Co-Author: John Koechel
In the ever-evolving landscape of legislative initiatives, the passage of new laws is a commonplace occurrence. The enactment of a new federal law often results in minimal impact on most individuals, typically not necessitating any specific actions on their part. The passage of the federal Corporate Transparency Act (“CTA”) is one of those rare cases where a new law going into effect will have tangible impacts and impose certain affirmative requirements on a relatively large number of business entities and related individuals.
What is the CTA?
So, what is the CTA exactly? The CTA is a federal law that was passed on January 1, 2021, as part of the National Defense Authorization Act. In recent years, state and federal authorities have experienced a myriad of issues trying to determine who owns and controls a given business entity, especially when trying to combat a wide range of crimes, including money laundering and tax fraud. The CTA was passed, in large part, to allow authorities to identify who controls an entity that may be participating in illegal activities. It establishes a reporting duty for certain parties as well as a system through which the federal government, specifically the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), will collect, keep, share, and use so-called “beneficial ownership information” for business entities.
Who does the CTA impact?
Entities – “Reporting Companies”
Generally, the CTA applies to both domestic and foreign “reporting companies.” A reporting company is broadly defined as any entity whose establishment necessitates a filing with a secretary of state or another governmental authority unless an exemption is applicable. Therefore, corporations, limited liability companies, partnerships and any other entities created by the filing of a document with a secretary of state or any similar office in the United States fall within the scope of the CTA. That is, many of the entities used for business and real estate investment in the United States are required to comply with the CTA absent an exemption. There are twenty-three (23) types of entities that are exempt from CTA reporting requirements. These exemptions apply to publicly traded companies meeting specific requirements, many nonprofits, and certain large operating companies. Please note, that whether an exemption applies to a specific reporting company can be a fact intensive question for which you should consult an attorney familiar with the CTA.
Individuals – “Beneficial Owners”
If you own, directly or indirectly, an interest in a reporting company (as defined above) you may be subject to the CTA and qualify as a “beneficial owner.” A beneficial owner is an individual who either directly or indirectly: (i) exercises substantial control over a reporting company; or (ii) owns or controls at least twenty five percent (25%) of the reporting company’s ownership interests. While the percentage ownership requirement is relatively straightforward, the substantial control inquiry is more fact intensive. An officer, director, or manager could be found to have substantial control and thus qualify as a beneficial owner necessitating compliance with the CTA and triggering reporting requirements. Therefore, even if an individual does not own an interest in a reporting company, they may still exert substantial control over a reporting company and be subject to CTA reporting requirements.
How long do we have to comply with the CTA?
- The amount of time that individuals must file their report through FinCEN depends on when the reporting company was formed.
- Reporting companies in existence prior to January 1st, 2024, have until January 1st, 2025, to file a report.
- Reporting companies formed between January 1st, 2024, and December 31st, 2024, will have ninety (90) calendar days after their date of formation or registration to file a report.
- Finally, entities formed on or after January 1st, 2025, will have thirty (30) calendar days to file a report.
The CTA also requires filings to be updated within thirty (30) calendar days after a change in the beneficial ownership of a reporting company. If an interest in a reporting company changes hands pursuant to, for example, an equity sale or a divorce settlement, then an update to the reporting company’s filing must be completed within thirty (30) calendar days.
The vast majority of entities will be subject to these CTA reporting requirements. Failure to comply with the CTA and submit a report could result in severe penalties. The CTA imposes civil penalties, amounting to $500 per day with a maximum cap of $10,000, and criminal penalties, including imprisonment for up to two years, on individuals who intentionally furnish false or fraudulent information or fail to adhere to the CTA reporting obligations.
The CTA has broad applicability and requires individuals to take specific steps to comply. The information provided herein is not intended to provide legal advice to the reader. CTA compliance is extremely fact intensive and varies depending on the specific circumstance. If you have questions or require assistance in complying with the CTA, please contact John Koechel for more information.