Understanding the Corporate Transparency Act: New Filing Obligations for Businesses in 2024

As we approach the new year, it is essential to be aware of the changes that will affect businesses across the United States in 2024. One of the most significant developments in corporate regulation is the Corporate Transparency Act (CTA), which introduces new filing obligations for businesses.  This article breaks down what the CTA is and how it will impact businesses in the coming year.

What is the Corporate Transparency Act (CTA)?

The Corporate Transparency Act is a federal law aimed at promoting transparency and combating financial crime. Enacted in January 2021, it represents a significant shift in how businesses are required to disclose who owns and controls them to the federal government.

The CTA is designed to enhance transparency in corporate ownership and prevent the misuse of anonymous shell companies for illegal activities such as money laundering, tax evasion, and fraud. By requiring businesses to disclose their beneficial ownership information, the CTA aims to create a more accountable and secure business environment. As FinCEN has stated, the current laws do not promote transparency in the ownership of small businesses and entities like corporations and LLCs, and this lack of transparency allows criminals, corrupt officials, and other bad actors to hide their identities and launder illicit funds through the United States using shell and front companies.

Who Does the CTA Apply To?

The CTA applies to a broad range of business entities, including corporations, limited liability companies (LLCs), and other similar entities. Essentially, any entity that is formed with its state’s Secretary of State (or similar office), or a foreign entity that is registered to do business in the United States, must comply with the CTA's requirements unless that entity is exempt.

Who is Exempt from the CTA Filing Requirements?

There are 23 exemptions to the CTA. The following entities are exempt:

·       Publicly traded companies

·       Certain financial institutions, such as banks, credit unions, and registered broker-dealers

·       Large operating companies (entities with 20 full-time employees in the United States and over $5 million in gross receipts or sales)

·       Tax-exempt organizations that are exempt from federal income tax under section 501(a) of the Internal Revenue Code. This includes 501(c)(3) nonprofits.

·       Securities brokers

·       Investment advisors or investment companies, if the entity is an investment company as defined in section 3 of the Investment Company Act of 1940 or an investment advisor as defined in section 202 of the Investment Advisers Act of 1940 and the entity is registered with the Securities and Exchange Commission under either the Investment Company Act or the Investment Advisers Act

·       Insurance companies

·       State-licensed insurance producers

·       Public accounting firms registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002 with the Public Company Accounting Oversight Board (PCAOB)

·       Inactive entities (an entity that was formed before 2020, is not owned by any foreign person, is not engaged in active business, has not experienced any change in ownership in the preceding twelve-month period, has not sent or received funds in an amount greater than $1,000 in the preceding twelve-month period, and which does not hold any type of asset).

When Must These Reports Be Filed?

Starting in 2024, businesses subject to the CTA will be required to file beneficial ownership information with the Financial Crimes Enforcement Network (FinCEN). Entities formed on January 1, 2024, or later will have 90 days following their formation to file the beneficial owner report. Existing entities formed before 2024 will have until January 1, 2025, to submit their beneficial owner report.

What Exactly Must Be Filed?

The report must contain various types of information about the business itself, such as the name of the entity, any fictitious business name (i.e., a DBA) it uses, the business’s address, its state of formation, and its EIN. The report must also disclose the identities of its beneficial owners.  A beneficial owner is defined as individuals who own at least 25% of the ownership interests in the company or individuals who control the company. This includes directors, officers, and shareholders with a 25% or more interest in the company and possibly senior officers who are employees but not owners if that senior officer has direct control over the entity. For every beneficial owner, the report must contain that person’s name, date of birth, residential address, and also include a copy of their identification (such as a passport or driver’s license). Entities formed in 2024 or later must also report who the company applicant is.  The company applicant is the individual who files the formation documents with the applicable Secretary of State. The company applicant could be the lawyer or accountant who formed the entity.

