The recently passed Corporate Transparency Act (CTA) took effect on January 1, 2024. The CTA creates new reporting and disclosure requirements for a broad range of businesses. It is important that our clients are aware of the framework and are prepared to comply with the CTA.
1) Is your business subject to the CTA? The coverage of the CTA is expansive. All business entities organized or registered in the U.S. are subject to the CTA, unless a specific exemption applies. This includes corporations, limited liability companies and limited partnerships.
There are numerous exemptions available, but they are narrowly tailored, and businesses must take care in evaluating whether an exemption may apply to them.
Exempt businesses include large operating companies, public companies, nonprofits, inactive entities and businesses in certain highly regulated industries (for example, banks, insurance companies, broker-dealers and investment advisers).
2) When do you need to begin complying? The CTA took effect on January 1, 2024. Business entities formed before this date must file an initial report by January 1, 2025. Business entities formed in the year 2024 must file an initial report within 90 days of formation. Beginning in 2025, newly formed business entities must file an initial report within 30 days of formation.
Once a reporting company has filed its initial report, it must file an updated report in the event that any of the reported information changes, within 30 days of the occurrence of such a change.
3) What kinds of information are you required to report? The CTA requires a reporting company to report basic, identifying information about its beneficial owners, such as their names and addresses.
A "beneficial owner" means the direct or indirect owner of a 25% or greater equity interest in the entity, or an individual who directly or indirectly exercises "substantial control" over the entity.
The definition of "substantial control" under the CTA is broad, and will require a facts-based analysis performed on a case-by-case basis.
4) How do you report the required information? Subject businesses will report the required information electronically by filing a form online. The Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) has developed a secure filing system, which it has recently made available on its website.
5) Who will have access to reported information? Notably, information reported under the CTA is not publicly available, and is maintained by FinCEN in a secure, non-public database.
6) What are the consequences of failing to comply? A person who willfully violates the CTA may be subject to civil penalties of up to $500 for each day that the violation continues, as well as criminal penalties of up to two years imprisonment and fines of up to $10,000. Both a reporting company and a beneficial owner may be held liable for such a violation.
It is important to note that the above penalties are applicable in the case of a willful violation or an attempt to provide false or fraudulent information. In the case of simply a missed deadline or inadvertent error, there is a 90-day grace period to rectify the violation.
7) Who administers the CTA? The CTA is administered by FinCEN. The law is intended to serve a criminal law enforcement function and seeks to combat money laundering, terrorist financing, tax fraud and similar offenses.
8) What steps should you take to prepare for compliance? The first two questions that a business must address are (1) whether the business qualifies for an exemption and, if not, (2) who are the beneficial owners of the business. These questions must be carefully considered, and in many cases will require the advice of legal counsel.
We advise that there are numerous open questions regarding how the CTA will be implemented and enforced, and we are continuing to monitor additional guidance published by FinCEN.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.