Congress recently passed the Corporate Transparency Act (“CTA”), which requires certain business entities to report the “beneficial ownership” of an entity to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FINCEN”).
The CTA is intended to deter activity such as money laundering, financing terrorism, and tax fraud, among other things. Failure to disclose the necessary information may subject businesses to significant civil and criminal penalties.
FINCEN is charged with developing regulations to implement the CTA by January 1, 2022. It released an advance notice of proposed rulemaking on April 5, 2021.
What Businesses Does the CTA Apply to?
The CTA applies to a “reporting company,” which under the statute includes a corporation, limited liability company, or other “similar entity” formed by filing with a secretary of state (or similar office under the law of a state) or formed under the law of a foreign country and registered to do business in the United States. We anticipate that the regulations developed by FINCEN will further clarify what “similar entity” means.
Several types of entities are exempt from reporting requirements, including government entities, as well as certain financial institutions, certain nonprofits, and publicly traded companies. Entities that (i) employ 20 or more full-time employees in the United States; (ii) filed a federal income tax return showing more than $5 million in gross receipts or sales; and (iii) have an operating presence at a physical office within the United States are also exempt.
An “exempt grandfathered entity” is one that: (i) was formed over one year prior to January 1, 2021; (ii) has not engaged in active business; (iii) is not owned, directly or indirectly, by a foreign person; (iv) has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds in an amount greater than $1,000; and (v) does not otherwise hold any type of assets.
Who is a Beneficial Owner or Applicant?
Under the CTA, a “beneficial owner” is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, (i) exercises substantial control over a corporation or limited liability company; (ii) owns 25% or more of the equity interests of a corporation or limited liability company; or (iii) receives substantial economic benefits from the assets of a corporation or limited liability company.
A reporting company must submit a report to FINCEN that discloses the full legal name, date of birth, address, and a unique identifying number from an acceptable identification document or a FINCEN identifier of any beneficial owner.
Reporting companies must also disclose similar information for any “applicant.” An “applicant” includes an individual who: (i) files an application to form a corporation, LLC, or other similar entity under state or Indian Tribe law; or (ii) registers or files an application to register a corporation, LLC, or other similar entity formed under the laws of a foreign country to do business in the United States by filing a document with the secretary of state or similar office under state or Indian Tribe law.
When Must Reporting Occur?
A reporting company that is formed or registered after the effective date of the regulations must submit a report to FINCEN with the beneficial ownership information related to the reporting company at the time it is formed or registered. A reporting company that was formed or registered before the effective date of the regulations must submit a report to FinCEN no later than two years after the effective date of the regulations. To the extent that there are changes in reported beneficial ownership information, a reporting company must submit an updated report to FINCEN by no later than one year after the date of the change.
What are the Penalties for Failing to Comply?
It is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information to FINCEN, or willfully fail to report complete or updated beneficial ownership information to FINCEN. Violations are subject to civil penalties of not more than $500 for each day that the violation continues, and criminal penalties of imprisonment of up to two years and fines of up to $10,000.
There is a safe harbor rule that protects individuals from liability if they voluntarily follow procedures and submit a report with correct information within 90 days. The safe harbor is inapplicable to individuals who submit a report with knowledge that it contains incorrect information in an effort to evade reporting requirements.
We Can Help
The foregoing is a summary of some of the important provisions of the CTA. The statute is lengthy and complex and there is much more to know. Businesses should consult with their attorney to understand their obligations under the CTA. For assistance, please contact Ed Castellani or your Fraser Trebilcock attorney.
Edward J. Castellani is an attorney and CPA who represents clients involved with alcohol beverages as a manufacturer, wholesaler, or retailer. He leads the firm’s Business & Tax practice group, and may be contacted at email@example.com or 517-377-0845.