The new federal Corporate Transparency Act (CTA) requires the reporting of the ownership and organizers of many entities formed on or after January 1, 2024, and of the ownership of many active entities formed prior to January 1, 2024. The law imposes significant penalties for failure to comply.
New reporting requirements under the CTA for certain entities will go into effect starting January 1, 2024. The core purpose of the CTA is to allow the Financial Crimes Enforcement Network (FinCEN) to collect information about “Beneficial Owners” and “Company Applicants” of entities that fall under the CTA’s regulations to assist with pursuing financial crimes.
When the CTA goes into effect, it will materially impact the process and procedures for formation of new entities and the administration of existing entities, unless one of the exemptions from the requirements of the CTA applies. A summary of the CTA and its reporting obligations is set forth below. Note that this is only a summary and not intended to be comprehensive.
Summary of the CTA
WHEN: The reporting obligations begin January 1, 2024. “Reporting Companies” formed prior to January 1, 2024, will have one year to file their initial report with FinCEN. As of this writing, Reporting Companies formed between January 1, 2024, and December 31, 2024, must file their initial report within 90 days after formation; and Reporting Companies formed on or after January 1, 2025, must file their initial report within 30 days after formation.
WHO MUST FILE: The CTA requires only “Reporting Companies” to file reports with FinCEN. Reporting Companies include: (1) domestic corporations, LLCs, or other entities created by the filing of a document with any government authority of a state, Indian tribe, or U.S. territory and (2) foreign corporations, LLCs, or such other similar entities that are registered to do business in a state, tribe, or U.S. territory. The CTA exempts 23 categories of larger and/or already-regulated entities from the reporting obligations under the CTA. The most common exempt categories are listed at the end of this summary.
WHAT MUST BE REPORTED: The required reports must include certain information about the Reporting Company, its “Beneficial Owners,” and, if the Reporting Company is formed after January 1, 2024, its “Company Applicants.”
“Beneficial Owners” include any individual who, directly or indirectly, either (1) exercises “Substantial Control” over the Reporting Company or (2) owns or controls more than 25 percent of the ownership interests of the Reporting Company.
Substantial Control of a Reporting Company is exercised by an individual if such individual: (1) serves as a senior officer, (2) has authority over the removal or appointment of any senior officer or a majority of the Board (or similar body), (3) has control over important decisions, or (4) has any other form of substantial control over the Reporting Company.
Company Applicants include any individual who either: (1) directly files the document creating or first registering the Reporting Company or (2) is primarily responsible for directing or controlling such filing by another.
HOW REPORTS ARE TO BE MADE: FinCEN is working on a website where such reports can be filed.
WHO HAS ACCESS TO REPORTED INFORMATION: FinCEN will store the reported information on a secure, nonpublic database. Disclosure of the information will be limited to various federal and state law enforcement agencies and financial institutions complying with government-imposed customer due diligence requirements.
PENALTIES: The CTA imposes civil and criminal penalties, including a fine of up to $10,000 and/or imprisonment for up to two years, for any person who willfully fails to file required reports or provides false information in a report. Penalties may be imposed on the Reporting Company and certain individuals who cause the Reporting Company to violate the law. A 30-day cure period after discovery is provided to file corrective reports.
EXEMPT COMPANIES: A complete list of companies exempt from reporting under the CTA is beyond the scope of this article. The most common exemptions are:
- Large operating companies – companies that:
- Have more than 20 full-time employees,
- Have a physical office in the United States, and
- Reported more than $5 million in domestic gross receipts or sales in their last tax return.
- Public companies – issuers of securities registered with the Securities and Exchange Commission.
- Certain other highly regulated companies – banks and their holding companies, broker/dealers, investment advisers, regulated utilities, etc.
- Tax-exempt entities – including charities, political action committees, charitable trusts, and certain advisers and service providers.
DOES THIS LAW AFFECT ME? The CTA will affect many people who are not the target of law enforcement agencies for any reason (e.g., money laundering, foreign investment, or organized crime). However, prior to January 1, 2024, anyone who uses entities in their business or personal affairs should determine with their attorney whether they are exempt from the CTA, and, if they are not exempt, develop a plan for compliance with the reporting requirements of the CTA.
This article has been updated since its original print version.