Starting in 2024, legal entities must disclose certain ownership information as provided by the Corporate Transparency Act (CTA). The CTA went into effect on January 1, 2024, and requires that entities register their “beneficial owners” with the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department. The purpose of the law is to combat money laundering, tax fraud, and other crimes by providing authorities with beneficial ownership information. However, FinCEN has done little to promote the CTA. As a result, many business owners and trustees are unaware of the CTA or assume it does not apply to them, putting them at risk of noncompliance and steep penalties.
Who Must Comply with the Corporate Transparency Act?
The CTA applies to a broad range of entities or “reporting companies,” as they are referred to under the law. Reporting companies include single-member limited liability companies (LLCs), professional corporations (PCs), partnerships, and other entities with some limited exceptions.
When Do Reporting Companies Have to Comply with the CTA?
Existing entities have until January 1, 2025 to make their initial report. Entities formed in 2024 have 90 days from formation. New entities formed in 2025 or later will have 30 days from formation to register their beneficial owners.
What Information Must a Reporting Company Provide?
Reporting companies must provide information on the following:
- The entity’s:
- Full legal name;
- Trade names or d/b/a names;
- Address of the entity;
- The jurisdiction of formation or registration; and
- The federal taxpayer identification number.
2. Each beneficial owner’s:
- Full legal name;
- Birthdate;
- Home address;
- An identifying number from a driver’s license, passport, or other approved documents; and
- An image of the approved document that contains the identifying number.
In lieu of the last two, an individual can apply for a FinCEN identifier number, after which the individual is permitted to use that identifier number on subsequent filings.
Importantly, a “beneficial owner” is defined as a person with at least 25% ownership/control interest OR substantial control of the business. “Substantial control” encompasses individuals who (i) serve as a senior officer of the reporting company; (ii) have appointment or removal authority over the senior officers and board of directors; (iii) can direct, determine, or have substantial influence over important decisions within the company; and (iv) have any other type of substantial control over the company.
3. The company applicant for companies created on or after January 1, 2024.
- A company applicant is both (i) the individual who directly files the document that creates or registers the company, and (ii) the individual who is primarily responsible for directing or controlling the filing of the relevant document by another.
- If both (i) and (ii) are the same individual, that person is solely the company applicant.
- The same information is required to be filed regarding the company applicant as the beneficial owners.
What Are the Penalties For Failing to Comply?
Any person who provides false information or fails to comply with reporting requirements is liable for a maximum civil penalty of $500 per day up to $10,000 and a criminal penalty of imprisonment for up to two years.
What Steps Should Businesses Take Next?
Entities formed before 2024 must comply by January 1, 2025. However, it is best to start now. Review any entities that you have an interest in, whether you are in charge of the entity or not. You must determine whether you are required to comply and who would be a beneficial owner. You may also want to consider terminating entities that are defunct or no longer needed to avoid possible reporting obligations.
If you need assistance with making these determinations and complying with the CTA, contact us for a consultation.
