The Legal Brief
Understanding the Corporate Transparency Act
November 27, 2023
The Corporate Transparency Act or the “CTA,” which requires businesses to report information about themselves and their owners to the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN), goes into effect January 1, 2024. The volume of information and articles currently available about the Act may make it seem overwhelming, so to make this manageable, here is an overview of what you need to know about the law and its implementing regulation. And, of course, Jackson Kelly has a team of lawyers available to help you navigate your obligations.
What Is the Corporate Transparency Act? The CTA requires most corporations, limited liability companies, and other entities organized or registered to do business in the United States to report information relating to the beneficial ownership of each entity to FinCEN. The report must be filed electronically through the system available on the FinCEN website.
Who Must Report? Most domestically formed business entities and foreign-formed business entities registered to do business in the United States are required to report under the CTA. This includes corporations, limited liability companies, partnerships, and other forms of business entities.
Twenty-three types of entities are exempt from reporting under the CTA. These are generally large operating companies (entities satisfying all prongs of a three-prong test: 20 or more US employees, a physical office in the US, and $5M or more annual revenues), inactive entities, tax-exempt entities, certain public companies, and other businesses that are subject to federal reporting requirements like banks and insurance companies. FinCEN has a chart and guide for determining whether a company is exempt as part of their Small Entity Compliance Guide.
What Information Must be Reported?
Company Information:
o Full legal name of the reporting company,
o Any trade names or DBAs,
o A complete current address,
o The state of formation of the company, and
o The company’s taxpayer identification number.
Details About Every Beneficial Owner and Every Company Applicant.
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 percent of the ownership interests of the entity. A company applicant is an individual who directly files an application to form a corporation, limited liability company, or other similar entity, and /or an individual who is primarily responsible for directing or controlling the filing of the relevant document by another. For each, the company must report:
o The full legal name of the individual,
o Their date of birth,
o Their complete current address,
o A unique identifying number from an acceptable identification document such as a driver’s license or passport, and
o An image of the document showing the unique identifying number.
When Must This Information be Reported?
For New Entities (Post- January 1, 2024, Formation or Registration)
o Within 30 calendar days of registration of formation of the business. Notably, a proposed amendment to the CTA, if passed, would extend that deadline to 90 days for companies formed between January 1, 2024, and January 1, 2025. Watch for updates from us regarding this proposed amendment.
Existing Entities (Pre- January 1, 2024, Formation or Registration)
o Entities formed before January 1, 2024, will be required to report their information no later than January 1, 2025.
Are There Continuing Reporting Obligations? Yes. Reporting companies will be required to report the following information within 1 year of the identified change:
· Newly exempt entities must file an updated report indicating that the filing entity is no longer a reporting company.
· All entities will be required to report corrections of any inaccuracies in information previously reported to FinCEN.
How/Where is the Information Reported? The information will be reported through a secure filing system available via FINCEN’s website. As of the date of this overview, the system is still in development.
Will This Information Be Public? No. Access to the information will be limited to certain Federal, State, and local officials along with certain foreign officials seeking information related to national security, intelligence, or law enforcement. Financial institutions and their regulators will also have access to the information in certain circumstances.
Important Note: fraudsters are sending emails or letters that appear as though FinCEN is soliciting information from a company and including a URL link or QR code. FinCEN is clear that it does not send out any unsolicited requests. Do not click on the link or QR code.
What Happens if a Company Does Not Comply? Civil and criminal penalties for willful reporting violations can include fines of up to $10,000 and imprisonment for not more than two years. There are also civil and criminal penalties for misuse or unauthorized disclosure of reporting information.
What Purpose Does the CTA Serve? Congress enacted the CTA as part of the Anti-Money Laundering Act of 2020 to increase prevention of money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption.
Jackson Kelly will continue to provide updates regarding new developments and/or requirements under the CTA.