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Corporate Transparency Act Overview

January 9, 2024 - By: Richard P. Breed, IV and Michael J. Radin

The Corporate Transparency Act went into effect on January 1, 2024 and is expected to affect nearly 32 million U.S. small businesses. The summary below includes information you need to know in order to comply with the new rules.

Millions of small businesses are formed within the United States each year as corporations, LLCs, or other corporate structures. Only a few states in the United States require legal entities to disclose information about their owners. Illicit actors frequently use corporate structures such as shell and front companies to hide their identities and launder their money through the U.S. financial system. A lack of a uniform, national ownership reporting system (at the time of entity formation or ownership changes) has hindered law enforcement’s ability to quickly investigate entities created and used to hide ownership for illicit purposes. The Corporate Transparency Act (“CTA”) was enacted as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act for Fiscal Year 2021. The CTA is intended to combat use of corporate entities for illicit activity by requiring each “Reporting Company” to disclose information concerning the individuals who own or control it. The CTA brings the U.S. regulatory scheme closer to the disclosure requirements used in other countries to assist international law enforcement.

The CTA requires every “Reporting Company” to file a disclosure report containing “Beneficial Ownership Information” for each individual that is deemed a “Beneficial Owner” of that Reporting Company. The disclosure report for each Reporting Company must be filed with the US Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The timing for filing report depends on when the Reporting Company was formed.

For entities formed before 1/1/2024, the required disclosure must be filed on or before January 1, 2025. For entities formed after 1/1/2024 and before 12/31/2025, the required filing must be filed within 90 days of the formation date. For entities formed on or after 1/1/2025, the required disclosure must be filed within 30 days of the formation date. So, all new entities must file within 90 days starting on January 1, 2024, and previously existing entities can start filing now but must file by 12/31/25. The CTA imposes civil penalties of up to $500 per day that the required disclosure is filed late and potential criminal penalties for anyone that willfully provides or attempts to provide false or fraudulent Beneficial Ownership Information.

To understand your new obligations under the CTA, you need to start with several new definitions in the CTA. Those definitions are:
  • “Reporting Company”: is a corporation, LLC, or similar entity that is (i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.
            - The CTA provides a list of 23 exemptions to the definition of “Reporting Company”, however, most small businesses and inactive entities will not satisfy any of these exemptions.
            - Notably, if you have 20 or fewer employees and reported $5 million or less of gross revenue on the entity’s prior year tax return, you will not be exempt from the definition of “Reporting Company."
            - Even entities that have no business activity need to comply with the CTA’s disclosure requirements. For example, the LLC that you use to own your vacation home will likely be deemed to be a “Reporting Company” under the CTA.
  • “Beneficial Owner”: Refers to a person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) owns or controls 25 percent or more of the ownership interests of the entity, or (ii) exercises substantial control over the entity.
            - The term Beneficial Owner can only refer to an individual. This is the critical information the CTA is intended to uncover.    

            - If there is an entity that owns an interest in your “Reporting Company," you must determine the “Beneficial Owners” of the Reporting Company by looking through the chain of ownership of entities. So where there are several levels of entities the Reporting Company needs to look through all those levels to reach the ultimate individuals.

            - A person can be a “Beneficial Owner” even if they own no equity interest in the Reporting Company if they meet the test for “exercising substantial control” over the Reporting Company. The “substantial control” test is new and FinCEN has provided only some general guidance on it.

            - Trusts that own an interest in a Reporting Company are also required to disclose information regarding the (i) the Settlor of the Trust, (ii) the Trustees, and (iii) potentially, certain beneficiaries of the Trust. FinCEN has provided little guidance on interpretation of the disclosure requirements as it relates to Trusts.
  • “Beneficial Ownership Information” means with respect to each individual Beneficial Owner, the following information:
            - The full legal name of the individual;

            - The date of birth of the individual;

            - The individual’s residential street address; and

            - A photocopy of any one of the following documents for the individual: (1) A non-expired passport issued to the individual by the United States government; (2) A non-expired identification document issued to the individual by a State, local government, or Indian tribe for the purpose of identifying the individual; (3) A non-expired driver’s license issued to the individual by a State; or (4) A non-expired passport issued by a foreign government to the individual, if the individual does not possess any of the foregoing documents.

This alert is only a summary of the disclosure requirements of the CTA. The bottom line is that the CTA is very broad and will require nearly every small business to determine whether it is a Reporting Company and who are its Beneficial Owners. The CTA will also present challenges for businesses to keep the Beneficial Ownership Information current and report changes in a timely manner to meet the strict timelines for disclosing such information to FinCEN. This necessitates greater internal controls by Reporting Companies over their owners and individuals with “substantial control.”

We have been following the CTA and here to answer any questions you may have. Please reach out to Richard Breed IV or any member of our corporate team if you have any questions.