The Corporate Transparency Act (CTA) was passed into law as part of the National Defense Authorization Act for Fiscal Year 2021 with an effective date of January 1, 2024. The CTA expands the anti-money laundering laws, regulates who must file a report with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), and identifies beneficial owners – individuals who own, control, or take steps to create an entity. The reporting obligations are estimated by FinCEN to impact more than 32 million pre-2024 entities and about 5 million entities per year formed in 2024 and over the next decade.
The new requirements are intended to help "prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity.”
While the beneficial ownership information (BOI) is relatively simple to obtain, the definitions of a "covered entity" and a "beneficial owner" are more complex determinations based on the overly broad language used in the CTA.
The following provides several “fast facts” that briefly cover the requirements now mandated by the CTA and identify who could be affected.
What Is the Corporate Transparency Act (CTA)?
The CTA requires certain entities – generally smaller, loosely regulated businesses – to file with FinCEN identifying beneficial owners; the information contained in the filing can be used by select authorities for the purpose of preventing corporate corruption.
Which Entities Must Report?
- Reporting companies are corporations, limited liability companies, and other similar entities that must file a document with the secretary of state or equivalent office.
- Domestic and foreign companies registered to do business in the United States are covered.
- There are 23 different exemptions under the CTA including the following:
- Banks, federal credit unions, and depository institution-holding companies.
- Investment companies.
- Insurance companies.
- Accounting firms.
- Regulated public utilities that provide telecommunications, electrical power, natural gas, or water and sewer.
- Large operating companies (more than 20 full-time employees and filing of federal taxes demonstrating more than $5 million in gross receipts or sales).
- Inactive entities (any entity in existence on or before January 1, 2020, not engaged in active business, not having funds greater than $1,000 in the preceding 12 months).
What Must Entities Report?
Reporting Companies must report the following:
- For the reporting company:
- Full legal name.
- Any trade name or “doing business as” name.
- A complete current address consisting of the principal place of business within the United States or the primary location in the United States for a foreign reporting company.
- The state or foreign jurisdiction of formation.
- Internal Revenue Service Taxpayer Identification Number including an Employer Identification Number.
- For every individual who is a beneficial owner:
- Full legal name.
- Date of birth.
- A unique identifying number (passport or driver’s license).
- A complete, current address consisting of:
- In the case of a company applicant, the street address of such business.
- In any other case, the individual’s residential address.
Who Is a Beneficial Owner as Described by the CTA?
- A beneficial owner is defined as any individual who, directly or indirectly, exercises substantial control over a reporting company or controls at least 25% of the ownership interests.
- Individuals with substantial control could be any of the following:
- A senior officer at the company.
- A person who directs or has substantial control over important decisions made by the company.
- A trustee of a trust.
- To determine a 25% of ownership interest, capital interests, profit interests, voting rights, convertible instruments, puts and calls may be considered.
- In effect, FinCEN has encouraged, with specific “catch-all” provisions, corporations to identify BOI to ensure compliance with the new law.
- BOI is not publicly accessible but rather may only be disclosed, after proper protocol, to certain agencies engaged in law enforcement and national security. Financial institutions can only obtain BOI through the consent of the reporting company.
When Does the CTA Go Into Effect?
- The CTA goes into effect on January 1, 2024.
- Initially, the CTA stated that companies created after January 1, 2024, must file an initial report with FinCEN within 30 days of creation or registration, but on September 28, 2023, FinCEN proposed extending this deadline to 90 days for entities formed in calendar year 2024.
- Existing companies must file before January 1, 2025.
- If an update or correction to BOI occurs, the entity is required to file a report within 30 days notifying FinCEN of the change.
- According to FinCEN’s website, reporting companies will report company and BOI information electronically through a secure filing system via FinCEN’s website. The system is currently being developed and will be made available before any report must be filed.
Because of the overly broad language of the CTA, if an entity doesn’t fall within an exemption for reporting, entities are advised to follow a liberal approach to reporting BOI. It is also imperative to note that changes to BOI must be reported to FinCEN within 30 days; thus, obligations under the CTA is not a “one-time” analysis but rather will be ongoing. If you have questions about whether your business is mandated to comply with CTA and/or how to ensure your business remains in compliance, please reach out to your financial advisor, attorney, the author listed below, or any member of Calfee's Corporate and Finance group.