The Corporate Transparency Act (CTA) was enacted January 1, 2021, as part of the National Defense Authorization Act, representing the most significant reformation of the Bank Secrecy Act and related anti-money laundering rules since the U.S. Patriot Act. The CTA is intended to address and guard against money laundering, terrorism financing, and other forms of illegal financing by mandating certain entities (primarily small and medium size businesses) to report “beneficial owner” information to the Financial Crimes Enforcement Network (FinCEN). The CTA authorizes FinCEN, a bureau of the U.S. Treasury Department, to collect, protect, and disclose this information to authorized governmental authorities and to financial institutions in certain circumstances.
TMH is sending you this communication to provide you with some general information regarding the new reporting rules as well as initial steps you should take to address the implications of the CTA to your organization.
What entities are subject to the new CTA reporting requirements?
Entities required to comply with the CTA (Reporting Companies) include U.S. corporations, limited liability companies (LLCs), and other types of companies that are created by a filing with a Secretary of State (SOS) or equivalent official. The CTA also applies to non-U.S. companies that file a registration to do business in the U.S. Additional entity types could be subject to CTA reporting requirements based on individual state law formation practices.
There are a number of exceptions to who is required to file under the CTA. Many of the exceptions are entities already regulated by federal or state governments and as such already disclose their beneficial ownership information to government authorities. One notable exception is for “large operating companies” defined as companies that meet ALL of the following requirements:
- Employ at least 20 full-time employees in the U.S.
- Gross revenue (or sales) over $5 million on the prior year’s tax return
- An operating presence at a physical office in the U.S.
Who is considered a “beneficial owner” of a Reporting Company?
A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” or owns or controls at least 25% of the company’s ownership interests.
An individual exercises “substantial control” if the individual (1) serves as a senior officer of the company; (2) has authority over the appointment or removal of any senior officer or a majority of the board; or (3) directs, determines, or has substantial influence over important decisions made by the Reporting Company. Thus, senior officers and other individuals with control over the company are beneficial owners under the CTA, even if they have no equity interest in the company. In addition, an individual may exercise control directly or indirectly, through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control. CTA regulations provide a much more expansive definition of “substantial control” than in the traditional tax sense, so many companies may need to seek legal guidance to ultimately determine who are deemed beneficial owners within their organization.
Phase-in of reporting requirements
Currently, the CTA’s reporting requirements will be phased-in in two stages:
- All NEW Reporting Companies – those formed or registered on or after January 1, 2024 – must report required information within 90 days after their formation or registration.
- All EXISTING Reporting Companies – those formed or registered before January 1, 2024 – must report required information no later than January 1, 2025.
How to prepare for the CTA
Now is the time to assess the new rules and the implication on your organization. Some questions and comments to consider, although not meant to be all inclusive, include:
- Is your company subject to the CTA, or do you qualify for any of the exemptions?
- If your company is not exempt, how should you calculate percentages of “ownership interests” to determine whether any owners meet the 25%-ownership threshold? In many companies with simple capital structures, the answer will be obvious. However, for companies with more complex capital structures it may be much less obvious to make this determination.
- How do you assess and determine each person who exercises “substantial control” over the company? There may be multiple people who qualify based on the broad definition.
- What new processes and procedures should the company put in place to monitor future changes in its beneficial owners and reportable changes on existing beneficial owners? Note that changes will require timely updated reports to FinCEN. The types of information that must be provided to FinCEN and kept current on an ongoing basis for beneficial owners include the owner’s legal name, residential address, date of birth, and unique identifier number from a non-expired passport, driver’s license, or state identification card (including an image of the unique-identifier documentation). Reporting Companies will be reliant on beneficial owners to timely notify them of any reportable changes to their information. As a result, the company operating agreement may need to be revised to include provisions related to compliance with the CTA.
What should be done now?
As the CTA is not a part of the tax code, the assessment and application of many of the requirements set forth in the regulations, including but not limited to the determination of beneficial ownership interest, may necessitate the need for legal guidance and direction. As such, since we are not attorneys, TMH is not able to provide you with any legal determination as to whether an exemption applies to your entity or whether legal relationships constitute beneficial ownership.
If you have any concerns regarding your organization’s compliance with the CTA, please contact us as soon as possible and we can help you evaluate your specific situation and assess what, if any, CTA-related administrative services we may be able to provide.
An important item to note is that there are serious penalties for willfully violating the CTA’s reporting requirement, including (1) civil penalties of up to $500 per day that a violation is not remedied; (2) a criminal fine of up to $10,000; and/or (3) imprisonment of up to two years.
For additional information regarding the beneficial ownership reporting requirements under the CTA, refer to FinCEN’s Frequently Asked Questions document at https://www.fincen.gov/boi-faqs.
As always, please feel free to contact us if you have any questions.
Sincerely,
TMH