What the Corporate Transparency Act Means for Your Business
The Corporate Transparency Act (CTA), passed on January 1st, 2021, becomes effective in 2022 and aims to fight money laundering and other illicit activity. In this week’s blog post, we will outline the CTA and discuss how businesses can comply with its requirements.
The Basics
Essentially, the CTA requires reporting companies to disclose beneficial ownership information for each beneficial owner and each applicant, with respect to the reporting company, to the Financial Crimes Enforcement Network of the United States Department of Treasury (FinCEN). Naturally, this definition raises some questions. What is a “reporting company”? What is “beneficial ownership information”? And who is a “beneficial owner”?
Reporting Company
A reporting company is any corporation, LLC, or other similar entity created via the filing of documents with a secretary of state or similar office under the law of a state. Additionally, a reporting company is any corporation, LLC, or other similar entity formed under the law of a foreign country and registered to do business in the US via the filing of documents with a secretary of state or similar office under the laws of a state. There remains some debate regarding the interpretation of the “similar entity” term seen above, and the legislature hopes to clarify the term before the CTA goes into effect.
As you might expect, there exists a laundry list of exceptions to the “reporting company” class. Here are two significant exceptions:
- Entities that employ more than 20 employees on a full-time basis in the US, filed in the previous year federal income tax returns in the US demonstrating more than $5,000,000 in gross receipts or sales, and have an operating presence at a physical office within the US.
- Banks.
“Beneficial Ownership Information” to be Reported
Beneficial ownership information includes each beneficial owner’s and each applicant’s full legal name, date of birth, current residential or business street address, and a unique identifying number from an acceptable identification document (e.g., passport, driver’s license, or other government issued ID) or a FinCEN ID.
Beneficial Owner
A beneficial owner is any individual who, directly or indirectly, and through any contract, arrangement, understanding, relationship, or otherwise, either exercises substantial control over the entity or owns not less than 25% of the ownership interests in the entity. Unfortunately, the phrase “substantial control” is inherently unclear. Additionally, it is uncertain how the 25% ownership threshold will apply to LLCs with multiple classes of interest, consent or veto rights, and negotiated distribution priorities.
Of note: while the CTA requires each reporting company to report beneficial ownership information of its beneficial owners, there is no corresponding affirmative obligation that the beneficial owners furnish this information to the reporting company.
When to Submit the Beneficial Ownership Information
The CTA provides three scenarios affecting the report date of beneficial ownership information.
First, if a reporting company is formed or registered after the effective date of the CTA, the reporting company must submit a report to FinCEN containing beneficial ownership information with respect to the reporting company at the time of its formation or registration.
Second, if a reporting company is formed or registered prior to the effective date of the CTA, the reporting company must submit a report to FinCEN no later than 2 years after the effective date of the CTA.
Third, if there are changes in reported beneficial ownership information, the reporting company must submit an updated report to FinCEN no later than 1 year after the changes.
Penalties for Non-Compliance
The CTA sets a penalty of $500 per day if a violation continues, and criminal penalties of imprisonment up to 2 years and fines up to $10,000. However, there is a 90-day safe harbor to revise or amend the reported information without penalty.
Considerations
So, what does this mean for your business? The process boils down to recognizing whether your business meets the classification of a reporting company, then identifying all beneficial owners and applicants with your business, acquiring the necessary beneficial ownership information, and reporting the information in timely accordance with CTA requirements. As the CTA comes into effect, we recommend reporting companies disclose the beneficial ownership information when it comes time for the yearly renewal of their entity. At Beresford Booth, we can help your business through the CTA process, and help ensure your business complies with the CTA.
To learn more about the Corporate Transparency Act, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.