The Corporate Transparency Act (“CTA”), effective as of January 1, 2024, marks a significant shift in the regulatory landscape for US entities. It mandates that all corporations, limited liability companies (“LLCs”), limited partnerships, and similar entities created or registered to do business in the United States by filing with any Secretary of State or other similar office under the laws of a State or Indian tribe, must now report to the Financial Crimes Enforcement Network (“FinCEN”). This change will impact an estimated 32 million entities.
This reporting requirement encompasses disclosing the business name, physical address, jurisdiction of formation, and tax identification number. It also requires submitting personal information, including the name, birth date, physical address, and government-issued photo identification, of every direct and indirect beneficial owner. Given the broad definition of an “indirect owner,” the scope of this requirement is vast and complex, potentially involving multiple filings for each entity.
The penalties for non-compliance are stringent, with civil penalties of up to $500 for each day the violation continues, criminal penalties of up to $10,000, and possible imprisonment of up to two years for each violation.
The CTA was ratified on a bipartisan basis on Jan. 1, 2021, with the stated purpose of the CTA being to combat money laundering and the concealment of illicit funds through “shell” corporations or other entities in the United States. The broad definition of an owner and the wide range of the inclusion of owners’ personal information appears to be intentional.
The CTA’s compliance requirements are uniform, irrespective of a company’s size, which differs from the exemption-based approach usually granted to smaller companies in securities filings. However, the Act does offer certain exemptions for larger entities, including those that are regulated (e.g., banks, credit unions), employ over 20 people with over $5 million in revenue, or are considered inactive under specific conditions.
The level of detail required in the reports is unprecedented in the US but aligns with similar European regulations. It includes information about beneficial owners, which extends to trustees and successor trustees within an estate plan. This could lead to unintended consequences, such as requiring individuals who are unaware of their designation as successor trustees to disclose sensitive information to the government.
Who is a beneficial owner? A beneficial owner is an individual who directly or indirectly (i) owns or controls at least 25% of the interests of a reporting company or (ii) exercises substantial control over the reporting company. A reporting company could have one beneficial owner who both exercises substantial control and owns or controls at least 25% of the ownership interest of the reporting company. Alternatively, a reporting company could have more than one beneficial owner; there is no maximum number of beneficial owners.
Effectively, all small family businesses will need to report. The CTA will catch and require reporting from almost every small family business, including LLCs and other entities designed to hold only real estate. Even single-member LLCs, “disregarded” for income tax purposes, must file reports with FinCEN under the CTA.
The definition of “ownership” under the CTA is expansive, going beyond actual title to include various interests and arrangements that could constitute control or profit-sharing within a company. Similarly, the Act’s interpretation of “substantial control” includes individuals in managerial or authoritative positions within the company.
Who is considered to hold “substantial control” under the CTA? People holding substantial control must be included in the report:
- Senior officers of the reporting company
- Individuals who “direct, determine, or have substantial influence over important decisions made by the reporting company
- Individuals with authority over the appointment of any senior officer or a majority of the board of directors
Individuals handling filings must report. Information regarding the individuals who submit the document that creates the reporting company or who register the reporting company for business in the US (“applicants”) after Jan. 1, 2024, must also be reported. There are two types of applicants. First is the direct filer who files the document to create or register the reporting company. Second, is the individual primarily responsible for directing or controlling such filing.
Timing for compliance is tight. Every reporting company must file a report. For companies created or registered for business in the US before Jan. 1, 2024, initial reports are due by Jan. 1, 2025. However, for new entities created or registered for business in the US on or after Jan. 1, 2024, the initial reports are due within 90 days from the date of creation or registration.
The reporting company must also report any changes within 30 days of any change. Such a short timeframe could be very challenging in today’s busy world.
Given the immense scope and the potential risks, it’s critical for business owners to consult with advisors and professionals, like those at Rooney Law with over 30 years of experience in forming entities, and to be aware and take the necessary steps to comply with the CTA. Non-compliance is not an option, considering the severe penalties, including financial (and imprisonment) risks for willful failure to report.
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