If you are a small to medium-size business owner, you need to be aware of the new Corporate Transparency Act (“CTA”). The CTA places additional regulatory burdens on most small to medium-size businesses making it more expensive and complicated to operate. There are significant penalties for a lack of compliance, so it is important for business owners to understand the CTA’s requirements and the steps necessary to comply. These are discussed in this Article.
When was the CTA passed and when did it go into effect?
The CTA is a Federal law passed by Congress in 2021 and went into effect on January 1, 2024.
Why was the CTA passed?
The purpose of the CTA is to prevent financial crimes (mainly money laundering) by requiring entities (corporations and LLCs) formed within the United States to disclose their individual owners and provide certain financial identifying information regarding these owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Allegedly, money launderers and other criminals are using anonymous entities such as Wyoming and Delaware LLCs to avoid detection of their crimes.
Who must report to FinCEN?
All entities currently existing or newly formed with twenty-three exceptions. For entities formed prior to January 1, 2024, they have until January 1, 2025 to provide their initial report to FinCEN unless they make a change to their entity, in which case, the entity will need to report the change within thirty (30) days from the date it was made. For entities formed after January 1, 2024, but before January 1, 2025, they must make their initial report to FinCEN within ninety (90) days from the date of formation. For entities formed after January 1, 2025, they must make their initial report to FinCEN within thirty (30) days from the date of formation. An entity subject to the CTA’s reporting requirements that make a change to its address or ownership must report the change to FinCEN within thirty (30) days from the date it is made.
The three exceptions to the CTA’s reporting requirement that will likely be most applicable to our clients are:
Tax-Exempt Entities
Entities that are tax exempt under U.S.C. 501(a) and 501(c) are not required to submit any reporting to FinCEN.
Large Operating Company
A large operating company does not have to report to FinCEN as long as it meets the following requirements: (1) has more than 20 full-time W2 employees (not independent contractors), (2) has a physical office in the United States out of which it operates, and (3) has $5,000,000 in gross receipts as documented on the prior year’s Federal tax return.
Inactive Entities
Entities formed before January 1,2020 that are inactive do not have to report to FinCEN if they following requirements are met: (1) it does not engage in any business, (2) it is not directly or indirectly owned by someone who is not a citizen of the United States, (3) it has not changed its ownership in the prior twelve (12) months, (4) it has not, directly or indirectly (through an affiliate, etc.) sent or received any amount greater than $1000 in the prior twelve (12) months, and (5) it does not own any assets within or outside the United States.
What information must be reported to FinCEN?
Entities formed prior to January 1, 2024 must provide the following information regarding the entity and the beneficial owners of the entity:
- Entities legal name
- Any trade name or DBA through which the entity operates
- Physical address of the entity’s principal place of business
- The state of formation or registration if the entity is foreign
- Taxpayer ID for the entity
- Full legal name of all beneficial owners
- Date of birth for all beneficial owners
- Physical address for each beneficial owner
- Identification information from a valid driver’s license, passport, or other government issued ID for each beneficial owner
- An image of the ID for each beneficial owner
A beneficial owner is a natural person who directly or indirectly (i.e. through a trust or other entities) has a twenty-five percent (25%) or greater ownership interest in the entity or who can exercise substantial control over the entity.
Entities formed after January 1, 2024 must provide the information listed above for the entity and each beneficial owner, but must also provide the following information for each company applicant:
- Full legal name for each company applicant.
- Date of birth for each company applicant.
- Business address for each company applicant.
- Identification information from a valid driver’s license, passport, or other government issued ID for each company applicant.
- An image of the ID for each company applicant.
A company applicant is the person who directly files the formation documents with the proper agency or department of the state where the company is formed or is the person who is responsible for overseeing and directing the file of the formation documents. A law firm who assists a client with the preparing and filing of entity formation documents will be considered a company applicant.
How is the information submitted to FinCEN and how secure is the information?
All required information must be submitted to the FinCEN website.
The CTA provides that the information reported to FinCEN is not subject to disclosure through a freedom of information act (“FOIA”). However, the information can be disclosed by FinCEN to Federal law enforcement, to financial institutions if it has the consent of the reporting entity, or to state or local law enforcement upon receipt of an order from a state court that has “competent jurisdiction”.
FinCEN and the Federal government claims that the information is secured with proper security protocols and encryption. Time will only tell whether the information submitted to FinCEN is truly secure and not subject to being maliciously accessed.
Conclusion
In conclusion, almost all U.S. based small to medium-size businesses must report information to FinCEN before the end of 2024. And, all newly formed entities or entities who make changes should report to FinCEN upon formation or making the changes.
The penalties for violating the CTA can be up to $500 per day until the violation is remedied. Or, in the case of a willful violation, the penalties can include a fine of up to $10,000 and 2 years of imprisonment. As these penalties are significant it is important for all businesses to obtain the proper financial and legal advice necessary to make sure that comply with and remain in compliance with the provisions of the CTA.
Please feel free to contact our firm at 480-788-9911 should you wish to schedule a consultation with one of our attorneys to discuss how or if the CTA applies to your business.
March 3, 2024: Update
On March 1, 2024, the U.S. District Court for the District of Alabama declared the CTA unconstitutional on the basis that Congress exceeded its powers in enacting the law, and permanently enjoined the government from enforcing the CTA against the named plaintiffs: the National Small Business Association (“NSBA”) and its members. It is currently unclear whether the Court’s ruling would extend to those small businesses who are not members of the NSBA.
It is likely that we will continue to see challenges to the CTA play out in the federal court system, and perhaps even a Supreme Court decision on the constitutionality of the CTA. This was only the first decision made regarding the constitutionality of the CTA, and we will likely continue to see challenges to the CTA play out in the federal court system, perhaps even all the way up to the U.S. Supreme Court. As this is a recent development, our firm will still be complying with the reporting requirements under the CTA until such a time that a more permanent decision about the CTA and its reporting requirements has been made. Our firm continues to keep on top of new developments with the CTA and will provide updates accordingly.
March 27, 2024: Update
Since the reporting requirements of the CTA have started, the US has moved from non-compliant to largely compliant, which is huge considering we are the world’s biggest economy – and the source of most money laundering. Today, the Financial Action Task Force (FATF)—the global standard-setting body for anti-money laundering, countering the financing of terrorism, and countering proliferation financing (AML/CFT/CPF)—announced that the United States has been upgraded to “largely compliant” with FATF Recommendation 24, which relates to beneficial ownership transparency for legal persons.
The Report details the United States’ progress in addressing deficiencies in its AML/CFT regime specific to Recommendation 24, including the ongoing implementation of the Corporate Transparency Act, the bipartisan law that requires many companies doing business in the United States to report information to Treasury’s Financial Crimes Enforcement Network (FinCEN) about who ultimately owns or controls them.