What You Need to Know!
Client Alert: There are many questions surrounding the upcoming implementation of the Corporate Transparency Act (CTA). We have prepared this outline to guide you through what it is and who needs to comply. We will be helping our clients comply and file with the government. BE CAUTIOUS. We have been made aware of fraudulent businesses seeking to collect information and fees related to the act that are NOT ASSOCIATED WITH THE GOVERNMENT. Working with such companies can result in inadvertently providing private information to a potential bad actor, and in believing you have filed with the government when you have not. Please contact your attorney before providing any information to any entity requesting your filing information.
1. Introduction to the Corporate Transparency Act (CTA)
The Corporate Transparency Act, enacted in 2021, becomes effective on January 1, 2024. It mandates certain business entities, termed as “reporting companies,” to disclose information about their “beneficial owners” and “company applicants” to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury. This initiative aims to combat illicit financial activities by promoting increased transparency and clarity across the country in how entities are structured.
- Defining Key Terms
– Beneficial Owner: An individual who either owns at least 25% of the reporting company or who exercises substantial control over the company. This includes but is not limited to senior officers, those with power to appoint or remove senior figures, key decision-makers, or any other person who exercises another form of substantial control over the company.
– Company Applicant: The individual(s) who files the document creating a domestic reporting company. Two categories exist: the “direct filer” and the individual who “directs or controls the filing action.” Companies created after January 1, 2024 must report at least one company applicant and at most two. Where only one person is involved in creating the entity, only one company applicant will need to be reported (i.e., the “direct filer”); however if the entity is created by a hired company or legal entity, it is likely that multiple company applicants will need to be reported as the filing will involve both a “direct filer” and an individual that “directs or controls the filing action.” This distinction will be particularly important as individuals who have hired companies or other legal entities to file on their behalf will need to ensure that those companies have the proper reporting procedures in place or otherwise themselves risk being subject to the penalties outlined below.
- Reporting Requirements
Reporting companies must provide FinCEN with:
– Full legal names, dates of birth, residential addresses (or sometimes business addresses) of beneficial owners and company applicants.
– Government-issued ID such as a U.S. Passport, State Driver’s License, state/local government ID, or if none of those are available, a foreign passport.
– An image of the photograph found on the government-issued idea used in the report.
- Entities Obligated to Comply
– Domestic Reporting Company: A corporation or LLC established under state or Indian Tribe law.
– Foreign Reporting Company: A foreign entity registered to do business in the U.S.
- Exemptions from Reporting
There are 23 exemptions, including banks, governmental authorities, investment companies, accounting firms, and large operating companies, among others. Many exemptions are defined by statute and include specific criteria that require careful evaluation to determine whether a particular entity is exempt from the reporting requirement.
- Penalties for Non-Compliance
Failure to report or providing false information may result in severe civil or criminal penalties, including $500/day fines, imprisonment up to two years, or a $10,000 fine per incident. Senior officers may also be held accountable for failure to report or for reporting false information. Furthermore, reporting companies will need to be keenly aware of any changes in the future to beneficial owners within the structure of their entities as these changes will need to be reported again to FinCEN and will be subject to the same penalties.
- Reporting Timeline
– Existing reporting companies must submit their initial reports by January 1, 2025.
– New reporting companies in 2024 have 90 days post-registration to comply.
- Implementation and Confidentiality
FinCEN is developing the Beneficial Ownership Secure System (BOSS) for managing this information. Access to this data will be restricted to law enforcement and financial institutions (with customer consent).
The CTA represents a significant shift in business reporting requirements, aimed at enhancing transparency and preventing financial crimes. Our team at Davis Miles is prepared to assist you in understanding and complying with these new obligations. For detailed guidance and support, please contact us at (480) 344-0913.