What is the Corporate Transparency Act and What Do I Need To Do To Comply?
Just in case small business owners and startups did not already have enough to do, the United States government passed the Corporate Transparency Act (“CTA”), which was enacted to combat money laundering, financial fraud, and other illicit activities that can hide behind anonymous shell companies. At its core, the CTA requires certain businesses to disclose their beneficial owners—the individuals who ultimately own or control the company—to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury. Below is a run down of what is involved in compliance. It’s a relatively light lift, but I think I can speak for most of my clients in saying that small businesses (like mine and yours) weren’t looking for more things to put on our “to-do” lists.
If you would like us to prepare this disclosure for your business, we’re happy to help. For current and former clients, contact us directly at info@long.law. New and prospective clients should go to https://long.law/intake to begin the client intake process and schedule a brief consultation.
Who Needs to Comply?
To determine whether your company must file a report under the CTA, you must first determine if it is a "reporting company" under the statute. There are two types of reporting companies, a “domestic reporting company” and a “foreign reporting company”.
A "domestic reporting company" means any entity that is "(A) a corporation, (B) a limited liability company, or (C) created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe." 31 C.F.R. § 1010.380(c)(1)(i).
A "foreign reporting company" means any entity that is "(A) a corporation, limited liability company or other entity, (B) formed under the law of a foreign country, and (C) registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe." 31 C.F.R. § 1010.380(c)(1)(ii).
However, there are exemptions for entities that operate in heavily regulated industries, such as banks, credit unions, and insurance companies, among others. Furthermore, the CTA exempts “large operating companies”, which it defines as companies that employ more than 20 full-time employees, maintain a physical office in the U.S., and filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales, as defined by the statute.
Domestic reporting companies created before January 1, 2024, and foreign reporting companies that became foreign reporting companies before January 1, 2024, must file their reports by January 1, 2025. Any entity that becomes a reporting company on or after January 1, 2024, must file a report within 30 calendar days after the reporting company has been registered to do business.
Key Requirements for Compliance
1. Disclosure of Beneficial Ownership: Eligible entities are required to provide FinCEN with information about their beneficial owners, including their name, birth date, address, and an identifying number from an acceptable document (e.g., a passport or driver’s license).
2. Reporting Updates: Any changes to beneficial ownership must be reported to FinCEN within a specified timeframe to ensure records are current.
3. Record Retention: Entities must maintain accurate records of the information provided to FinCEN for a certain period after the entity dissolves or terminates.
Penalties for Non-Compliance
Failure to comply with the CTA can result in significant penalties, including a $500 per day fine up to a maximum of $10,000. A willful failure to file a report or an intentional filing of inaccurate information is punishable as by up to two years imprisonment. A willful violation in combination with violations can result in up to ten years imprisonment.
Conclusion
The Corporate Transparency Act marks a new era in corporate governance and transparency, with a clear aim to enhance the integrity of the business environment in the U.S. While compliance may seem daunting at first, understanding your obligations and taking proactive steps to meet them can ensure that your business not only complies with the law but is also positioned to flourish in a more transparent market.
Please note that New York also passed a similar statute, the New York LLC Transparency Act, which was signed into law December 22, 2023 and goes into effect December 22, 2024.
Should you have any questions or require assistance with ensuring your business complies with the Corporate Transparency Act, current and former clients should contact us directly at info@long.law. New and prospective clients should go to https://long.law/intake to begin the client intake process and schedule a brief consultation.