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What the Heck Is...February 27, 2024by Fazeleh Yahyaei-MoayyedWTH is the Corporate Transparency Act?

FinCEN has officially started accepting Beneficial Ownership Information reports. If you are a business owner, there is a good chance this reporting requirement will apply to you and your business. And if you’re starting a new business, this will definitely apply to you. 

The Corporate Transparency Act (CTA), enacted as part of the Anti-Money Laundering Act of 2020, is a significant legislative effort aimed at combating money laundering, terrorist activities, and criminal operations conducted through American businesses. 

The Corporate Transparency Act aspires to address a critical issue: the misuse of U.S. companies by illicit actors seeking to disguise their ownership interests and facilitate unlawful activities. The CTA introduces reporting requirements designed to curb this problem and protect U.S. national security.

Key Provisions:

  1. Reporting Companies:
    • The term “reporting company” encompasses both domestic and foreign privately held companies.
      1. Domestic reporting companies are entities formed under state law by filing documents with a secretary of state or similar office; and
      2. Foreign reporting companies are entities formed under foreign country law and registered to do business in the U.S. by filing documents with a secretary of state or similar office.
  2. Beneficial Owners:
    • A “beneficial owner” is an individual who, directly or indirectly, exercises substantial control over the entity or owns or controls at least 25% of the ownership interests of the entity.
  3. Company Applicants:
    • A “company applicant” is an individual who either files an application to create a corporation, limited liability company, or a similar entity under US state laws or registers a foreign entity to do business in the US.

Also named in the CTA is a list of “exempt entities.” Exempt entities fall outside of the CTA’s scope and are not required to report anything additional as a result of this legislation. For the most part, exempt entities are those that already have stringent reporting requirements. Examples include, among others:

  • An entity that: (i) employs more than 20 employees on a full-time basis in the United States; (ii) filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales; and (iii) has an operating presence at a physical office within the United States;
  • A corporation, limited liability company or other similar entity of which the ownership interests are owned or controlled, directly or indirectly, by one or more aforementioned exempt entities (“exempt subsidiaries”); and
  • A bank or credit union

The CTA mandates the creation of a federal database for beneficial ownership within the Financial Crimes Enforcement Network (FinCEN) to combat anonymous shell companies. This database, however, places an additional reporting burden on small businesses. The CTA becomes effective on January 1, 2024. Existing companies must report to FinCEN before January 1, 2025, while companies formed after the start of 2024 have a 30-day reporting window.

Required Information:

Reporting companies must provide the following information to FinCEN:

  1. Identifying information about the reporting company:
    • Legal name, trade name, and DBA;
    • Principal place of business address;
    • Jurisdiction of formation or first registration; and
    • Tax ID number
  2. Identifying information about beneficial owners and company applicants:
    • Legal name;
    • Date of birth;
    • Current address;
    • ID number; and
    • Image of an ID document
  3. FinCEN identifier

Once a company reports to FinCEN, no further action is necessary unless there is a significant change. Any changes must be reported to FinCEN within 30 days. For example, alterations in senior management structure require an update.

The CTA imposes severe penalties, including civil and criminal consequences. Maximum penalties can involve fines of up to $10,000 and imprisonment for up to two years. Individuals may also be held accountable under the CTA if they were responsible for reporting failures or held a senior officer position during a violation.

It is essential for businesses to either confirm their exemption from CTA requirements or submit the required information to FinCEN within the specified timeframes to ensure compliance with this legislation. With deadlines fast approaching, reach out to one of our experienced attorneys today to ensure your business is compliant and avoids stiff penalties.