Get Ready to Report: The Corporate Transparency Act

The Corporate Transparency Act (CTA) was enacted as part of the National Defense Authorization Act in 2021, without much attention. However, it represents the most significant reformation to the Bank Secrecy Act and related anti-money laundering rules since the Patriot Act in 2001. It is enforced by the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) by creating a registry and requiring certain business entities to report information about themselves, their ownership and their creators.

Most importantly, the CTA becomes effective January 1, 2024, and all existing Reporting Companies must file a report prior to January 1, 2025. Newly created Reporting Companies must file information within 30 days of creation.

Many people have chosen not to worry about this new reporting requirement but there are some penalties involved for noncompliance. Moreover, there may be some actions to take prior to year-end with regard to the CTA.

What is the Corporate Transparency Act?

The CTA is designed to create a national registry of the beneficial ownership and originators of certain businesses. The intent is to improve financial transparency and better understand how private entities are used to launder money, evade taxes and fund terrorism. The U.S. was seen by the rest of the world as having inadequate standards in this regard and pressured to provide more transparency. However, in casting this net, Congress will also ensnare millions of entities used for legitimate purposes in the requirement to report under the CTA.

Who must file under the CTA?

The name “Corporate” within the CTA is a misnomer as the law applies to all entities created by filing a document with a state, such as corporations, limited liability companies, limited partnerships, limited liability partnerships, etc. These are referred to as “Reporting Companies” and include both domestic and foreign entities.

There are 23 exemptions to filing for Reporting Companies, such as publicly traded companies, banking, brokerage and financial services entities, tax-exempt entities and utilities. One important exemption applies to a “large operating company,” which is defined as a company employing more than 20 employees with U.S. gross receipts or sales in excess of $5 million and a physical presence in the U.S. This will eliminate the filing for many private business owners. However, if the business owner owns the corporate real estate in a separate LLC, the separate LLC would be a Reporting Company.

The Beneficial Owners of the Reporting Company will be reported under the Act. A “Beneficial Owner” is an individual who exercises substantial control over the Reporting Company, owns at least 25% of the Reporting Company or controls ownership of at least 25% of the Reporting Company. A person exercises substantial control over a Reporting Company by serving as a senior officer or a board member or having substantial influence over important decisions.

With respect to trusts that hold an interest in a Reporting Company, the Beneficial Owners include the trustee of trusts or an individual with authority to dispose of trust assets, a beneficiary who is the sole recipient of income and principal, or who has the power to demand or withdraw substantially all of the assets, or a grantor who has the right to revoke the trust or withdraw assets.

Lastly, anyone who is primarily responsible for the creation of a Reporting Company will be reported as the “Company Applicant.” This is likely going to be the attorney that forms the entity. Fortunately, Reporting Companies that were formed prior to January 1, 2024, are not required to report the Company Applicant as it may be difficult to determine who was responsible for the initial filing of a Reporting Company created in the past.

What information must be filed?

The information required to be reported isn’t significant but it’s more information than is typically reported on any tax return. Some may find it intrusive. For a Reporting Company, the following will be reported:

• Name (including d/b/a)
• Business address
• Jurisdiction of formation
• Unique identification number

 For both a Beneficial Owner and a Company Applicant, the CTA requires the reporting of the following:

• Legal name
• Date of birth
• Residential address for Beneficial Owner
• Business address for professional Applicant or residential address for other Applicants
• Unique identifying number from an acceptable identification document (e.g., passport)
• Alternatively, FinCEN will issue a unique identifier

When do reports need to filed?

All reporting will begin on and after January 1, 2024. For Reporting Companies formed in 2024, the Reporting Company, Beneficial Owners and Applicants must file a report within 30 days of creation or registration. For Reporting Companies formed prior to January 1, 2024, the Reporting Company and Beneficial Owners must file a report prior to January 1, 2025.

Applicants for Reporting Companies formed prior to January 1, 2024, are not required to report. Any modifications or corrections to previously reported information must be made within 30 days. The reporting is made to FinCEN pursuant to their website. The system is commonly referred to as the Beneficial Ownership Secure System or BOSS.

What are the penalties for not reporting?

There are both civil and criminal penalties for willfully failing to file or willfully providing a false or fraudulent report. The civil penalties are $500 per day for each day that the violation continues or a criminal fine of not more than $10,000 and/or imprisonment for not more than two years.

Considerations prior to year-end

Even though existing entities don’t have to report until January 1, 2025, if the entity exists on January 1, 2024, there is a reporting requirement next year. With all of the complex structures used in estate planning and business planning, various legal entities, trusts and related individuals will be required to report, and it would be prudent to take an inventory of those entities that need to report under the CTA and begin to gather data about the Beneficial Owners. Alternatively, it may be easier to terminate unnecessary entities prior to year-end.

Additionally, year-end gifting and transfers of ownership or resignation of authoritative positions could change or even eliminate the reporting requirements. For example, certain officers, directors, trustees, power holders and other individuals may choose to resign from positions to avoid any reporting of personal information.

The CTA is clearly here to stay as part of U.S. coordination with other countries to prevent money laundering, illegal activity and terrorist funding. The information obtained will be disclosed to federal, state, local or foreign governments if properly requested and subject to appropriate standards and procedures. Many would prefer not to get caught in this web of reporting, but it may be difficult to achieve, especially for entities that serve a valid legal purpose.

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