A Comprehensive Business Guide on the Corporate Transparency Act The Corporate Transparency Act (CTA) is…
How to Ensure Your Business is Prepared for the Corporate Transparency Act?
The Corporate Transparency Act (CTA) was enacted on January 1, 2021, to combat money laundering, financially supporting terrorism and other criminal activities. All registered US business entities that are in the “reporting company” category must disclose any beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) of the Department of Treasury starting in 2024.
Reporting companies that are new on or after January 1, 2024, will have to collect a variety of information from every beneficial owner and reporting applicant and send it in within 30 days of receipt of the notice. Businesses that were in existence before 2024 have a deadline of no later than January 1, 2025, to report. This new act is meant to protect, but it touches a wide variety of businesses causing new burdens.
What is a Reporting Company?
The term “reporting company” casts a very wide net. Under the CTA, certain reporting companies must report beneficial owners to FinCEN and the exemptions are very narrow. A reporting company is any entity that has filed a document with the secretary of state or similar office. This includes all entities under State law as well as Indian Tribe law. Limited Liability Companies (LLCs), corporations (S and C), limited partnerships, and other types of businesses are all required to act in 2024.
There are exemptions when it comes to the definition of a reporting company. That said, most of the exemptions are for businesses that are already required to provide ownership information to the government. Some exempt entities include Securities and Exchange Commissions, banks and credit unions, insurance companies, public utilities, tax-exempt organizations, and a few other large companies.
What Must be Filed with FinCEN?
Two main involved individuals must be reported with FinCEN under the Corporate Transparency Act. All companies are required to send in identifying information for beneficial owners and company applicants. However, if your company was formed before January 1, 2024, you will only need to report beneficial owners, not company applicants. Identifying information includes:
- Legal full name
- Date of birth
- A copy of a valid photo ID
- Residential address
Who are Beneficial Owners?
A beneficial owner must either exercise significant control in a company or own at least 25% of the ownership interests. This ownership and control can happen either directly or indirectly. The term “exercise substantial control” is somewhat ambiguous. Under the CTA, it includes:
- Individuals with a substantial percentage of ownership whether directly or indirectly.
- Executive officers such as CEO, CFO, and COO.
- Managers with significant decision-making authority or control over operations.
- Trustees are responsible for managing a trust that has substantial ownership or control.
- Individuals who have authority over the removal or appointment of board members or senior officers.
Who are the Company Applicants?
A company applicant is anyone who files the documentation to form a reporting company. If there are several individuals involved, it is the person who holds the most control over filing. Company applicants include:
- A person initiating the creation of a company by filing the necessary documents with the appropriate state or tribal authorities
- Individuals acting on behalf of others, such as lawyers or agents, who are applying to form a company.
- If an existing entity undergoes a change that triggers the need to report under the CTA, the individual responsible for filing the relevant documents is the applicant.
What Happens When Changes are Made?
Many companies experience changes in their beneficial owners or company applicants over time. This could be updated identifying information, or a change in beneficial owners or company applicants. According to the CTA, when this happens, your report must be updated and filed within 30 days of the change.
If the reporting company filed a report that was later found to be inaccurate, it must file a corrected report within 30 days of becoming aware of the inaccuracy.
Is My Information Safe with FinCEN?
All of the information your business sends to FinCEN is confidential and not accessible to the public. However, there are a few agencies that will be able to gain access if necessary:
- Federal agencies such as those involved in law enforcement, intelligence, and national security.
- State, local, and tribal law enforcement agencies can gain access for authorized purposes.
- Financial institutions may have access, especially during their customer due diligence processes.
- The US Department of Treasury and its officers, employees, contractors, or agents.
Access to the information is governed by strict privacy and security provisions to safeguard the sensitive nature of the data. Rest assured, the CTA emphasizes the importance of protecting the privacy and confidentiality of the information provided.
What Happens if My Company Doesn’t Comply?
Noncompliance is taken seriously by the CTA, but it involves willfully not complying to provide information or willfully providing false information. The penalty is up to $500 per day if the company does not take action toward remedy. The individual responsible could also be subject to criminal fines of up to $250,000 and/or jail time for up to 5 years.
That said, the penalties do not apply to those who immediately and voluntarily correct the report within 90 days of the incorrect information. Mistakes happen and as long as the mistakes are not willful, there is time to correct them.
How Does My Company Report?
Reports will need to be filed starting on January 1, 2024, and will not be accepted beforehand. The CTA will require the reports to be filed electronically and FinCEN is working on an online portal to do so.
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