As a business owner, you may have heard about the Corporate Transparency Act (CTA) and wondered how it might affect your company. The law is intended to prevent money laundering, terrorist financing, and tax evasion by making it harder for criminals to hide their activities behind anonymous corporate structures. However, compliance with the reporting requirements can be daunting, and failing to do so can result in significant penalties. In this blog post, we’ll examine the CTA and what it means for businesses and trusts.
What is the Corporate Transparency Act?
The Corporate Transparency Act was passed as part of the National Defense Authorization Act for Fiscal Year 2021, requiring certain businesses and trusts to report their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department.
The CTA applies to “reporting companies” and “reporting trusts.” Reporting companies are defined as corporations, limited liability companies (LLCs), and other similar entities created by filing a document with a state secretary of state or a similar office under state law. Reporting trusts are drafted under U.S. law and are required to file a tax return.
Corporate Transparency Act Reporting Requirements
Reporting companies and reporting trusts must disclose the “beneficial ownership information” of their “beneficial owners.” A beneficial owner is defined as any individual who, directly or indirectly, owns or controls 25% or more of the ownership interests of a reporting company or reporting trust, or exercises “substantial control” over the company or trust.
The required beneficial ownership information includes:
- The full legal name
- Date of birth
- Current address
- Unique identification number of each beneficial owner
- A statement describing the nature and extent of the beneficial ownership interest
Reporting companies and reporting trusts must provide this information with an initial report and update that report within 90 days of any changes.
Benefits of the Corporate Transparency Act and Penalties
The reasoning behind the Corporate Transparency Act is to help prevent anonymous shell companies and trusts for illicit purposes such as money laundering, terrorist financing, and tax evasion. The law is intended to make it harder for criminals and terrorists to hide their identities and activities behind anonymous corporate and trust structures. For many business owners and trustees, it will feel overly invasive and like using an axe when a scalpel will do.
Of course, failing to comply brings penalties. Reporting companies and reporting trusts that fail to comply with the CTA’s reporting requirements may be subject to civil and criminal penalties, including fines of up to $10,000 and imprisonment for up to two years. In addition, company and trust officers and employees who knowingly provide false or misleading information concerning the CTA may be subject to fines and imprisonment.
Reporting companies and reporting trusts in existence prior to January 1, 2024, and subject to the CTA’s reporting requirements, will need to start collecting and verifying beneficial ownership information and report it to FinCEN no later than January 1, 2025. Reporting companies and reporting trusts formed or created after January 1, 2024, must file the required report within 30-days of formation.
The Corporate Transparency Act represents a significant shift in U.S. corporate and trust law and will require many businesses and trusts to collect and report beneficial ownership information for the first time. While the law is intended to help prevent financial crime, compliance with the reporting requirements will require significant resources and expertise. Companies and trusts should start preparing for the new requirements as soon as possible. If you have questions or concerns about the Corporate Transparency Act, don’t hesitate to contact your attorney at CPM or any member of our business law team.