January 1, 2024, should file an initial report within 30 calendar days after the company is created or registered. There is no ongoing filing requirement, there is an ongoing duty to correct or update information within 30 days.
Penalties
Failure to comply with the reporting requirements of the CTA can result in civil and criminal penalties. Penalties consist of fines of $500 per day, up to $10,000, and imprisonment for up to two years. Any individual who knowingly discloses beneficial owner information without authorization is subject to a $500 per day penalty, up to $250,000 and up to five years’ imprisonment.
We’re Here to Help
Need help figuring out whether your company needs to file under the CTA and, if so, who should be identified as a beneficial owner? The team at Lex Moderna can assist so that your firm is fully compliant with these new reporting requirements.