Breaking Down the Corporate Transparency Act: What It Means for Your Business

ARTICLE | May 31, 2024

As a response to the pervasive issues of money laundering, terrorism financing, and other forms of illicit financing, the U.S. government has enacted the Corporate Transparency Act (CTA). This piece of legislation, which came into effect on January 1, 2021, represents a significant overhaul of the Bank Secrecy Act and associated anti-money laundering rules since the introduction of the U.S. Patriot Act. 

The CTA requires certain entities, primarily small and medium-size businesses, to report beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department. This move is expected to enhance the transparency of the U.S. financial system and discourage its use for illegal activities.

So, who exactly is required to comply with the CTA? The regulations apply to domestic and foreign entities that are created or registered to do business in the United States. Specifically, these include corporations, limited liability companies, and other entities formed by filing with a Secretary of State or equivalent official in the U.S. 

However, the CTA makes provision for numerous exemptions. For instance, entities already under federal or state regulatory oversight and therefore already disclosing their beneficial ownership information to government authorities fall under this category. One noteworthy exception is the "large operating companies," defined as entities employing at least 20 full-time employees in the U.S., with gross revenue over $5 million on the prior year's tax return, and a physical office in the U.S. 

The CTA defines a beneficial owner as any individual who directly or indirectly exercises substantial control or owns or controls at least 25% of the company's ownership interests. This definition of substantial control is broader than the traditional tax sense, encompassing senior officers and individuals with significant influence over key decisions made by the company.

The implementation of these new requirements will be gradual. Reporting companies formed or registered before January 1, 2024, will have until January 1, 2025, to submit their initial BOI reports. Those created or registered from January 1, 2024, will have 90 days from their formation or registration to file their initial BOI reports. From January 1, 2025, new companies will have 30 days from the receipt of notice of their creation or registration to file their initial BOI reports.

The information to be reported to FinCEN includes the legal name of the reporting company, its trade name, IRS taxpayer identification number, and details of its U.S. place of business or jurisdiction of formation. Beneficial owners' details such as name, date of birth, address, and unique identifying number from an acceptable identification document will also be required.

It's crucial for companies to understand these new regulations and their implications, as non-compliance carries heavy penalties. Willful failure to comply with the reporting requirements may result in daily civil penalties of up to $500, a criminal fine of up to $10,000, and/or up to two years imprisonment.

The CTA represents a significant shift in the transparency of the U.S. financial system. Companies are advised to consult with their legal advisors to understand their obligations under the CTA and to ensure they are compliant, thereby avoiding the harsh penalties associated with non-compliance. As always, feel free to reach out to us if you have any questions or need assistance understanding these new requirements.