Insights and Resources

The CTA: A Step Towards Greater Transparency in Business Operations"

ARTICLE | January 17, 2024

The Corporate Transparency Act (CTA), enacted as part of the National Defense Act for Fiscal Year 2021, is a new legislation that has become a hot-topic for many businesses since its implementation on January 1, 2024. The act mandates millions of entities, both domestic and foreign, to disclose their Beneficial Ownership Information (BOI) to the Financial Crimes Enforcement Network (FinCEN). While this might appear daunting, understanding the key aspects of this legislation can help businesses navigate these new reporting requirements more efficiently.

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The primary purpose of the CTA is to usher in greater transparency in business operations. By mandating the disclosure of BOI, the Act aims to curb illicit activities such as money laundering and terrorism financing. While it is not a part of the tax code, the CTA is a significant part of the Bank Secrecy Act, which governs record-keeping and reporting of certain financial transactions.

Entities required to comply with the CTA include those organized in the U.S, and foreign entities registered to do business in the U.S. This encompasses corporations, limited liability companies (LLCs), and similar entities created by filing a document with a secretary of state or a similar office. However, entities not created through such filings are exempt from the CTA's reporting requirements.

Additionally, there are 23 categories of exemptions, including publicly traded companies, banks, credit unions, securities brokers/dealers, public accounting firms, tax-exempt entities, and certain inactive entities. It's important to note, however, that these are not blanket exemptions as these entities are usually heavily regulated and already disclose their BOI to a government authority. Large operating entities that employ more than 20 people in the U.S., reported gross revenue over $5 million on the prior year’s tax return, and have a physical office in the U.S., can also qualify for an exemption.

The core of these reporting requirements is the identification of 'Beneficial Owners.' A Beneficial Owner is defined as an individual who either exercises substantial control over a reporting company or owns or controls at least 25 percent of the ownership interests of a reporting company. The term "substantial control" is defined broadly to include senior officers who can exercise significant influence over major decisions of a company, regardless of their formal title or ownership interest.

The reporting deadlines vary based on when an entity is registered or formed or when there is a change to the Beneficial Owner’s information. New entities formed in 2024 must file within 90 days of creation, while those formed after December 31, 2024, have a 30-day window. Existing entities created before January 1, 2024, have until January 1, 2025, to comply. In case of any changes to previously reported information or discovered inaccuracies, entities must file within 30 days.

The required information includes the full name of the reporting company, any trade names, business address, state or Tribal jurisdiction of formation, and IRS Taxpayer Identification Number (TIN). Additionally, detailed information about the Beneficial Owners, including their name, birthdate, address, a unique identifying number from an acceptable identification document (e.g., driver’s license, passport), and an image of such a document, must be reported.

Non-compliance with these reporting requirements carries significant penalties. Entities can face civil penalties of up to $500 per day for ongoing violations, a $10,000 fine, and up to two years in jail for willful non-compliance. Therefore, it's crucial for businesses to understand their obligations under the CTA and seek professional advice to ensure compliance.

While the complexities of the CTA may seem overwhelming, various resources are available to help businesses navigate these changes. Webinars, risk alerts, and professional advice can provide valuable insight and guidance. It's important to remember that while public accounting firms can provide information and updates, the preparation of these reports may be considered providing legal services. Therefore, businesses should consult with legal professionals who have expertise in this field to ensure compliance with this new regulation.

In conclusion, while the CTA introduces new reporting requirements for many businesses, understanding its key aspects can help ensure compliance and mitigate potential legal and financial risks. As the implementation of the CTA continues, businesses should stay updated and informed to navigate these changes successfully.

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