The Corporate Transparency Act: A Game Changer

The following article was provided by Whittlesey. It is reposted here with permission.

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As we approach the New Year, one of the most anticipated regulations to reshape the U.S. business landscape is the Corporate Transparency Act. 

Enacted in January 2021, the CTA will go into effect on Jan. 1, 2024. 

The CTA requires certain legal entities, including LLCs, to report Beneficial Ownership Information to the Financial Crimes Enforcement Network.

The CTA is vital in the country’s efforts to combat financial crime, money laundering, and terror financing by introducing new business disclosure requirements.

At its core, the CTA was designed to prevent bad actors from using U.S. companies for illicit activities by obscuring their identities behind the veil of corporate structures. 

Historically, certain U.S. entities were magnets for illicit funds because they did not require the disclosure of the beneficial owners.

What Does the CTA Mandate?

Beneficial Ownership Disclosure is the CTA’s centerpiece in requiring certain U.S. companies to report their beneficial ownership details to the Financial Crimes Enforcement Network. 

A beneficial owner is anyone who exercises substantial control over a company or owns 25% or more of its ownership interests.

• Substantial control can be exercised through various means, such as ownership of voting interests, the ability to elect or remove managers, or the ability to direct the LLC’s day-to-day operations.
• Ownership interests can include membership, management, and other types of ownership interests.

Who Is Covered?

Primarily, the reporting requirements are for corporations, limited liability companies, and other similar entities formed within the U.S. or foreign entities registered to do business in the U.S.

There are several exemptions to the CTA’s reporting requirements, including:

• Publicly traded companies
• Financial institutions
• Insurance companies
• Tax-exempt organizations
• Operating companies
• Have more than 20 full-time employees in the United States.
• Have an operating presence at a physical office in the United States.
• Must have filed a federal income tax or information return for the previous year showing more than $5 million in gross receipts or sales.

In addition to these general exemptions, there are also exemptions for certain types of LLCs, such as LLCs owned by foreign governments or used to hold intellectual property.

Reporting Requirements

Reports are filed electronically with FinCEN, a division of the U.S. Treasury. The form is available on FinCEN’s website.

The report must include the following:

• Company legal name and any trade names or DBA names
• Principal business address
• Jurisdiction it was formed in
• Taxpayer identification number

For each company’s beneficial owners created on or after Jan. 1, 2024, report must include the following:

• Full legal name
• Date of birth
• Current residential address
• Unique identifying number from an acceptable identification document which could be from a U.S. passport, U.S. driver’s license, or foreign passport. 

Reporting Deadlines

• Reporting companies formed or registered in the U.S. on or after Jan. 1, 2024, must file an initial beneficial ownership information report with FinCEN within 30 days of their formation or registration.
• Reporting companies already formed or registered in the U.S. as of Jan. 1, 2024, must file an initial beneficial ownership information report with FinCEN by Jan. 1, 2025.
• Reporting companies must also update their beneficial ownership information reports with FinCEN within 30 days of any changes to their beneficial ownership information.

Compliance

FinCEN enforces the CTA’s reporting requirements. 

Reporting companies that fail to comply with the reporting requirements may be subject to significant civil penalties.

What Should Businesses Do?

The CTA’s reporting requirements will go into effect on Jan. 1, 2024. 

Companies should start by assessing if they fall under the purview of the CTA. Those that do will need to:

• Gather and verify information: Ensure you have accurate and updated details of all beneficial owners.
• Stay updated: Regularly review and understand evolving guidelines and requirements related to the CTA.
• Consult professionals: It may be helpful to seek professional advice to ensure complete compliance.

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About the author: Brenden Healy is partner head of tax services in Whittlesey’s Hartford office. With over 25 years of experience in public accounting, Healy is a tax expert who consults with businesses and individuals and focuses his practice on manufacturing and distribution, retail industries, real estate, and nonprofit organizations.