As a small business owner, staying abreast of regulatory changes is vital to ensuring compliance and safeguarding your business interests. One such recent development is the implementation of the Corporate Transparency Act (CTA), a significant piece of legislation aimed at enhancing transparency and combating financial crimes. In Part 1, we’ll delve into what the CTA entails. Read Part 2 for more details on what steps to take next.
What is the Corporate Transparency Act?
The Corporate Transparency Act (the “CTA”) was enacted by Congress as part of its ongoing effort to combat terrorism, organized crime, and money laundering. The United States is joining other nations that have already adopted similar reporting requirements in an effort to make it more difficult to hide criminal activity from law enforcement by creating shell companies.
The CTA requires certain entities (called “reporting companies”) to report information about the
companies themselves, their beneficial owners (more on who these persons are below), and
company applicants (the persons who signed the formation documents for the entity). Timely
reporting is required to the government through an online reporting system created by Financial
Crimes Enforcement Network (“FinCEN”), a department of the United States Treasury.
The reporting deadlines for entities existing as of December 31, 2023 are delayed until January 1, 2025; however, entities formed on or after January 1, 2024 will be subject to these rules and required to report under a tighter deadline (as of this letter, within 90 days after formation if created in 2024 or within 30 days of formation thereafter).
While it is true that several professional organizations have petitioned Congress to delay
implementation of the CTA, no one should assume CTA deadlines will be deferred.
What information must be reported?
Each reporting company must file its initial report online with FinCEN. This reporting is available
now. The initial report must include the full legal name and any trade or “doing business as name” for the reporting company, a complete address of the reporting company, including street address of the principal place of business (no P.O. Box or the address of the attorney who formed the entity), state of formation, and the Taxpayer Identification Number for the reporting company. In addition, the report must include the following information for each beneficial owner and each company applicant: full legal name, date of birth, complete current residential address, a unique identifying number from certain official governmental identification documents (e.g., non-expired passport or government issued driver’s license), and a copy the document used.
Who are “beneficial owners”?
For purposes of the CTA, beneficial owners are not just the persons many would consider to be
owners of an entity. A beneficial owner includes any individual who, directly or indirectly, either (i) exercises “substantial control” over a reporting company or (ii) owns or controls at least 25 percent of the ownership interests of such reporting company. There are a lot of key phrases in this definition, including “directly or indirectly,” “substantial control,” “owns or controls,” and
“ownership interests.” Each of them is defined in the final FinCEN rule for Beneficial Ownership
Information Reporting Requirements (the “FinCEN rule”) and generally results in a very broad
series of rules intended to catch as many people as possible who could potentially influence the
operation of the entity.
“Substantial control” over a reporting company can include a wide range of things, including (i)
serving as a senior officer of the reporting company; (ii) having authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); and (iii)
having substantial influence over important decisions made by the reporting company (which is
further defined in the FinCEN rule).
In addition to direct control over the reporting company, an individual can exercise substantial
control indirectly through a number of arrangements and relationships set forth in the FinCEN rule. It is important to note that a person acting as trustee of a trust may have direct or indirect control of an entity owned by the trust.
Thus, you can see that there are a number of ways in which a person might have direct or indirect control over substantial decisions and operations of a reporting company, and that person would then be required to report as a beneficial owner.
“Ownership interests” include not only equity and stock instruments (and other similar
arrangements), regardless of whether they are transferable or confer voting rights, but also a broad array of other interests, rights, and other arrangements set forth in the FinCEN rule.
As with direct and indirect methods of having substantial control over a reporting company, an
individual can have direct or indirect ownership of a reporting company. Direct ownership of an
interest in 25% or more of a reporting company is fairly easily understood. However, beneficial
owners also include those who “control” ownership interests in a wide manner of ways, including
holding the interest as a joint owner, through an individual who acts as agent or nominee of the
beneficial owner, through ownership or control of intermediary entities, or through a trust.
If a trust holds an ownership interest, the FinCEN rule provides that the beneficial owner is the
trustee of the trust or other individual “with the authority to dispose of trust assets,” which may
include a power of appointment. The trustee of a trust that holds a 25% ownership interest in a
reporting company seems an obvious beneficial owner. But in addition to the trustee, the term also includes (a) a beneficiary who (i) is the sole permissible recipient of income and principal from the trust or (ii) has the right to withdraw or to demand a distribution of substantially all of the assets from the trust; and (b) a grantor who has the right to revoke the trust or otherwise withdraw the assets of the trust.
Are there any exceptions?
There are exceptions to the reporting requirements of the CTA, notably for non-profits (but not
including an entity owned by the non-profit), banks, and large companies with more than 20
employees and gross receipts in excess of $5 million as shown on an income tax return filed with the Internal Revenue Service the prior year. These types of entities are generally subject to sufficient regulation that Congress exempted them from the new CTA requirements. In addition, if a minor is a beneficial owner, the minor’s parents’ information may be reported instead of the minor child’s information.
Is there only one filing required?
Initially, only one filing is required. However, filings are required any time there is a change in
beneficial ownership or if information has changed for an existing beneficial owner, such as name or address or if the business.
What are the penalties?
The penalties for willfully failing to report complete or updated beneficial ownership information to FinCEN or willfully providing or attempting to provide false or fraudulent beneficial ownership
information are substantial. There are civil and criminal penalties for violations of up to $500 for
each day that the violation continues or has not been remedied, with fines up to $10,000, and up to 2 years imprisonment.
At Mathews Law, we’re prepared to offer advisory services to help you grasp the intricacies of the CTA. Additionally, we’re pleased to offer paid hourly consultations to support LLCs in their self-filing endeavors or to guide small businesses through their FinCEN filing requirements.
When you’re ready, we’re ready. Schedule a time to chat to get started.
One thought on “Part 1: What Business Owners Need to Know About the Corporate Transparency Act”
Comments are closed.