Corporate Transparency Act
The Corporate Transparency Act (CTA) was passed by Congress on January 1, 2021, as part of the National Defense Authorization Act of 2021. When implemented, the CTA will require certain businesses domiciled or registered to do business in the United
States to report “beneficial ownership” information with the Financial Crimes
Enforcement Network (FinCEN) of the United States Treasury Department (Treasury).
The reporting requirements under the CTA are not yet effective but are expected to go live when Treasury’s implementing regulations take effect. While there is no specific guidance on when this will occur, the CTA requires Treasury to finalize the rules prior to January 1, 2022. Once effective, existing reporting companies will have up to two years to submit reports on their beneficial owners, and new reporting companies will need to report at the time of formation or registration.
Reporting Companies – Who needs to report?
The CTA defines a “reporting company” as any corporation, limited liability company, or other similar entity that is (i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe or (ii) formed under the law of a foreign country that is registered to do business in the United States.
Congress has established exemptions from reporting for several categories of entities that are already required to disclose beneficial owners or that are unlikely to be used for illicit purposes. Companies will not be subject to the reporting requirements if they:
have more than 20 employees on a full-time basis,
report gross receipts or sales of more than $5 million in the previous year’s tax returns, and
have a physical presence in the United States.
Who is a Beneficial Owner?
The CTA defines “beneficial owner” to mean, with respect to an entity, an individual who, directly or indirectly, through any contract, arrangement, understanding, relationships, or otherwise:
exercises “substantial control” over the entity, or
owns or controls not less than 25% of the “ownership interests” of the entity.
Information Reported
Under the CTA, any “reporting company” will be required to report the following information to FinCEN for each of the reporting company’s “beneficial owners” and for the individual who filed the application forming or registering the reporting company:
the full legal name,
date of birth,
current address, and
unique identification number from an unexpired passport, driver’s license, other acceptable identification document, or FinCEN identity number.
Once reported, the information will need to be updated within a year of any changes. The information will not be publicly accessible, but will be available to federal, state and international law enforcement agencies and to financial institutions for customer due diligence.
Failure to comply with the CTA could result in (i) civil penalties of up to $500 for each day that the violation continues, and (ii) a fine of up to $10,000 and imprisonment for up to two years or both. The unauthorized disclosure of information collected under the CTA carries the same civil penalty but carries a higher criminal penalty of up to $250,000 and up to 5 years of imprisonment or both.
Attention now turns to Treasury to draft regulations implementing the CTA. While Treasury has been instructed to implement the CTA in a manner that minimizes the burdens on reporting companies to the greatest extent practical, there is no doubt that this legislation will have a great impact on many businesses.
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