Businesses must also update this information if there are any changes. The filings must be made directly to FinCEN, which is a bureau of the U.S. Department of the Treasury responsible for combating money laundering and other financial crimes.

Penalties for Non-Compliance

Businesses that fail to comply with the CTA's filing obligations may face penalties, including fines and potential criminal liability. Specifically, the willful failure to report or the willful provision of false or fraudulent information may result in penalties of up to $500 per day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. It is crucial for businesses to take these obligations seriously and ensure they meet the filing requirements in a timely and accurate manner.

How to Prepare for 2024 and Be Cautious About Fraudulent Requests for Information

As the CTA's compliance deadlines approach, it is essential for businesses to start preparing now. Here are some steps you can take:

Identify Beneficial Owners: Determine who qualifies as a beneficial owner for your business and gather their information.

Stay Informed: Keep up to date with any guidance or updates provided by FinCEN regarding the filing process.

Seek Legal Advice: Consult with legal professionals who specialize in corporate compliance to ensure your business meets the CTA's requirements.

Plan Ahead: Develop internal processes and procedures to facilitate compliance with the CTA's reporting obligations.

In addition, FinCEN is already warning businesses that there have been fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the CTA. The fraudulent correspondence may be titled “Important Compliance Notice” and ask the recipient to click on a URL or scan a QR code. Do not open those solicitations, click any such links, or provide your information, especially personal information, without doing adequate research in advance as to who you are providing that information to and the safety of the information you are providing.

Summary

In conclusion, the Corporate Transparency Act represents a significant shift in corporate regulation, aimed at increasing transparency and preventing financial crime. Businesses must be aware of their filing obligations and take proactive steps to ensure compliance in 2024 and beyond. You can obtain more information about this from FinCEN here: Beneficial Ownership Information Reporting | FinCEN.gov.  FinCEN has published FAQs here: https://www.fincen.gov/boi-faqs.

If you have any questions or need assistance with CTA compliance, please don't hesitate to reach out to me at kate.santon@sgclegal.com.  Santon General Counsel, P.C. is here to help you navigate these changes and ensure your business remains in good standing.

Paycheck Protection Program Forgiveness Expanded; Economic Injury Disaster Loan Reopened

On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”) was signed into law. The Treasury Department then published revisions to its rules relating to the Paycheck Protection Program on June 11, 2020, clarifying how the Flexibility Act will be interpreted as there has been some confusion regarding its application. There are a few changes that are important for small businesses to keep in mind when developing their financial plans related to their PPP loans and applying for forgiveness. First, the Flexibility Act expanded the forgiveness period from 8 weeks to 24 weeks from the date of origination (or December 31, 2020 if earlier) but retains the option for pre-June 5 borrowers to choose between the 8-week or the 24-week covered period. Second, the Flexibility Act requires only 60% of the loan to be used towards payroll costs, as opposed to 75%. This is not a condition of forgiveness as previously thought but, rather, it means that spending less than 60% of the loan on payroll will reduce the amount of the loan that can be forgiven. Third, the Flexibility Act extends the period in which borrowers must restore FTEs from June 30, 2020 to December 31, 2020. Fourth, the Flexibility Act provides two exceptions to the requirement that borrowers must restore FTEs to February 15, 2020 levels: (1) if a borrower cannot find qualified employees for unfilled positions and 2) if the borrower cannot restore operations to comparable levels of business activity due to social distancing needs and other practicalities of operating within customer and worker safety guidelines established due to COVID-19. Fifth, for borrowers whose loans originated June 5 or later (where ‘origination’ means the date on which the SBA assigns a loan number), the borrower will have 5 years to repay the loan and will only need to start repayment of the loan from the date the loan forgiveness amount is determined. For borrowers whose loans originated prior to June 5, the deferment period remains 6 months and those borrowers still only have 2 years to repay the loans. Finally, the Flexibility Act allows PPP borrowers to utilize the existing payroll tax deferrals permitted under the CARES Act, which was previously only available to businesses not participating in PPP, and which enables borrowers to defer 50% of the employer’s share of payroll taxes until 2021 and the remaining 50% until 2022.

