The Corporate Transparency Act (CTA) is a federal law passed as part of the National Defense Authorization Act on January 1, 2021. Beginning in 2024, millions of Limited Liability Companies, Corporations, and Partnerships are required to file information about owners, those who run the businesses and others. Failure to comply can result with large fines and even criminal penalties. This article outlines on how to comply with the law. This is not a comprehensive article.
Regulations are being proposed and/or drafted. Soon there will be a process to comply. You cannot currently submit a report. Compliance reports start beginning 2024. But it is good to learn about the obligations now.
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What is the Corporate Transparency Act?
This law is intrusive, complex and laden with potential for mistakes. While designed to catch money launderers and other bad actions, instead it will likely cause law abiding individuals to become subject to fines, investigation and possible criminal sanctions for noncompliance. Millions of small businesses are subject to the law. While we disagree with the structure, requirements and deadlines of the law, that does not excuse compliance. For many small businesses owned and run by an individual or couple compliance should be fairly simple. Still, there are many ways in which one could innocently violate the law.
Who Does this Apply to?
This law will impact millions of Limited Liability Companies (LLCs), Corporations, partnerships and other entities who were created by registering with any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, the United States Virgin Islands, and any other commonwealth, territory, or possession of the United States. It also includes entities created by filing with a tribal authority. Finally, it includes any foreign entity that has registered with any of the above.
What is the Law Intended to Do?
The purpose of the law is to prevent the use of business entities to conduct money laundering, terrorist funding, sex trafficking and other criminal activities.
Unfortunately, the act requires compliance by most small Limited Liability Companies, Corporations, or Partnerships registered with a Secretary of State or a Tribal Authority.
What Happens if My Company Doesn’t Report?
Unless the company is exempt, there are files of $500 per day that can be imposed. Additionally, there are potential criminal fines of $10,000 and up to 2 years in prison for failure to register. The United States Treasury is responsible for the administration which is done through the Financial Crimes Enforment Network.
What is FinCEN?
FinCEN is the acronym for the Financial Crimes Enforcement Network. It is a bureau within the Department of Treasury. Its role is to “follow the money” it is tasked with enforcement of several laws including the Corporate Transparency Act.
It is unclear whether non-compliance would result in a criminal investigation. It is suggested that it would be incredibly foolish to invite such scrutiny when compliance is possible.
Are there Exceptions to Who Must File?
With few exceptions, most small companies will be required to provide information regarding beneficial owner, those who control the business. Beginning in 2024, individuals who filed the paperwork to create the entity will also be reported.
Exceptions exist for large businesses, banks, insurance companies, various financial institutions, companies subject to SEC or Commodities & Exchange reporting. Also, companies who meet a strict definition as being inactive are not required to report.
What Individuals Information Needs to be Reported?
25% Owners: Individuals, companies or trusts that own 25% or more of an entity must be reported. For companies with complex ownership interests or voting rights this will require careful review.
Persons Exercising Control: This will include every senior officer. For Limited Liability Companies this will include Managers. The law is broad reaching and can include many others depending upon the circumstances.
Company Applicants: These include the individuals who helped the company create and file that documents with a Secretary of State or Tribal Authority. This would include the person who directed the filing and the individual who submitted the paperwork in person or online. Often this will be an attorney and a paralegal. Note, reporting of Company Applicants is unnecessary for entities created before January 1, 2024.
What Must Be Reported Regarding Individuals?
The report must be filed in on or before January 1, 2025. However, it is a good idea to obtain certain records now. These include:
- Full legal name
- Date of Birth
- Residential or Business Street Address
- A non-expired driver’s license, passport or other photographic governmental id that has a personal identifying number assigned.
Reporting violations.—It shall be unlawful for any person to—
(A) willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN in accordance with subsection (b); or
(B) willfully fail to report complete or updated beneficial ownership information to FinCEN in accordance with subsection (b).
Who is Responsible for Making the Report?
The law states that liability for noncompliance will fall on the person either causes the failure, or is a senior officer of the entity at the time of the failure.
The term “senior officer” means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function.
When is the Initial Report Due?
|Companies Formed Before January 1, 2024||Companies formed on or After January 1, 2024|
|Due Date: January 1, 2025||Due Date: Within 30 calendar days after filing |
document that created the Entity
Are There Any Additional Reporting Requirements?
Yes, the law requires companies to update FinCEN within 30 days after any information regarding a owner or person exercising substantial control changes. There is no requirement to update Company Application information.
Why Should I Comply with This Law?
Failure to comply may result in:
- Civil Fines of $500 per day
- Criminal Fines up to $10,000
- Prison up to 2 years
- It is anticipated that banks will be required to verify that their customers are in compliance be for lending or other transactions.
This post is not legal, tax or investment advice. Reading or responding to this post does not create an attorney/client relationship.