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December 21, 2023 | BusinessGeneral

The Corporate Transparency Act: What Business Owners Need to Know

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Author(s)
Robert Kleinfeldt

Senior Counsel

Jari Wilson

Associate Attorney

The Corporate Transparency Act, (CTA) is a groundbreaking federal law that was recently passed by Congress.  Not only is the legislation the first of its kind, but it affects virtually every business owner in the United States.  It is important for business owners to understand what their responsibilities are under the CTA.

What is the Corporate Transparency Act (“CTA”)?

Scheduled to come into effect on January 1, 2024, the CTA is an unprecedented federal registration program for business owners administered by the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of Treasury.

The CTA targets small businesses and will require business owners to submit a report to FinCEN regarding the beneficial ownership information.  These reports are required for all corporations, limited liability companies, and any entity that is created by the filing of a document with a secretary of state or any other similar office under the laws of a State or Indian tribe.  These entities are referred to under the CTA as “Reporting Companies”.

The report filed with FinCEN must identify each beneficial owner of the applicable reporting company and each company applicant with respect to that reporting company by:

  • Full legal name and birthdate of the individual;
  • Complete current address
    • In the case of a company applicant who files a formation document in the course of such individual’s business, the current address must contain the business street address of such business; or
    • In any other case, the residential street address that the individual uses for tax residency purposes;
  • A photo and birthdate of any individual with a beneficial ownership interest in the reporting company.

Only reporting companies created or registered on or after January 1, 2024, will need to report their company applicants.

What is a Beneficial Ownership Interest?

Under the CTA, a “beneficial owner” interest is defined as any individual who, directly or indirectly, either: (1) exercises substantial control over such reporting company or (2) owns or controls at least 25% of the ownership interests of such reporting company.  Essentially, the definition is written broadly in order to require transparency from those who have control over the company or those with an economic interest in the company.

What Does “Exercise Substantial Control” Over a Reporting Company Mean?

While not exactly clear in the statute, the CTA provides for three specific indicators of “substantial control”:

  1. Service as a senior officer of a reporting company;
  2. Authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of a reporting company; and
  3. Direction, determination, or decision of, or substantial influence over, important matters of a reporting company.

FinCEN wants to prevent individuals from evading identification as beneficial owners by hiding behind variables such as job descriptions, job titles, and nominal lack of authority.

As such, under the CTA, senior officers of the company will also likely be required to register despite not being an owner of the Company itself.  Under the CTA, a “senior officer” means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function.  A company’s general counsel is also deemed to have substantial control even if that officer does not have policy making or other control functions.  Of note, neither a Treasurer nor secretary have been deemed to have substantial control.

CTA Exceptions and Exemptions

Under the CTA, entities that are not created by filing with the state, such as general partnerships or trusts, are not yet required to file reports with FinCEN.  Additionally, certain “beneficial owners” are also excluded for now, such as:

  1. A child who is a minor, if the information of the parent or legal guardian of the minor child is otherwise reported;
  2. An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; or
  3. An employee of a reporting company, acting solely as an employee and not as a senior officer, whose substantial control over or economic benefits from such entity are derived solely from the employment status of the employee.

In addition, there is a Large Company exception.  A large company is defined as any entity that employs more than 20 full time employees in the U.S., files income tax returns showing more than $5M in domestic gross receipts or sales, and has an operating presence at a physical office in the United States.  Under the Large Company exception, any newly formed entities would not yet satisfy the tax returns element as the tax returns are based on what the entity filed in the previous year.

What are the CTA Compliance Deadlines?

The compliance deadline depends on the type of entity that needs to report.

For entities that were created or registered during 2024, the following deadlines apply to their initial reports to FinCen:

  • Domestic reporting companies must file a report within 90 days of the date it was created. The date of creation is specified by the secretary of state or a similar office.
  • Foreign reporting companies must file a report within 90 days of the date it first becomes a foreign reporting company.

For future entities that are created or registered on or after January 1, 2025, they must file a report within 30 days of creating.

And for existing reporting companies, both domestic and foreign, they must file a report no later than January 1, 2025.

Penalties for Non-Compliance or Unauthorized Disclosures

Under the CTA, business owners could face both civil and criminal penalties if they willfully fail to comply with the law’s reporting requirements. The civil penalties can include fines of up to $500 for each day the violation continues.  The criminal penalties can include fines of up to $10,000, 2 years’ imprisonment, or both.

The CTA also provides for civil and criminal penalties for unauthorized disclosure or use violations.  Civil penalties again include fees of up to $500 for each day that violation continues, while the criminal penalties include fines up to $250,000, 5 years’ imprisonment, or both.  The criminal fines can also be multiplied where another federal law has been violated, or if the violations are part of a pattern of any illegal activity involving more than $100,000 in a 12-month period.  In these cases, a fine of up to $500,000, 10 years’ imprisonment, or both, may apply for willful violations.

Conclusion

Since the CTA is taking effect soon, it is imperative for business owners to understand what they need to do to comply with the new law.  If business owners do not comply with the CTA, then they could potentially face huge civil or criminal penalties.  Contact a member of our team to learn more.

 

Photo by Getty Images in collaboration with Unsplash on Unsplash
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