The Corporate Transparency Act (“CTA”) was passed by the Senate and signed into law by President Trump on December 20, 2020, and was thereby enacted into law effective January 1, 2021 pursuant to the National Defense Authorization Act for Fiscal Year 2021, having broad bipartisan support. The CTA requires certain businesses to report their beneficial ownership information to the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury. The purpose of this act is to prevent money laundering and other illicit activities by identifying the true owners of companies, much the same reasoning given for the current reporting system for foreign assets, and with many of the same criticisms as well as the burden of these reporting requirements. For those that are familiar with reporting for foreign bank accounts (i.e. the FinCen 114 forms), this will be the same Treasury Department bureau that those foreign bank accounts are reported to, although with a different form and format.
Similar to the foreign account report rules, the penalties for noncompliance can be steep, and may in fact increase in the future, so this reporting should be taken very seriously by companies and their owners. The civil penalty for failure to report is $500 per day for each day that the violation continues, up to a maximum of $10,000. The criminal penalty for failure to report is a fine of up to $10,000 and/or imprisonment for up to two years. The CTA also allows for the forfeiture of any property that was used to commit the violation. In addition to the penalties imposed by the CTA, there may also be other consequences for failing to report beneficial ownership information. For example, a company that fails to report may be ineligible for certain government benefits or contracts.
The CTA applies to entities that have fewer than 20 employees, less than $5 million in annual revenue, or no physical presence in the United States, and applies to the following types of entities that meet any of those three requirements:
- Limited liability companies
- Other legal entities that are created or organized under filing with a secretary of state or similar office
The CTA does not apply to the following types of entities:
- Government entities
- Financial institutions
- Insurance companies
- Real estate investment trusts
- Other entities that are regulated by federal law
The CTA also has a number of exemptions for small businesses and other entities that are not considered to be high-risk for financial crime.
The CTA requires those applicable corporations, limited liability companies, and other similar entities created in or registered to do business in the United States to report their beneficial ownership information to FinCEN. Beneficial owners are individuals who own or control 25% or more of the equity interests of an entity, or exercise substantial control over its management or operations. The final rules set forth by FinCEN also specify rules for trust reporting for trusts with ownership interests, which require the trustee to report their information, and also require certain beneficiaries and grantors to report as well, depending upon their rights and powers.
The CTA requires entities to report the following information about their beneficial owners:
- Full legal name
- Date of birth
- Current residential or business street address
- A unique identifying number from an acceptable identification document (e.g., a passport or driver’s license) or the individual’s FinCEN identifier
The filing deadline for the report under the Corporate Transparency Act is 30 days from the date of formation for new entities starting January 1, 2024, and January 1, 2025 for existing entities. Updates are generally to be made within 30 days of any changes. No reporting can be done prior to January 1, 2024. There are also rules for inactive entities.
The CTA is, of course, new law, and despite there being a “final rule” there are still questions being worked through by the Treasury Department as to its exact implementation. We at Lewis Thomason are of course monitoring this law, so that we will be ready to assist clients once the relevant reporting systems come online.