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.