Beginning January 1, 2024, the Corporate Transparency Act (the “CTA”), will implement information reporting requirements for corporations, limited liability companies, and other business entities that are and were created in or are and were registered to do business in the United States.

As of August 2023, there are still rules and processes being formalized that are necessary to begin implementing the CTA on January 1, 2024. While these items are not final, below is a summary of the CTA and what to expect.

 

Background on the CTA.

The CTA was passed to build on the Anti-Money Laundering Act of 2020, which was passed in 2020 to address increased illegal activity in areas such as corruption, money laundering, terrorist  financial activity, and tax fraud.

The intent of the CTA is to prevent criminals involved in the listed illegal activities above by requiring additional information and reporting requirements. Specifically, companies that create multiple “shell” companies in order to conduct such activities are going to have to report on the beneficial owners not just the “shell” company created to protect them.

While the law was passed in 2021, it wasn’t final until 2022. Further, it won’t take effect until January 1, 2024. This two year period was established in order to give companies the proper time to be on notice and prepare to file the appropriate documents.

Who does the CTA apply to?

1. Corporations, limited liability companies, and other business entities that were created by a filing with a secretary of state or a similar office to create the entity.
2. Foreign companies with a registration to do business in the United States.

When Do Entities Have to File?

For entities created or registered prior to January 1, 2024, they will have until January 1, 2025 to file the report.

For entities created or registered after January 1, 2024, they will have 30 days from creation or registration to file the report.

For entities created or registered prior to January 1, 2024 with a material change in the ownership or structure of its entity, such changes will need to be reported as a separate amendment filing, delivered with the initial “as of January 1, 2024” report filing required to be made on or before January 1, 2025.

For entities created or registered after January 1, 2024 with a material change in the ownership or structure of its entity, they will have thirty days to file a correction or change to any information previously reported.

Who Does Not Need to Report (Exemptions to CTA)?

 The CTA has 23 exemptions. While this may seem like a lot, the exemptions primarily include certain banks, heavy regulated public companies, and government-owned entities.  Below are some of the pertinent exemptions:

1. An issuer of securities registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) or that is required to file supplementary and periodic information under Section 15(d) of the Exchange Act.
2. Any broker or dealer, as those terms are defined in Sec. 3 of the Exchange Act, that is registered under Sec. 15 of the Exchange Act.
3. Any entity that is: (A) an investment company as defined in Sec. 3 of the Investment Company Act of 1940 (the “ICA”), or is an investment adviser as defined in Sec. 202 of the Investment Advisers Act of 1940 (the “IAA”), and (B) registered with the SEC under the ICA or the IAA.
4. Any investment adviser that: (A) is described in section 203(l) of the IAA, and (B) has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the SEC.
5. Any pooled investment vehicle that is operated or advised by a person described in exemptions [of the CTA] for a bank, credit union, broker or dealer in securities (#2 above), investment company or investment adviser (#3 above), or venture capital fund adviser (#4 above).
6. Any entity that: (i) Employs more than 20 employees; (ii) reports more than $5 million in gross receipts; and (iii) maintains a physical presence at a business office in the United States.
7. Subsidiaries of an exempt entity – Any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities described in exemptions.
8. Any entity that: (A) was in existence on or before January 1, 2020, (B) is not engaged in active business, (C) is not owned by a foreign person, whether directly or indirectly, wholly or partially, (D) has not experienced any change in ownership in the preceding twelve-month period, (E) has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12 month period, and (F) does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

How Will I Send the Report?

The report will be sent to the Department of the Treasury’s Financial Crimes Enforcement Network of the U.S. Department of Treasury (“FinCEN”) through secure filing system available via FinCEN’s website. The forms and electronic system have yet to be made available to the public.

What is Required to Be Reported?

 In the report provided to FinCEN, the Company will be required to provide:

• Its legal name and any trade name or dba;
• Its principal place of business address;
• The jurisdiction in which it was formed or first registered, depending on whether it’s a U.S. or foreign company; and
• Its taxpayer identification number (ie. EIN).

In the report provided to FinCEN, the beneficial owners and each Company Applicant will be required to provide:

• Legal name;
• Birthdate;
• Address (in most cases, a home address); and
• An identifying number from a driver’s license, passport, or other approved document for each individual, as well as an image of the document that the number is from.

A “Company Applicant” is an individual (or two) who, if the entity is created or registered on or after January 1, 2024:

• directly files the document that creates, or first registers, the reporting company; and
• is primarily responsible for directing or controlling the filing of the relevant document.

 

What are the Penalties of Not Reporting?

 Violations of the CTA, including not reporting or reporting false information, can have severe penalties including:

• a $500-a-day penalty, up to $10,000; and
• up to two years’ imprisonment.

What can I do now?

We recommend that companies begin compiling the information of its beneficial owners, even if it is just beginning with a list of such owners. Also, we recommend that you keep an eye out for communication from your attorney for further information regarding the final rules and process to file the required information.

If you have further questions or would like to request a free consultation, please reach out to us by emailing info@doidacrow.com or call 720-306-1001.