The deadline to apply for a PPP Loan is still June 30, 2020. Loan forgiveness applications are due within ten months following the end of the 8- or 24- week covered period.

The SBA announced on June 8, 2020 that it would issue new rules and guidance, a modified borrower application form and a modified loan forgiveness application. The SBA published a modified borrower application but has not yet published a modified loan forgiveness application.

On June 10, there was a Senate Committee meeting, in which the participants discussed, among other things, a simplified application for forgiveness, which is hopefully coming soon. Extending the PPP program was also a topic of discussion but at this point the June 30 deadline remains the applicable deadline.

Additionally, the SBA announced on June 15 that it has reopened the Economic Injury Disaster Loan to all eligible applicants experiencing economic impacts due to COVID-19. You can apply here: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/economic-injury-disaster-loan-emergency-advance.

Paycheck Protection Program and Economic Injury Disaster Loan Program Receive Additional Funding

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law. The CARES Act created, among other things, the Paycheck Protection Program (PPP) Loan and enhanced the Economic Injury Disaster Loan (EIDL) with an advance (grant). However, the funds available for the PPP and EIDL were depleted within about two weeks. On April 24, 2020, a new bill (called the Paycheck Protection Program and Health Care Enhancement Act) was signed into law that added a much needed additional $310 billion into the Paycheck Protection Program and Economic Injury Disaster Loan. This round of funding became available as of this morning and is projected to last two weeks. The SBA began processing PPP applications again today. The SBA has not yet reopened the EIDL application portal, however. If you did not receive funding during the first tranche, it would be wise to submit your application or confirm your bank is resubmitting your application as soon as possible. Below is additional information about each program.

Paycheck Protection Program Loan

Small businesses can apply for a paycheck protection program loan in an amount up to 2.5 times the business’ average monthly payroll costs in 2019 (2020 if the business did not start until after June 30, 2019), not to exceed $10 million.  At least 75% of the loan proceeds must be used for payroll while the remaining 25% may be used for rent, utilities, as well as interest on debt obligations (as long as the debt obligation was incurred before February 15, 2020). Borrowers are eligible for loan forgiveness on payroll, mortgage interest, rent and utility costs that are paid during the 8 week period following loan origination if the employer does not reduce salaries by more than 25% AND if the employer does not lay off employees, or brings back previously laid-off employees before June 30, 2020.  The amount of forgiveness goes down as the amount of employees laid off goes up.  To obtain loan forgiveness, the borrower would have to apply for the loan forgiveness at a later date.  Further guidance on that process should be available this week. Any amounts not forgiven are paid off over a term of 2 years at an interest rate of 1%. 

Small businesses can resubmit applications for the PPP loan starting today.  It is first come, first served on these loans so it would be wise to get your application in sooner than later.  To apply, you’ll need to submit your application directly to a bank that is an active SBA lender.

Economic Injury Disaster Loan and Grant

Small businesses experiencing economic injury can apply directly to the SBA for an Economic Injury Disaster Loan of up to $2 million with a term of up to 30 years and interest rates of 3.75% for for-profit businesses and 2.75% for nonprofits.  Collateral may be required on loans greater than $25,000.  Personal guarantees would be needed for loans greater than $200,000.

This program now offers an emergency advance of up to $10,000 ($1,000 per employee) to small businesses which will be treated as a grant that does not need to be repaid.  To access the grant, you would need to apply for the Economic Injury Disaster Loan and then request the advance.  The advance does not need to be repaid under any circumstance.  The advance may be used for payroll, paid sick leave, increased costs due to supply chain disruptions, or to pay business obligations, including debts, rent and mortgage payments.  To be eligible for the advance, the business must have been in operation since January 31, 2020 or earlier. 

