Corporate Transparency Act

The new federal Corporate Transparency Act became effective January 1, 2024.  The act requires certain companies in the United States to disclose information regarding its beneficial owners to the US Treasury Department.  The reports are directed to the Department’s Financial Crimes Enforcement Network (FinCEN), and are not annual reports.  Rather, the reports need to be submitted one time, and then thereafter when there are changes in ownership (new beneficial owners).  The purpose behind the act was to combat illegal activity, including tax fraud, money laundering and terrorism finance, though consumers, lenders and companies will also benefit from the disclosure regime.

Reporting Entities

The entities required to report are very comprehensive.  Domestic reporting companies include corporations, LLPs, or any other similar entity created by the filing of a document with a secretary of state or similar office.  Foreign reporting companies are those private entities formed under foreign law that are registered to do business in the United States.

Exemptions, companies not considered reporting companies, include banks, credit unions, SEC-reporting companies, insurance companies and public accounting firms.  Additionally, companies that employ more than 20 employees on a full time basis in the U.S., that filed in the previous year federal income tax returns demonstrating more than $5 million in gross receipts, revenues or sales, and operates with a physical office presence in the U.S.  This exempts all Fortune 500 entities and many publicly traded companies.  The focus for CTA reporting is small business.

Beneficial Owners

A beneficial owner is an individual who directly or indirectly through any contract, arrangement, understanding relationship or otherwise exercises substantial control over the entity or owns or controls at least 25% of the equity interests of the entity.  “Substantial control” is defined as individuals who serve as a senior officer of the reporting company, have appointment or removal authority over the senior officers and board of directors; can direct, determine, or have substantial influence over important decisions within the company, or have any other type of substantial control over the company.  The categories likely includes all CEOs, COOs, CFOs, CMOs, and board members, as well as major equity holders.

The category does not include minor children if the parent or legal guardian is reported, an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual (for example, an incapacitated individual remains the beneficial owner, not his or her custodian), an employee of the reporting company (not a senior officer with little control), an inheritor whose interest is a future interest through inheritance or expectancy, and creditors unless the creditor exercises substantial control or owns or controls at least 2 of the equity of the company.

Content of the Report

Reporting is simple:  it is purely identity based.  The CTA simply mandates a small business ownership registry.  Beneficial owners must report the entity’s full legal name, trading/DBA names, address of the entity, jurisdiction of formation/registration and the federal taxpayer ID number (EIN).  Each beneficial owner must report his or her full legal name, birthday, home address, an identifying number from a driver’s license, passport or similar document, and an image of the same approved document.

Timing, Penalties and Other Considerations

Companies in existence before January 1, 2024 must file initial reports no later than January 1, 2025.  Newly formed companies created after January 1, 2024 must file their initial reports 90 days after receiving notice of their creation or registration.  Companies have 30 days after a change in ownership to include updated information, and also have 30 days to correct inaccurate information after discovery of an error.

Individuals and entities covered by U.S. sanctions have preexisting financial constraints in place.  Even so, the CTA is an additional check on ownership by sanctioned individuals or entities.

Any person who provides false information or fails to comply with reporting requirements is liable for civil penalties of up to $500 per day that the violation continues.  Violators are also subject to criminal penalties of up to 2 years imprisonment and fines of up to $10,000.  Pragmatically, it is likely most enforcement usually will be handled as a civil matter, except for bad faith failures to file accurately or nonreporting designed to evade taxation or advance some other criminal activity, or to undermine a national security interest.  Nonreporting could also have adverse consequences in mergers and acquisitions or during creditworthiness reviews.  Banks, for example, will likely reformat their credit applications to validate reporting compliance.

Many nonprofits are covered, in that every nonprofit organized in the U.S. has a corporate formation on which the nonprofit status is grounded.

Finally, small businesses who are mandated reporting entities can consult FinCEN’s Small Entity Compliance Guide for assistance in filing and reporting. 

Crenshaw, Ware & Martin is ready and able to assist companies and organizations with their compliance obligations, and is pleased to offer your business an advisory session on reporting obligations.  Contact Managing Partner Darius Davenport at DDavenport@cwm-law.com, attorney Butch Bracknell at RBracknell@cwm-law.com, or any of the firm’s attorneys by email, or call the firm at 757-623-3000.