Smart Money: New for 2024: The Corporate Transparency Act requires action

Beginning January 1, 2024, all companies incorporated and operating in the United States must comply with the Corporate Transparency Act (CTA). This generally requires each company to register its “beneficial owners” with the Financial Crimes Enforcement Network (FinCEN).

What is the CTA?

The CTA is a US law that went into effect in 2021. The purpose of the CTA is to combat money laundering, fraud, and other illegal activities by requiring companies to report their beneficial owners to FinCEN’s non-public database. The goal of the CTA is to increase transparency and accountability in corporate ownership and prevent the misuse of anonymous entities for illegal purposes.

Which companies have to report?

Any entity registered to do business or organized with a U.S. state or Indian tribe must comply with the CTA. This includes corporations, LLCs, LLPs, LPs and business trusts, as well as any other entity created by filing a document with a secretary of state or Indian tribe.

Are there exceptions to the reporting requirement?

FinCEN has issued a list of companies that are exempt from reporting, including certain nonprofit companies, “large operating companies,” and companies operating in highly regulated industries (e.g., banks and CPA firms), provided the company the list of required factors are met and are considered exempt. Given the list of factors, most LLCs – even if closely related – do not meet the exceptions and must report under the CTA. All non-exempt companies must register their beneficial owners with FinCEN. Unless an entity has confirmed its exempt status based on the factors published by FinCEN, it should be considered a reporting entity.

What needs to be reported and how often?

Every company must report its beneficial owners, who are individuals who ultimately own or have significant control over at least 25% of the company. For corporate-owned businesses, the ultimate upstream individual owners are the beneficial owners who must be reported for the downstream entity. FinCEN requires certain information to be reported for each beneficial owner, including, but not limited to, full name, unexpired U.S. identification document, and current residential address. Once reported, a company must update FinCEN within 30 days of any change to its reported information. Companies must provide, among other things, their company name, any trade names and their tax identification number.

The data is entered into the Beneficial Owner Secure System (BOSS), a database operated and maintained by FinCEN. These reports are considered confidential information and will be kept confidential, except for access by the following: FinCEN, certain law enforcement agencies with court authorization, non-U.S. law enforcement agencies (e.g., foreign governments), and financial institutions and regulatory authorities with the consent of the reporting party.

When does compliance start?

Reporting began on January 1, 2024. Companies founded before the end of 2023 have until January 1, 2025 to report their current beneficial owners. For companies registered or incorporated after December 31, 2023, reporting must be made within 90 days of the company’s incorporation. For companies incorporated in 2025 and future, registration must be completed within 30 days of incorporation. Companies incorporated in 2024 and future must also report the “corporate applicant,” which is the individual(s) who orchestrates and coordinates the registration or organization of the company.

What consequences can a failure to report have?

Willful failure to report information required under the CTA may result in significant penalties. For reporting violations, the CTA provides for: (i) civil penalties of up to $500 for each day that a violation continues or is not corrected; and (ii) criminal penalties of up to $10,000, imprisonment of up to two years, or both. For disclosure and use violations, the CTA provides for: (i) civil penalties of up to $500 for each day that a violation continues or is not remedied; and (ii) criminal penalties of up to $250,000, imprisonment of up to five years, or both.

Parsons Behle & Latimer attorneys are well-versed in the CTA and can provide assistance with registration and ongoing compliance required under the CTA through our tailored interface. We have developed an integrated registration process and a dedicated team to help customers comply and maintain the CTA. To discuss consulting for your organization, please email [email protected].

Jamie Tract is a corporate transactions attorney who focuses her practice on mergers and acquisitions, corporate restructurings, complex contract drafting and negotiations, start-ups and formations, and corporate governance.