An applicant must apply directly with the SBA on the SBA website. The application portal is currently closed but it may be reopened soon due to the additional tranche of funding made available this morning.

Please note that if you apply for and are approved for both the Economic Injury Disaster Loan/Grant (EIDL) and the Paycheck Protection Program (PPP) Loan, it will be possible to refinance an EIDL into a PPP loan.  If you ultimately receive a PPP loan or refinance an EIDL into a PPP loan, any advance amount/grant received under the Emergency Economic Injury Grant Program would be subtracted from the amount forgiven under the PPP loan.  However, you cannot use your EIDL for the same purpose as your PPP loan.  For example, if you use your EIDL to cover payroll for certain workers in May, you cannot use the PPP loan for payroll for those same workers in May, although you could use it for payroll in April or for different workers in May.

Paid Sick Leave and Paid Family Leave Under the Families First Coronavirus Response Act

The Families First Coronavirus Response Act (FFCRA) was passed on March 14, 2020 and requires that employers with 500 or fewer employees provide paid sick leave and paid family leave to employees under certain conditions. This law takes effect on April 1, 2020 and applies to leave taken between April 1, 2020 and December 31, 2020.

The law provides that employees are eligible for the following paid sick leave:

• Two weeks (up to 80 hours) of paid sick leave at the employee’s regular rate of pay where the employee is unable to work because the employee is quarantined pursuant to a governmental order or on advice of a health care provider and/or experiencing COVID-19 symptoms and seeking a medical diagnosis.  The amount paid is capped at $511 per day and $5,110 in total.

• Two weeks (up to 80 hours) of paid sick leave at two-thirds the employee’s regular rate of pay because the employee is unable to work because of a bona fide need to care for an individual subject to quarantine pursuant to governmental order or on advice of a health care provider, or to care for a child under age 18 whose school or child care provider is closed.  The amount paid is capped at $200 per day and $2,000 in total.

The law provides that employees are eligible for the following paid family leave:

• Up to an additional 10 weeks of paid family leave at two-thirds the employee’s regular rate of pay where an employee, who has been employed for at least 30 days, is unable to work due to a bona fide need for leave to care for a child whose school or child care provider is closed due to COVID-19.  The first 10 days of this leave are unpaid.  The amount paid is capped at $200 per day and $10,000 total.

If employees can telework, they are not required to be paid either type of leave. Small businesses with fewer than 50 employees may qualify for an exemption from the requirements to provide extra paid sick leave and extra paid family care leave due to school closings or child care unavailability if the company can demonstrate that doing so would jeopardize the viability of the business as a going concern.  The exemption does not apply to paid sick leave for any of the other enumerated reasons.  Such businesses would have to show certain conditions are established in order to claim the exemption.

The Act provides a refundable tax credit for employers for leave paid by an employer under the Act, which is applied against an employer’s total portion of Social Security taxes. 

The U.S. Department of Labor has compiled an extensive FAQ series here.

Interview with Partner Channel OC

I am very pleased and honored to have been interviewed by Andrew Lopez of Partner Channel OC!

Announcing the Opening of Santon General Counsel, P.C.

I am pleased to announce the opening of Santon General Counsel, P.C.  I decided to open my own firm so that I can help small businesses and emerging companies build and protect their companies.  

My firm is based on a few fundamental building blocks:

• Harnessing sophisticated technology to improve clients' access to high quality legal services and to enable a virtual and paperless law practice in an efficient manner

• Implementing predictable pricing that gives clients peace of mind regarding their legal budgets

• Providing clients with ready access to a point person to handle the breadth of legal needs that arise, with the added benefit of relationships with a carefully vetted group of legal specialists that can provide depth of knowledge

• Utilizing creativity and innovation on an ongoing basis to improve the delivery of legal services

To have the opportunity to help small business and emerging companies and to contribute to the advancement of legal services delivery is a calling of mine and I am grateful for the chance to fulfill it.