What is the Corporate Transparency Act (CTA)?

The following is reposted from Kinetic Law, with minor modifications.

The Corporate Transparency Act (CTA) is a part of the National Defense Authorization Act (NDAA) and the Anti-Money Laundering Act, which became effective on January 1, 2021, when Congress overrode former President Trump’s veto of the NDAA. The CTA officially takes effect on January 1, 2024. All privately owned corporations, LLCs, and other entities created by filing documents with the state are required to comply with the CTA by filing reports on their beneficial ownership. Essentially, in the absence of a specific exemption, information on “beneficial owners” of companies must be filed.

While this information will not be publicly available, it can be disclosed to U.S. federal law enforcement agencies. The information can also be disclosed to certain other enforcement agencies and non-U.S. law enforcement agencies with court approval. If the reporting company consents, the information provided in the Corporate Transparency Act may also be provided to financial institutions and their regulators.

The CTA results from over a decade of attempting to create a database of beneficial ownership information within FinCEN (Financial Crimes Enforcement Network). The ultimate goal is to crack down on shell corporations used by terrorists and money launderers. Before the implementation of the CTA, the collection of beneficial ownership information was the responsibility of financial institutions; that responsibility now lies on the actual reporting companies. Willful non-compliance and unauthorized disclosures will result in stringent penalties. Learn more about what is the Corporate Transparency Act below.

Definitions and Exceptions to the CTA

The two most significant definitions of the CTA are “reporting company” and “beneficial owner.” Under federal legislation, a “beneficial owner” is an individual who has a “level of control over, or entitlement to, the funds or assets of a corporation or LLC…enabling the individual to directly or indirectly control, manage, or direct the corporation or LLC.” FinCEN is more specific, defining a beneficial owner as anyone who directly or indirectly owns 25 percent or more of an LLC or corporation and meets the definition above.

A “reporting company” is any corporation, LLC, or similar entity created by filing corporate documentation and registered to do business in the United States. The following are considered exempt from the “reporting company” definition under the CTA:

• Banks

• Accounting firms

• Issuers of securities when registered under Section 12 of the SEA of 1984

• Federal or state credit unions

• Savings and loan-holding companies

• Registered money-transmitting businesses

• Brokers or dealers registered under Section 15 of the SEA

• Tax-exempt entities under the 501(c) tax code

• Sole proprietorships

• The majority of estate planning trusts and other trusts, unless beneficial ownership of a company that is required to report is involved

• Companies with more than 20 full-time employees, more than $5 million in gross sales, and a U.S. physical presence (and the wholly owned entities of these companies)

• Other highly regulated companies registered under Section 6 or 17A or otherwise registered with the Securities and Exchange Commission

Practically speaking, “substantial control” of a company could be triggered by:

• Ownership of a majority or dominant minority of voting shares

• Board representation

• Rights associated with a financing arrangement or interest in the company

• Arrangements of financial or business relationships (formal or informal)

Essentially, the right to control is what’s important, whether or not that right is exercised.

How Many Companies Are Expected to Be Impacted by the CTA?

The consensus seems to be that most corporations impacted by the CTA reporting requirements are entirely unprepared. A recent survey by the National Federation of Independent Business (NFIB) found that 90 percent of its members—especially smaller companies—were unfamiliar with the CTA reporting requirements. While FinCEN has worked to raise awareness, the fact remains that most businesses remain unaware of the upcoming filing requirement.

The NFIB also believes that FinCEN has “woefully underestimated” the time and stress these requirements will cause smaller business entities. Early estimates are that at least 32.6 million entities will be required to report, with approximately 14.4 million needing to file updated reports in the second year. FinCEN also estimates initial compliance to cost at least $2,615 per entity, with updates costing approximately $561.

What Persons Must Be Reported Under the CTA?

Under the CTA, the following persons must be reported:

• Company applicants, defined as the person who files a certificate of incorporation or articles of organization for a company (reporting companies in existence before January 1, 2024, do not have to report company applicant information)

• Shareholders who hold 25% or more of the voting stock

• For an investor that is an entity, that investor must be reported, along with individuals that own 25 percent or more of the investor or have substantial control over the investor

• Any individual investors or shareholders with substantial control

• Senior officers, such as the CEO and CFO, and potentially also members of the Board of Directors

Trusts

• Grantors, settlors, beneficiaries, and trustees of a trust if the trust directly or indirectly owns an interest of 25 percent of a reporting company

• Grantors or settlors of a trust who have the right to withdraw trust assets or revoke the trust

• Beneficiaries of a trust who are the sole permissible recipient of the income and principal of the trust

• Beneficiaries of a trust who have the right to demand a distribution or withdraw all the assets of the trust

• Any other person with the authority to dispose of trust assets

Certain Creditors

• Creditors who have a right to equity via a convertible note or SAFE if, upon conversion, they could hold 25 percent or more of the company or would have substantial control (If the convertible note or SAFE converts into preferred stock, ownership of that stock could provide substantial control)

What Information is Required for Persons Who Must Report Under the CTA?

If you are an individual who is required to report under the CTA, you will need to provide your full legal name, date of birth, current address, and a photo of a current government-issued identity document (a driver’s license, state I.D., or passport) which shows your photograph, I.D. number, and the jurisdiction of issuance. Reporting companies must provide the full legal name of the company as well as trade names or DBAs, a street address for the business, an EIN (tax I.D. number from the IRS), and the jurisdiction of the formation of the company.

What Are the Filing Deadlines Associated with the CTA?

Existing entities have until December 31, 2024, to file an initial report. New entities must file an initial report within 90 days of the date they are formed if formed in 2024. For entities created in 2025 and after, the initial report must be filed within 30 days of the entity’s formation date.

Those required to report must update information in a timely manner when it changes. If inaccurate information has been submitted, it must be corrected promptly (within 14 days). Reporting companies have thirty days to file updates regarding changes in beneficial ownership, including:

• New officers, shareholders, or investors that meet the requirements of beneficial ownership

• Changes to a beneficial owner’s address, driver’s license, or passport

• Those who are no longer officers or beneficial owners

Willful failure to report complete or updated information can result in fines as high as $10,000 and/or up to two years in prison. The same penalties apply to anyone who willfully provides false or fraudulent beneficial ownership information. Penalties apply to the responsible individuals (officers, directors, controlling shareholders) and the reporting company.

What Should You Do Now?

• Step 1 – Identify all persons that may need to be listed on the report – senior officers, directors, shareholders, investors

• Step 2 – Evaluate that list against the requirements described above, to narrow down the list to only those persons who must be reported

• Step 3 – Contact each person on the list to obtain the necessary information. Make sure that you explain why you are asking for this information, give them a deadline for compliance, and make sure that they understand that this is mandatory. Also, inform them that they are obligated to notify you in writing of any changes to their information

• Step 4 – Start compiling your initial report with the information provided & submit it to the BOI E-Filing System

You should also implement a process for handling updates – this includes both new beneficial owners, and updates to existing beneficial owners.