In an effort to combat money laundering, terrorism financing and other criminal funding activities from occurring in the United States, the Corporate Transparency Act (CTA) was signed into law in 2020 as part of the National Defense Authorization Act. Unfortunately, caught in this dragnet are legitimate companies to which a compliance burden has been added.
Beginning Jan. 1, 2024, the CTA implements uniform beneficial ownership information reporting requirements for corporations, limited liability companies and other business entities formally created in or registered to do business in the United States. Under the CTA, the identity and other confidential information about the “beneficial owners” of these entities must be disclosed to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
Note, several accounting professionals, industry associations and governmental organizations have voiced concerns about the expected start date for the new reporting requirement, citing small businesses will be unprepared to meet this obligation. Until formal legislation is passed, businesses should proceed with preparing to meet this new reporting requirement.
Below are a select few FAQs related to the CTA, including who is required to comply, what information is required and more.
Who is required to comply?
All domestic and foreign reporting entities that are corporations, limited liability companies or similar entities that were either:
- Created by the filing of a document with the Secretary of State or a similar office under the laws of a State or Indian Tribe; or
- Formed under the laws 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.
Some entities, such as banks, credit unions, investment advisors, brokers/dealers, insurance companies and charitable organizations are exempt from the reporting requirement. Businesses with more than 20 employees and $5 million in sales that have a physical presence in the United States are also exempt.
What company information should be reported?
If a reporting company is created or registered on or after Jan. 1, 2024, it is required to report information about itself, its beneficial owners and company applicants. Reporting companies created or registered before Jan. 1, 2024, will only need to provide information about itself and beneficial owners.
Reporting companies must report the following information to the FinCEN:
- The company’s legal name
- Any trade names
- Current street address of its principal place of business
- Jurisdiction of formation or registration
- Taxpayer identification number
Who is considered a beneficial owner and what information is required?
Beneficial owners are any individuals with substantial control over the entity, who own at least 25% of the entity or receive substantial benefits from its assets. Required information to be submitted about each beneficial owner (and applicants, if applicable) includes:
- Full legal name
- Date of birth
- Form of unique identification number, such as a driver’s license or U.S. passport number
All information will be placed on a confidential registry maintained by FinCEN.
When are reports due?
Existing reporting companies (those formed before Jan. 1, 2024) must report the company and its beneficial owner(s) information by Jan. 1, 2025. New reporting companies (those formed o nor after Jan. 1, 2024) must report the identity of its beneficial owner(s) and applicant(s) to the FinCEN within 30 days of receiving actual or public notice that the creation of registration of the reporting company is effective.
What are the penalties if I fail to comply?
Violations of the CTA, including failure to report benefit ownership information or the reporting of false or fraudulent information, may lead to the following penalties:
- Civil penalties can up be to $500 for each day the violation continues
- Criminal penalties may include fines of up to $10,000 and/or imprisonment for up to two years
Growing Pressure to Delay CTA Effective Date
There continues to be growing concerns about the CTA’s effective date due to its complex rules and anticipated time it will take for businesses to get in compliance. Some of the most recent requests for delaying the CTA’s start date include: · Protecting Small Business Information Act of 2023: This bill urges Congress to delay the CTA reporting requirements until all three rules under the CTA have been finalized with a concurrent effective date. The Treasury Department: The organization proposes giving newly formed companies more time to report its ownership information, acknowledging that the pending new requirements to do so are complex and these companies need more time. The proposed rule would give companies created or registered in 2024 a 90-day period after they’ve formed to report its ownership information. Existing companies would still have to file their initial report within the year the requirement goes into effect.
Until the proposed legislation is passed, we encourage you prepare now by developing internal policies and procedures to assess your reporting obligations and identify your beneficial owners and applicants. To help small businesses prepare for these new compliance rules, the FinCEN recently published a Small Entity Compliance Guide. The guide is intended to help businesses determine if they are required to report its beneficial ownership information to FinCEN, as well as what reporting is required should that be the case.
We encourage you to work with your attorney and tax advisor to help guide you through these new reporting requirements and determine your reporting obligations. To obtain assistance with your CTA compliance needs, contact us today.