The Corporate Transparency Act-What You Need to Know

What is the Corporate Transparency Act?

The Corporate Transparency Act (the “CTA”) was enacted by Congress on January 1, 2021 in an effort to increase the transparency of private company ownership and to "help prevent and combat money laundering, terrorist, financing, tax fraud, and other illicit activity."

If you own, manage, or otherwise have an interest in an LLC, corporation or similar entity certified to do business by your applicable secretary of state, then the CTA will likely be applicable to your company. The reporting requirements under the CTA take effect on January 1, 2024, and any private company, and its owners, need to determine and understand exactly what their obligations are under the CTA, to avoid facing serious penalties once the CTA is effective.

Under the CTA, any entity qualifying as a "reporting company" (see below) must file a report with the Department of Treasury's Financial Crimes Network (FinCEN), identifying information about each "beneficial owner" and each "company applicant” of the entity.

Who is Required to Report?

Any corporation, limited liability company (LLC), or other entity that is created by the filing of a document with a secretary of state or any similar state or tribal regulatory office.

Additionally, any corporation, limited liability company (LLC), or other entity that is created under laws of a foreign country AND is registered to do business in the United States by the filing of a document with a secretary of state or any similar state or tribal regulatory office.

The CTA does exempt certain entities from reporting obligations, including (among others) governmental authorities, banks and depository institution holding companies, "money services businesses," securities brokers and dealers, and accounting firms. Large entities operating in the United States, employing 20 full time employees or more, and grossing over $5 million in revenue may also be exempted.  You can find the entire list of exempted categories here.

What Information Do I Need to Report?

A reporting company is required to file a report with FinCEN with the following information:

·         legal name (as filed with the secretary of state) (and any d/b/a names),

·         principal business address

·         jurisdiction of formation, and

·         unique identification number (e.g. typically the entity’s EIN).

In addition to the entity information, each reporting company must provide the following details with respect to each individual qualifying as a "beneficial owner" or "company applicant" of the reporting company:

·         full legal name,

·         date of birth,

·         current address, and

·         unique identifying number (e.g., their social security number),

·         A scanned copy of the identification document evidencing such number.

To the extent a reporting company it owned by other entities, the reporting obligations of the CTA require information to be disclosed all the way down to the individual, natural person, and beneficial owners, regardless of how many layers of intermediate holding entities there may be.

Who is a Beneficial Owner?

A "beneficial owner" is any individual who (directly or indirectly through entities, either: (a) exercises "substantial control" over such company; or (b) owns or controls at least 25 % of the ownership interest of the entity.

Determining whether an equity holder has “substantial control" over a reporting company is determined on a fact-by-fact basis, but generally speaking, individuals holding the following positions/authority should be reported:

·         senior officers (e.g., president, CEO, CFO, COO, general counsel)

·         individuals with appointment or removal authority (e.g., board of director members)

·         important decision makers who otherwise have authority to exercise any other form of substantial control over the reporting company (e.g., managers and/or general partners)

Who is a Company Applicant?

Under the CTA, the "company applicant" is the individual who directly filed the documents with the appropriate secretary of state’s office creating the entity.  This includes the person that actually filed the document (e.g., the entity’s attorney or CPA) and the beneficial owner of the entity that directed the person filing the document, as applicable.  This reporting requirement only applies to reporting companies formed on or after January 1, 2024.

When Do I Need to File My Report?

Any reporting company that is currently existing and formed prior to January 1, 2024, needs to file their initial report prior to January 1, 2025.

For new reporting companies established on or after January 1, 2024, the initial report must be filed within 90 calendar days of the date on which a secretary of state or similar office first provides public notice of such creation/formation or registration/qualification (as applicable).

What are my Ongoing Reporting Obligations?

You are only required to file one report, however if at any time thereafter the information contained in the report becomes inaccurate (or needs to be updated), the reporting company will need to file an updated report within 30 calendar days after the date on which such it becomes aware, or otherwise has reason to know, of the inaccuracy.  Applicable changes may include a change in the beneficial owners of the entity or their specific personal information.  For example, if the reported address of a beneficial owner changes, then an updated report must be filed within 30 days of such change. 

What if I fail to Comply?

Failure to comply with the reporting requirements of the CTA can lead to significant civil and criminal penalties. Any person failing to report or who provides false or misleading information in connection with a filed report face civil penalties of $500 a day while such violation continues, as well as be fined up to $10,000 or be imprisoned for up to two years (or both).

What Happens to the Reported Information?

FinCEN must maintain the reported information in a "confidential, secure, and nonpublic database." The reported information is not available to the public, but FinCEN may share the information with other government agencies, certain financial institutions, and regulators, in furtherance of national security, intelligence, or law enforcement activity.

Where Do I Get Additional Information?

If you have questions about whether the CTA applies to you or your entity, please reach out to us at 785.825.4674