If you haven’t heard of the Corporate Transparency Act (CTA) of 2021, you’re not alone. Outside of the legal community, the CTA has not received much attention from the business community at large. That’s why Ellin & Tucker is here to share why it’s critical that you take a second (or maybe first) look at this new law.
What is the CTA?
Passed in 2021, the CTA directs the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to maintain a national registry of beneficial owners of entities formed or operating in the U.S. The intent of the CTA is to identify bad actors that seek to conceal their ownership of business entities through shell companies and elaborate legal structures. A noble cause for sure, but the CTA imposes the same information reporting requirements on millions of legitimate small business owners, not just the bad actors and their associates.
Here’s the most alarming part: the CTA is armed with serious penalties of $500 per day, fines up to $10,000, and potential jail time for the non-compliant.
Do we have your attention yet?
Let’s Break It Down
According to the CTA’s proposed regulations issued in December of 2021, reporting companies are required to identify and report certain information about their beneficial owners and company applicants within a prescribed period of time after formation (14 days) or, if already in existence prior to the implementation of the new law, within a prescribed period of time, which is currently one year.
Here is a breakdown of the required information that must be reported:
- Full legal name
- Date of birth
- Street address
- Unique ID number from an acceptable form of ID (license or passport)
Under the CTA, here is what generally defines a reporting company, beneficial owner, and company applicant:
- Reporting companies include corporations, limited liability companies, and any other entity created by filing a document with a state or tribal authority. The broad definition includes nearly all business entities, both domestic and foreign. However, like most legislative provisions, there are numerous exemptions – 23 such exemptions to be exact! The most important exemptions to note are:
- Insurance companies, accounting firms, investment companies and venture capital advisors, publicly traded companies, tax exempt entities, and wholly-owned subsidiaries of exempted entities
- “Large Operating Companies” would be defined as an entity that employs more than 20 employees on a full-time basis in the U.S., reported more than $5M of gross receipts or sales on a U.S. federal income tax filing in the previous year, and has an operating presence at a physical office within the U.S.
- Beneficial owners are individuals who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:
- Exercise “substantial control” over the reporting company -or- own or control 25% or more of the ownership interest of the reporting company.
- Company applicants are individuals who direct, control, or file the document that forms or registers the entity with a state.
Although the CTA became law in 2021, the reporting requirements will not take effect until the final regulations are published and it is expected that final regulations could be finalized by the end of this calendar year. Until then, entities should be prepared for continued increased levels of transparency sought by the government in their fight against criminal activities.
Ellin & Tucker will continue to provide you with the most up-to-date information and guidance as it becomes available. And as always, please do not hesitate to contact a member of the Ellin & Tucker team with any questions.