The Corporate Transparency Act – Prepare for More Paperwork

Pile of Folders

The Corporate Transparency Act (“CTA”), scheduled to take effect on January 1, 2024, represents a significant shift in the regulatory landscape for businesses operating in the United States. This sweeping legislation is designed to enhance transparency and reduce the risk of illicit activities such as money laundering and terrorist financing. The act accomplishes that goal by making a lot of people do a lot more paperwork.  One of those people may be you.

Under the CTA, reporting companies are obligated to provide extensive information about their beneficial owners and company applicants. The term “beneficial owner” refers to individuals who directly or indirectly exercise substantial control over a reporting company or own at least 25 percent of its ownership interests. Beneficial owners may include individuals who serve as senior officers, exert authority over senior officers or the majority of the board, possess substantial influence over important decisions, or otherwise exercise substantial control over the company.

Reporting companies must also identify “company applicants,” which are individuals responsible for filing documents that create or register the entity.

The information required for reporting includes full legal names, trade or “doing business as” (d/b/a) names, addresses, jurisdictions of formation, and federal taxpayer identification numbers. Additionally, for each beneficial owner and company applicant, reporting companies must provide personal details such as names, dates of birth, home addresses, and unique identifying numbers (e.g., U.S. passport or driver’s license), along with an image of the corresponding identifying document. Alternatively, individuals or entities can obtain a Financial Crimes Enforcement Network (“FinCEN”) identifier for use in subsequent filings.

Reporting companies should be aware of the following deadlines for filing initial reports:

  • Companies Formed or Registered Before January 1, 2024: If a reporting company was created or registered prior to January 1, 2024, it will have one year from the effective date of the CTA (January 1, 2024) to comply with the reporting requirements. This means that these companies will have until January 1, 2025, to file their initial reports with FINCEN.
  • Companies Formed or Registered on or after January 1, 2024: For reporting companies formed or registered on or after January 1, 2024, they will have a shorter deadline to comply. These entities will have 30 days from the date of their creation or registration to file their initial reports with FinCEN.

It’s essential for reporting companies to be aware of these deadlines and ensure that they submit their initial reports within the stipulated time frame. Failure to meet these deadlines could result in non-compliance with the CTA, leading to potential penalties. Therefore, timely and accurate reporting is crucial for affected businesses.

While the CTA imposes these extensive reporting requirements on a wide range of legal entities, it’s important to note that certain exemptions exist. These exemptions are designed to exclude specific types of entities from the reporting company definition. Some key exemptions include:

  • Tax-Exempt Entities: Entities that enjoy tax-exempt status are generally not subject to CTA reporting.
  • Subsidiaries of Exempt Entities: Subsidiaries of entities that themselves are exempt from CTA reporting are also exempt.
  • Large Operating Companies: Companies employing more than 20 full-time employees in the U.S., with over $5 million in gross receipts or sales (excluding international revenue sources), and operating from physical U.S. office premises are exempt. However, startups may find it challenging to meet these requirements.

The CTA imposes both civil and criminal penalties for non-compliance or the provision of false or fraudulent reports. Civil fines can accumulate at a rate of $500 per day for as long as inaccurate reports remain uncorrected. Criminal penalties include fines of up to $10,000 and potential jail time of up to two years for violators.

In anticipation of the CTA’s implementation, entities that may qualify as reporting companies should proactively assess their compliance plan. This includes gathering the necessary information for reporting, updating internal policies to ensure effective reporting, and establishing systems to track and promptly report changes in the required information.

Moreover, prospective acquirers involved in mergers and acquisitions should be diligent in confirming whether their target companies fall under the definition of reporting companies and whether they are in compliance with CTA reporting obligations.