In an era where corporate transparency and accountability are paramount, the Corporate Transparency Act (CTA) stands as a significant milestone in the United States’ efforts to combat money laundering, corruption, and illicit financial activities. Enacted in January 2021, the CTA, which aims to enhance corporate transparency by requiring certain entities to disclose beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), becomes effective January 1, 2024 and will require action by many small businesses by January 1, 2025, if not sooner. The CTA is the next step in the Know Your Customer (KYC) laws which many businesses may be familiar with, as they are relevant when opening bank or other financial accounts.
Understanding the Corporate Transparency Act
Defining Beneficial Ownership:
One of the fundamental aspects of the CTA is its focus on beneficial ownership. Beneficial ownership refers to the individuals who ultimately own or control a legal entity, such as a corporation or limited liability company (LLC). These individuals often remain hidden behind complex corporate structures, making it challenging for authorities to trace illicit activities or financial improprieties.
The CTA mandates that certain U.S. entities report their beneficial ownership information to FinCEN, known as a “Reporting Company.” Covered entities include corporations, LLCs, and similar structures. The act and final rulemaking allow for 23 exemptions of a Reporting Company; an exemption means that the company will not need to comply with the CTA reporting. Exemptions include:
- Regulated Entities
- These include securities reporting issuers, US government authorities, banks & credit unions, money transmitting or money service businesses, investment companies as defined in the Investment Company Act of 1940 or investment advisors under the Investment Advisors Act of 1940, PCAOB registered accounting firms and tax-exempt entities.
- Large Operating Company (all must apply)
- A company that employs more than 20 full-time employees in the United States (employed by the company but not a subsidiary or affiliate) as of the report date
- Has an operating physical presence within the United States – this can include a personal residence
- Filed a Federal Income Tax or Information return demonstrating more than $5,000,000 in gross receipts.
- Subsidiaries of the above
- Inactive Entities (all must apply)
- In existence before January 1, 2020
- Not involved in an active business
- Not owned by a US Person
- No change in ownership in the previous 12 month period
- No financial transactions in total greater than $1,000
- Does not hold any other assets
Given the above exemption, the intent is to capture data about smaller entities which may be used for certain activities by casting a wide net that will require many smaller businesses to report with FinCEN.
Covered entities must report beneficial ownership information at the time of formation or registration and update this information within one year of any changes. Failure to do so can result in substantial penalties. For entities formed after January 1, 2024, this means reported within 30 days. For entities formed prior to this date, they have one year (till January 1, 2025) to comply.
Contents of the Report:
The CTA requires the submission of comprehensive information about the beneficial owners, including their full legal name, date of birth, current residential or business address, and a unique identifier, such as a driver’s license or passport number.
A beneficial owner is a person who owns or controls at least 25% of the ownership interests OR exercises substantial control of a Reporting Company. Substantial control includes senior officers, managing members/partners or the ability to direct, determine and influence important and significant decisions. There are exceptions toward beneficial owners, which include
- Minor children
- An individual acting as a nominee or agent
- An employee of a Reporting Company, acting solely as an employee, whose benefits are derived solely because of employment.
- Individuals that may inherit an interest in a Reporting Company
- Creditors of Reporting Companies
Implications for Businesses
The CTA significantly enhances transparency by providing law enforcement agencies with access to beneficial ownership information. This allows authorities to more effectively investigate and combat financial crimes, such as money laundering, tax evasion, and fraud.
For businesses, compliance with the CTA can serve as a risk mitigation strategy. By identifying and disclosing beneficial ownership information, companies can demonstrate their commitment to transparency and legal compliance, which may enhance their reputation and reduce the risk of legal repercussions.
While the CTA serves a vital purpose, compliance can be challenging, especially for entities with complex ownership structures. Navigating the reporting requirements and ensuring accuracy can be a time-consuming and resource-intensive process.
Some individuals may have legitimate concerns about their personal information being disclosed as beneficial owners. However, the CTA does include safeguards to protect sensitive information, such as limiting access to authorized government officials.
Steps for Compliance
Identify Covered Entities:
The first step towards compliance is to determine which entities within your corporate structure are covered by the CTA. This may involve a comprehensive review of your organization’s legal structure and ownership.
Gather Beneficial Ownership Information:
Once you’ve identified covered entities, gather the necessary information about beneficial owners, including their personal details and unique identifiers.
Establish Reporting Protocols:
Develop internal protocols for reporting beneficial ownership information to FinCEN. This may include appointing responsible individuals or teams within your organization to oversee compliance.
Implement Data Security Measures:
Given the sensitive nature of the information being collected, it’s crucial to implement robust data security measures to protect against data breaches and unauthorized access.
Stay Informed About Changes:
The CTA may undergo amendments or changes in the future. It’s essential to stay informed about any developments and adjust your compliance strategy accordingly.
Update to Entity Formation:
Along with obtaining an EIN and forming with the Secretary of State of the state of incorporation and obtaining a registered agent service, entities formed in 2024 will have to figure out who will be doing the required reporting with FinCEN as part of the formation.
The Corporate Transparency Act represents a significant step forward in the United States’ efforts to promote corporate transparency and combat financial crimes. While compliance with the CTA can be challenging, it is essential for businesses to embrace transparency as a means of reducing risks, enhancing their reputation, and contributing to a more transparent and accountable corporate landscape. By understanding the key provisions and taking proactive steps towards compliance, businesses can navigate the complexities of the CTA successfully and contribute to a more transparent and accountable corporate landscape.
In an age where transparency is increasingly valued, the Corporate Transparency Act is a step in the right direction towards ensuring businesses are held accountable for their actions and fostering a more honest and ethical corporate environment. As of the date of this article there is no ability to report in advance, with only a proposed rulemaking on the data collection. As more data becomes available we will share.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.