New Year, New Rules: Unpacking the CTA's Impact on Company Reporting

ARTICLE | May 24, 2024

The Corporate Transparency Act (CTA), effective since January 1, 2024, has been enacted to fight financial crimes, including money laundering. The act mandates 'Reporting Companies' to submit information about their 'beneficial owners' to the Financial Crimes Enforcement Network (FinCEN). This requirement has raised numerous questions, prompting FinCEN to respond through its Beneficial Ownership Information Frequently Asked Questions (BOI FAQ), which included a crucial update regarding corporate trustees.

A 'Reporting Company' under the CTA is either a domestic entity, formed by filing a document with a secretary of state or similar office in the United States, or a foreign entity formed under foreign law and registered to do business in the United States. The reporting of beneficial ownership information must be electronically submitted to FinCEN, using a secure filing system on their BOI E-Filing website.

The Act defines a beneficial owner as an individual who either directly or indirectly exerts substantial control over a reporting company or controls at least 25% of the reporting company’s ownership interests. In the context of trusts, if a trust with a corporate trustee holds an ownership interest in a reporting company, the beneficial owners of the corporate trustee may need to be disclosed. However, this largely depends on the ownership or operating structure of the corporate trustee in relation to the reporting company.

There are exemptions to these requirements. For instance, if the corporate trustee is exempt from the CTA's reporting requirements, the reporting company may only need to disclose the corporate trustee's name. Other exemptions include situations where the beneficial owner of the corporate trustee does not individually exercise substantial control over the reporting company.

The regulations accompanying the CTA list 23 types of entities that are exempt from these requirements. These include various government agencies, financial institutions, investment companies and advisors, as well as large operating companies. The latter is defined as an entity employing over 20 full-time employees in the US, with a physical presence and at least $5M in US-sourced gross receipts reflected on the previous year's tax return.

The CTA necessitates strict reporting deadlines for companies, which vary depending on when the company was created or registered. Penalties for willful non-compliance or provision of false information can be severe, including civil penalties of up to $500 for each day of violation and criminal penalties including up to two years imprisonment and/or a fine of up to $10,000.

Despite the clear guidelines, the rollout of the BOI reporting requirements has been met with opposition. A recent Federal District Court ruling in Alabama found the CTA to be unconstitutional, prompting an appeal from FinCEN. In response to this, the Ohio Society of CPAs, along with other state CPA societies and the AICPA, have expressed concerns and recommended suspending BOI enforcement until a year after all judicial activity related to the case has concluded. However, FinCEN has maintained that reporting companies are still required to comply and file beneficial ownership reports.

In this evolving landscape, businesses are urged to seek professional advice to understand their legal obligations under the CTA. Remember, the information shared here is for general guidance and should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.