The Corporate Transparency Act (CTA) went into effect on January 1, 2024, after a lot of moaning and growing from small business advocates. The act aims to enhance transparency in entity ownership reporting to the federal government to combat illegal activities. The act requires reporting companies to disclose beneficial ownership information to FinCEN, with exemptions for certain entities. Many business owners may find the new law frustrating, as they have likely reported this information to various other agencies that do not connect. 

‍

With an estimated 25M businesses falling under these rules, understanding the CTA's key provisions and reporting requirements will keep you in compliance and away from $500 per day fines. 

What is the CTA?

The Corporate Transparency Act (CTA) was derived from a pilot program in Miami back in 2016. FINCEN saw the cash sales of real estate using shell LLCs drop overnight. International criminals have long been linked to using “anonymous” LLCs, which are legal in some states, to park their ill-gotten gains into luxury real estate. 

‍

After much success in the pilot program, Senator Marco Rubio championed this legislation which was ultimately signed into law by former President Trump, with a delayed effective date of 1/1/2024.

‍

The purpose of the CTA is to enhance transparency within corporate ownership structures and assist with anti-money laundering enforcement by the US Government. By requiring companies to disclose information about their beneficial owners, such as individuals who directly or indirectly own or control 25% or more of the company's ownership interests, the law aims to prevent or lessen the misuse of shell companies for illegal purposes. 

‍

However, critics say this law goes too far and this has led to several constitutional challenges. As of March 2024, a Federal judge in Alabama has ruled that this may indeed be unconstitutional, but the ruling only applies to the plaintiffs in the suit. We urge all business owners to check with their own legal and tax counsel on how they should proceed in the wake of any court rulings. 

What are CTA’s requirements and exemptions?

Under the CTA, most corporations, limited liability companies (LLCs), and similar entities formed by filing “documents with a Secretary of State” or equivalent office are considered "reporting companies." A nonstate-level entity, such as a partnership (without an LLC) would not need to comply. 

‍

However, several exemptions exist under the CTA. The vast majority of these exceptions are narrow and do not affect small businesses. 

‍

Exempted companies: 

• Publicly-traded companies: Companies listed on a U.S. stock exchange or filing reports with the Securities and Exchange Commission (SEC) are exempt from reporting under the CTA.
• Regulated financial institutions: Entities already subject to certain types of federal oversight, such as banks and credit unions, are exempt from the CTA reporting requirements. Be careful here, as there are extremely specific definitions for these exclusions. 
• Tax-exempt entities: Tax-exempt organizations under IRC 501(c) of the Internal Revenue Code are exempt from reporting under the CTA.
• Inactive entities meeting specific criteria: Entities that are no longer operating and meet specific criteria may be exempt from reporting. 
• Large operating companies: Companies with more than 20 full-time employees, substantial U.S. gross receipts ($5m or more), AND a physical office in the United States are exempt from reporting under the CTA. Remember, the CTA criteria are designed to target smaller, potentially higher-risk entities for reporting purposes.

 
Who is considered a beneficial owner?

A beneficial owner may seem obvious at first, but some interesting elements may complicate this. The CTA outlines a beneficial owner as someone meeting either of two criteria:

• Ownership of 25% or more of the ownership interests in a reporting company.
• Substantial control over the company's operations.

Ownership interests can mean a variety of structures such as true equity, profits interests, convertible instruments, certain variations of restricted stock, warrants, and similar rights related to equity ownership. When in doubt, ask your tax advisor who likely has this information on hand. 

‍

Here is where it gets tricky. FINCEN has rules that someone can have substantial control, without owning ANY equity. For example, a CFO who owns 0% of a reporting company, MAY BE considered a beneficial owner.

‍

FINCEN has said substantial control can be demonstrated through holding senior officer positions, having authority over appointments or removals of officers or board members, or having significant influence over company decisions. From our perspective, there is not a black-and-white answer here, so facts and circumstances will dictate whether a non-owner becomes a beneficial owner. 

‍

Regarding reporting, the reporting company must provide specific details of the “beneficial owners” including full legal name, date of birth, residential address, and identification document information approved by FINCEN.

‍

In practice, companies should implement a process to collect all of this information in the short term but also have a way to receive updates from beneficial owners if their information changes.

Reporting timeline and updates

The CTA establishes specific timelines and requirements for reporting and updating information. The reporting obligations under the CTA will be implemented gradually after strong pushback from lawyers, accountants, and small business advocates. 

‍

Here are the key dates we believe all business owners should understand:

• For newly formed reporting companies, as of January 1, 2024, they are required to submit their initial reports within 30 days of formation. However, after pushback, FINCEN has now pushed this to 90 days. some text
  • For example, if you formed a company on January 1, 2024, you have until March 31, 2024 to comply. 
• Existing reporting companies, formed before January 1, 2024, have until January 1, 2025, to submit their initial reports. If you close a business during 2024, be sure to check with your advisor on the regulations surrounding this. some text
  •  In other words, you have the full year to get your act together and report by midnight 12/31/24. 

With regards to updates related to changes in beneficial ownership or previously reported information, companies must promptly update this information within 30 days of the change. 

‍

As an example, if a beneficial owner moves their home address, or gets married with a name change, the reporting company is responsible for updating the new information with FINCEN in 30 days. This may be a substantial challenge for some businesses. Practically, a business may not know this information or may not hear about it for months. Business owners or their advisors should be implementing policies to help capture these changes in real time. 

‍

Small business advocates have continued to push back on this provision but we have yet to see FINCEN waiver on this piece. 

Penalties for non-compliance

The Corporate Transparency Act (CTA) includes penalties for non-compliance with its reporting requirements. 

‍

Companies that do not file required reports or provide inaccurate information may face civil or criminal consequences. Remember, attempting to comply is always better than willful noncompliance. 

‍

The regulations state that submitting false information or willful noncompliance to submit complete reports can lead to fines of up to $10,000 (accruing at $500 per day) and imprisonment for up to two years.

‍

However, the CTA provides the opportunity for individuals to voluntarily correct any inaccuracies within 90 days without facing civil or criminal liability. We do not believe FINCEN will be harsh on business owners who do their best to comply but make mistakes. This is an anti-money laundering law and not a law designed to punish small business owners. FINCEN will be looking out for those who willfully ignore this law or hide the beneficial ownership information. 

Putting the CTA together and the next steps

The Corporate Transparency Act is going to ruffle a lot of feathers in 2024. More compliance often means more headaches and more fees for small business owners. Given the law is now live, we believe all business owners should contact their advisors to create a compliance plan for the initial filing and all future updates. 

‍

While compliance may seem challenging at first, business owners should not be intimidated by these laws. Most business lawyers and CPAs have spent substantial time studying these laws and can be a great option to assist you in meeting these new obligations. 

‍

The information provided in this article does not constitute accounting, legal or financial advice and is for general informational purposes only. Please contact an accountant, attorney, or financial advisor to obtain advice with respect to your business.

‍