Corporate Transparency Act: Part One
1. What is it?
On January 1, 2021, Congress passed the Corporate Transparency Act (CTA) as part of the overall 2021 National Defense Authorization Act and under the scope of the Anit-Money Laundering Act of 2020 (AMLA). The CTA’s goal is to combat money laundering, terrorism financing, organized crime, and other financial crimes.
The CTA requires (1) the establishment of new federal beneficial ownership requirements for certain U.S. domiciled or active entities, including foreign entities that operate in the U.S., and (2) FinCEN’s maintenance of a federal database for the beneficial ownership information collected. In addition to “beneficial owners,” the CTA requires information reporting for company “applicants” applying to form an entity. A national registry of entities and their applicants will be created.
2. Who is Affected by it?
a. Reporting Companies
Every LLC and corporation that is active in the United States, whether formed here or abroad, will have to complete this filing, with very limited exemptions. That means that if you are a member of an LLC or shareholder of a corporation, you will be considered a “reporting company” and will have to comply with the Act. Filing deadlines vary depending on when the business was formed:
For companies that became active December 31, 2023, or prior, they will have until January 1, 2025 to complete the necessary filings.
For companies formed January 1, 2024 through December 31, 2024, they will have 90 days from becoming active to complete the necessary filings.
For any company formed January 1, 2025 or later, they will have only 30 days to complete the necessary filings.
It is currently believed that the filing will only need to be completed once and that this will not be an annual requirement. However, if there are any changes to the company’s ownership or addresses, an amended filing will need to be completed within 30 calendar days of the change. Likewise, if there is an inaccuracy within the filing, an emended filing must be completed within 30 calendar days after the date in which the reporting company becomes aware or has reason to know that any required information contained in any report filed with FinCEN was inaccurate.
b. Company Applicants
The CTA defines the applicant as the person who files the document that forms the entity. The proposed regulations also include, as “applicant,” “anyone who directs or controls the filing of the document by the other.” It is unclear under the proposed regulations whether this would result in one true “applicant,” who must be reported, or if it results in reporting for multiple “applicants.” The final rule specifies that the term company “applicant” means the individual who directly files the document to create or register the reporting company and the individual who is “primarily responsible” for directing or controlling such filing if more than one individual is involved in the filing. Although there may be more than one “applicant,” there cannot be more than two.
c. Notable Exemptions
There are several exceptions for companies that are otherwise required to report to a federal agency, such as banks and investment companies. There is also a “large operating company exemption,” which exempts companies that (1) employ more than 20 employees on a full-time basis in the US; and (2) filed in the previous year Federal income tax returns in the US demonstrating more than $5 million in gross receipts or sales in the aggregate; and (3) have an operating presence at a physical office within the US.
Private trusts are not currently included as “reporting companies” - as there is no state filing required - and charitable organizations, including private foundations, are specifically exempt from the reporting requirements. However, the CTA calls for a further study of partnerships, trusts, and other legal entities, so these rules may change over time.
In Part Two, we will cover reporting requirements for all beneficial owners, who qualifies as a beneficial owner, what documentation is needed for filing, who will ultimately have access to reporting information, and the penalties for not complying with the Act. If you are a business owner throughout the United States and have questions regarding compliance with the Act, please do not hesitate to contact my office to discuss further.