The Corporate Transparency Act: Part Two

1. Recap of Last Time

My last post discussed the Corporate Transparency Act, mainly what it is and who is affected by it (reporting companies, company applicants, and the notable exemptions), In this post we will discuss who needs to report (beneficial owners and company applicants), what they need to report, and penalties for noncompliance.

2. Beneficial Owners: What Are They?

The CTA defines “beneficial owner” to mean, with respect to any entity, an individual who, directly or indirectly, through any contract, arrangement, understanding, relationships, or otherwise (1) exercises “substantial control” over the entity or (2) owns or controls not less than 25% of the “ownership interests” of the entity. However, the CTA excludes from such definition of a “beneficial owner”:

1. a minor child (as defined in the state in which the entity is formed), if the information of the parent or guardian of the minor child is reported in accordance with the CTA;

2. an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;

3. an individual acting solely as an employee of a reporting person and whose control over the economic benefits from such entity is derived solely from the employment status of the person;

4. an individual whose only interest in a reporting company is through a right of inheritance;

5. a creditor of a reporting person, unless the creditor meets the requirements of a “beneficial owner” based on substantial control or ownership or control of not less than 25% of the ownership interests.

 The regulations set forth three specific indicators of “substantial control”:

1. service as a senior officer of a reporting company;

2. authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar body) of a reporting company; and

3. direction, determination, or decision of, or substantial influence over, important decisions made by a reporting company. The basic goal is requiring a reporting company to identify the individuals who stand behind the reporting company and direct its actions.

For a trust that is a beneficial owner, it will not be sufficient to report the identity of the trustee. The proposed regulations would treat as beneficial owners: (1) the trustee, (2) a trust beneficiary who is the sole permissible recipient of income and principal or who can demand distribution of or withdraw substantially all of the trust assets, and (3) the trust grantor who has the right to revoke the trust or otherwise withdraw all of its assets. The final regulations retained this rule from the proposed regulations.

3. Company Applicants: What Are They?

The CTA and its regulations also require reporting information for the “company applicant.” The statute defines the company applicant as the “person who files the document that forms the entity.” The proposed regulations also include, as company applicant, “anyone who directs or controls the filing of the document by the other.” 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.

4. What Information Must Be Reported?

a. Reporting Companies must submit the following information:

1. the full legal name of the reporting company;

2. any trade name or “doing business as” name of the reporting company;

3. the business street address of the reporting company;

4. the state or Tribal jurisdiction of formation of the reporting company (and for a foreign reporting company, the state or Tribal jurisdiction where such company first registers);

5. an IRS TIN of the reporting company (or, of a foreign company, a foreign tax ID number);

b. Beneficial Owners and Company Applicants must submit the following information for each individual:

1. their full legal name;

2. their date of birth;

3. their complete current address, which FinCEN clarifies as

   a. For a company applicant who provides a business service as a corporate or formation address, the business address or

   b. For all other cases, the residential street address that the individual uses for tax residency purposes

4. A unique identifying number from acceptable ID documents (a passport or driver’s license number) and the jurisdiction that issued the ID document

5. An image of the acceptable ID document from which the unique identifying number was taken, showing both the unique identifying number and the individual’s photograph

5. Penalties for Noncompliance

Noncompliance with the CTA can result in both civil and criminal penalties. These penalties are designed to deter non-compliance and ensure that businesses adhere to the required reporting standards.

Civil Penalties:

Non-compliance with the CTA can result in substantial civil fines. Entities that fail to report the required information about their beneficial owners, or report incorrect or incomplete information, can face fines up to $500 per day until the violation is corrected. These fines can accumulate quickly, leading to a significant financial burden for small businesses.

Criminal Penalties:

In cases where non-compliance is found to be willful or accompanied by fraudulent intent, criminal penalties may be imposed. This includes scenarios where false or misleading information is knowingly submitted. Violators can face fines of up to $10,000 and imprisonment for up to two years. The severity of these penalties underlines the seriousness with which the government views compliance with the CTA.

6. Next Steps for the Small Business Owner

First thing that all small business owners should do is start compiling data of all members of their LLC, or shareholders of their corporations. Next, make sure that the addresses that they have on file are complete and accurate, and that these addresses match both the addresses on file with the secretary of state as well as the members’ (or shareholders’) addresses on their respective driver’s licenses or state IDs.

Next step would be to contact my office to ensure that filing is completed in a timely manner and that it is done correctly. Any business formed prior to January 1, 2024 will have until January 1, 2025 to file. Any business formed January 1, 2024 or later will have only 90 days since becoming active to file. Time is of the essence and business owners need to be prepared or face large fines and potentially criminal penalties. Reach out to my office today to learn more!