The Corporate Transparency Act (CTA) was passed in 2021 and became effective beginning on Jan. 1, 2024. The CTA requires certain legal entities (such as corporations, limited liability companies and limited partnerships) in the U.S. to begin reporting identifying information about the individuals who own or control the entity. This is part of the federal government’s goal to strengthen its efforts involving money laundering, terrorism financing and other financial crimes.
The CTA is focused on entities created by the filing of formation documents with a secretary of state (or a similar body) in any state or territory of the U.S. and any non-U.S. entities that are registered to do business in any state or territory of the U.S. Generally, this will include corporations, limited liability companies (LLCs), limited partnerships (LPs), limited liability partnerships (LLPs) and certain business trusts. Sole proprietorships, general partnerships, joint ventures and trusts are usually not created by filing formation documents and therefore, are generally exempt from reporting.
Twenty-three types of entities are exempt from reporting including an exemption for large operating businesses that meet the following requirements: (1) have more than 20 full-time employees, (2) have an operating office at a physical location in the U.S. and (3) have more than $5,000,000 in gross receipts as reported on the prior year’s federal income tax return. Other notable exceptions include – banks, publicly-traded companies, insurance companies and tax-exempt entities – that are already subject to regulation and disclosure, although this exemption is not likely to provide relief for many small- or mid-sized businesses.
There is some newly created terminology that is critical to compliance with the CTA:
The term “substantial control” includes the following: (1) being a senior officer in a reporting company, (2) having authority over the appointment or removal of senior officers or a majority of the board of directors, (3) having “substantial influence over important decisions” of the reporting company and/or (4) having any other form of substantial control over a reporting company. Reporting companies will need to undertake a factual assessment to determine which individuals qualify as beneficial owners from a substantial control perspective.
With the initial report, the reporting company is required to disclose its full legal name, any trade name or doing business as (DBA) name, the complete address of the reporting company’s principal place of business, the state of formation and its employer identification number. For beneficial owners and company applicants, each beneficial owner’s or company applicant’s full legal name, date of birth, residential street address, an “identifying number” from a legal document like a driver’s license or passport and an image of that document are submitted. To address privacy concerns, individuals can provide this information to the Financial Crimes Enforcement Network (FinCEN) in exchange for a unique identifying number called a FinCEN identifier and supply the FinCEN identifier to the reporting company instead.
The timeline for reporting depends on when the entity was formed. As can be seen by the following, there is more time for initial reports for businesses existing prior to the effective date of the CTA:
Subsequently, if any of the information changes after the filing of the initial report, additional reporting is required within 30 days of the occurrence of the event. One example is the addition of new beneficial owners, their identities and ownership. If a reporting company learns of an error in a previously filed report, a new amended report must be filed within 30 days.
Reports are required to be filed with FinCEN, which is part of the United States Treasury. Failure to comply will result in civil and criminal penalties under the CTA.
Please contact an attorney for assistance with determining whether a particular business is a reporting company and any subsequent compliance with the CTA. In the meantime, Baker Tilly will continue to apprise you of developments on the CTA in 2024 and beyond.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.