Small Businesses Will Be Required To Comply With The Corporate Transparency Act Starting In January 2024.
With little fanfare or media coverage, Congress passed the Corporate Transparency Act of 2020 (the “CTA”) as part of the William M. Thornberry National Defense Authorization Act for Fiscal Year 2021. Setting aside the very real question of why our republic names its defense spending bills after people, and at what point those bills will start being named after their corporate sponsors (e.g., The Home Depot National Defense Auth. Act for Fiscal Year 2027, or the Walmart National Security Act of 2028?), what does the CTA mean for business owners?
The primary change for entrepreneurs is that the CTA requires most U.S. businesses to report basic information about who owns those businesses. Those reporting requirements take effect in January 2024. Any domestic business entity, including corporations, LLCs, LPs, LLPs, PLLCs, business trusts and any other entity “that is created by filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe”, will be required to comply with the reporting requirements. Foreign entities registered to do business in any state or tribal jurisdiction are also subject to the same requirements.
Several entities are exempted from the reporting requirement. These are primarily companies that are already subject to similar requirements under other regulatory rule-sets, e.g., publicly-traded companies, banks, credit unions, municipal corporations, insurance companies, certain brokers and advisers, accounting firms, pooled investment vehicles, non-profits, and, most interestingly “entities that employ more than 20 employees, operate at a physical office in the United States, and filed federal tax returns demonstrating more than $5 million in gross receipts or sales.” In other words, the CTA is aimed at small businesses operating in the U.S.
The CTA applies to companies whether they are newly formed or already existing. For entities formed before Jan 2024, they must report by Jan 1, 2025. For newly-formed entities, they must file within 30 calendar days of receiving notice from the state of creation of the entity.
Reporting will require:
Entity’s full legal name
Trade names
A complete current address
The jurisdiction it was formed in or jurisdiction in which a foreign company first registers
Internal Revenue Service Taxpayer Identification Number and Employer Identification Number
As well as information about each beneficial owner and company applicant of the reporting company:
Full legal name
Date of birth
Current business or residential address
A unique identifying number from an acceptable identification document (i.e., passport, driver’s license, etc.)
This raises unique issues for companies in the cannabis industry, who are state-compliant by are technically operating an illegal business under federal law.
Small companies will now also have the added burden of having to plan for compliance with the CTA on an ongoing basis. Regulations like these have a tendency to expand over time, not contract, so expect that the reporting requirements will continue to grow.
The Long Law Firm intends to work with its clients to assist with compliance of the reporting requirements, and will price CTA reporting into its corporate formation package so that clients need not worry about running afoul of the CTA. Once we have more information about the form to be used for reporting, we will be reaching out to individual clients to handle.