2024 Corporate Transparency Act: Compliance and Reporting

On January 1, 2024, the Corporate Transparency Act (CTA) came into force, leaving a lot of business owners wondering what are the particular impacts them and their business. In this article we will provide a detailed overview and answer all the questions you might have about the new regulation.

This federal initiative, designed to combat money laundering, mandates comprehensive reporting of beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of the Treasury.

CTA impacts every fresh incorporation, limited liability company (LLC), limited partnership, and any entity established through a state filing with a Secretary of State. This extensive reach is estimated to affect over 32 million entities across various sectors.

The obligatory filing entails providing the business’s name, current address, state of origin, and tax identification number. Additionally, it necessitates furnishing detailed personal information such as name, birth date, address, and a government-issued photo ID like a driver’s license or passport for every direct and indirect owner. The broad spectrum of included information for indirect owners amplifies complexity, extending the scope of qualifying indirect owners requiring the disclosure of otherwise personal data. Non-compliance penalties are notably severe, with fines ranging from $500 daily up to $10,000 and the potential for two years’ imprisonment per violation.

What Is the Background of the Corporate Transparency Act?

Enacted on a bipartisan basis as of January 1, 2021, the CTA’s deliberate inclusive definition of an owner and expansive coverage of owners’ personal data serves the purpose of combating money laundering and thwarting the concealment of illicit funds funneled through “shell” corporations or similar entities within the US.

However, not all entities categorized as shell corporations are associated with malevolent intents. There exists a legitimate demand for privacy among various demographics seeking to safeguard personal information in an era of burgeoning public data. These include professionals seeking liability protection, public figures, athletes, and notably, law enforcement officers striving to shield their residential information from potential criminals.

Distinguished from exemptions typically extended to smaller companies from rigorous securities filing obligations imposed on larger public companies, the CTA operates as an overarching regulation applicable to entities irrespective of their scale or size.

Entities Affected and Reporting Requirements

Under the CTA, the scope extends to encompass both domestic and foreign reporting entities. Domestic companies include corporations, limited liability partnerships (LLPs), and various other entities established through state filings. Foreign entities refer to those formed under foreign laws but operating within the US, requiring registration and compliance with the CTA.

Detailed Reporting Obligations

The core reporting obligations necessitate a comprehensive dossier on the beneficial owners within these entities. “Beneficial owners”. “Beneficial owners” are individuals directly or indirectly exercising substantial control over an entity or owning/controlling at least 25% of its ownership interests. Notably, top-tier corporate officers—such as presidents, chief executive officers, chief financial officers, chief operating officers, or general counsels—may be deemed to possess substantial control over the entity.

For entities formed in or after 2024, a designated “Company Applicant,” responsible for the formation filing or submission, must be identified.

Exceptions to the reporting obligations

Regulated entities like banks and credit unions.
Large-scale companies characterized by having over 20 employees and boasting an annual revenue surpassing $5 million.
Entities labeled as inactive or dormant — nevertheless, the definition of inactive is stringent, specifying entities devoid of any assets and having neither sent nor received funds amounting to more than $1,000 directly or indirectly. Additionally, these entities must have been in existence as of January 1, 2020, and not owned by a foreign entity. Contrary to the term “inactive,” this exemption is notably more restricted in scope.

Reporting Deadlines and Compliance Obligations

Timelines and Updates: Existing entities must comply with the CTA by January 1, 2025, while new entities formed after the enactment require reporting within 90 days of establishment. The CTA also mandates prompt updates within 30 days of any alterations in beneficial ownership structures.

Penalties for Non-Compliance: Stringent repercussions await entities failing to comply with the CTA’s reporting mandates. Civil penalties amounting to $500 per day for each violation could escalate significantly, accompanied by the prospect of criminal charges with fines up to $10,000 and a potential two-year imprisonment.

Information included in the reports

Details encompassed within the CTA reports comprise both company-specific data and particulars concerning any individual identified as a direct beneficial owner. The inclusion of “beneficial owners” carries implications for individuals listed as trustees or potential successor trustees in the original owner’s estate plan.

Many clients designate successor trustees in their estate plans without explicitly consulting the named individual. Consequently, this scenario could potentially lead to the successor trustee being obligated to divulge personal information to federal authorities under the CTA, potentially prompting challenging discussions with these prospective successors.

Specifically, the company-related information to be reported encompasses:

Legal name along with any trade names or DBA (doing business as) titles used by the company.
Actual physical address representing the company’s primary business location, excluding P.O. Boxes or addresses of legal representatives or advisors.
State of origin where the company was formed.
Identification number, necessitating even pass-through entities like single-member LLCs, which may not have previously required a tax ID number, to acquire a distinct identification number.
An official identity document from a relevant issuing jurisdiction, such as filed Articles of Incorporation or Organization, including an image of said document.

The reporting mandate for beneficial owners requires companies to file reports for all individuals classified as “beneficial owners,” often encompassing multiple individuals.

The information requisite for each beneficial owner comprises:

Full legal name (not abbreviated initials).
Date of birth.
Residential address (excluding P.O. Boxes or addresses of advisors or legal representatives).
A scanned copy (in PDF format) of the individual’s U.S. passport or driver’s license.

The level of information demanded is markedly more personal and intrusive than what has been historically required in the United States. Notably, a similar form of reporting is already mandatory within Europe, indicating a global trend toward greater transparency in reporting individual ownership within companies.

Unraveling Complexity within the Corporate Transparency Act

Nearly every small family business, including LLCs and property-specific entities, is set to come under the purview of reporting obligations dictated by the Corporate Transparency Act (CTA). Even single-member LLCs, though disregarded for income tax purposes, are mandated to furnish reports to FinCEN as stipulated by the CTA.

The concept of “ownership” under the CTA is far from simple or narrowly defined. It transcends mere record title to shares or membership interests, instead encompassing a broad spectrum of facets within its definition. The CTA’s interpretation of ownership extends to encompass profit interests, capital interests, options, calls, puts, convertible notes, or warrants.

This encompassing definition of ownership extends to joint arrangements like trusts, voting trusts, and informal partnerships, where ownership can be ascribed under the CTA’s definition. However, certain scenarios, such as holders of interests in a phantom stock plan, might not initially fall within the purview of ownership until the phantom shares convert into tangible ownership interests.

The CTA mandates the inclusion of individuals exercising “substantial control” in the report. This might entail:

Managers or officers within the reporting entity.
Directors affiliated with the reporting entity.
Individuals with authority over senior office appointments or the majority of the board of directors.

However, minors are not required to report, although a legal guardian or trustee might be obligated to report on their behalf. The issue becomes more complex in scenarios like divorce; for instance, the question arises whether a wife should report her ex-husband’s information.

Professionals responsible for filing, such as those creating entities (“applicants”) and submitting filings with the Secretary of State post-January 1, 2024, might face reporting obligations. Two types of applicants exist: those who directly control the filing and those who physically file or execute the submission.

Reporting Dynamics and Complexities: Trusts, Beneficiaries, and Control Parameters

Regarding inheritances and trusts, an exception exists for an “inheritor,” albeit with limitations. The inheritor is exempt only while possessing a future interest. Upon receipt of the inheritance and the associated company interest, reporting under the CTA becomes obligatory.

Trusts that aren’t established via a Secretary of State filing typically evade CTA reporting as an entity. However, certain business trusts formed through such filings may fall under reporting obligations. A trustee within any trust could potentially hold direct or indirect ownership or control through the trust, introducing complexity, especially in scenarios involving a trust protector, often used in completed gift trusts, potentially exerting significant control over a company owned in part by a trust with protector provisions.

Beneficiaries face reporting obligations under varying circumstances. A beneficiary, the sole rightful recipient of income and principal, must report. Similarly, a beneficiary with authority to distribute or withdraw trust assets is required to report. However, uncertainties exist regarding larger beneficiary classes or individuals with rights to borrow or lend assets, raising questions about their reporting obligations.

Seeking Guidance in Compliance

Now that we are past the January 1, 2024 deadline, understanding and ensuring compliance with the CTA and BOI reporting requirements are of paramount importance. Legal guidance from experts well-versed in navigating these regulatory landscapes becomes invaluable.

At Vaksman Khalfin, our team of Business Law attorneys stands ready to assist you. We acknowledge the complexities and implications of the Corporate Transparency Act and are here to address your inquiries, providing guidance to ensure your entity’s compliance.

Contact any of our attorneys to gain a comprehensive understanding of how the CTA and its reporting requirements will impact your entity. Stay ahead of compliance obligations with informed counsel and proactive measures to navigate this evolving regulatory landscape effectively.