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Corporate Transparency Act (CTA): Explained

by | Dec 19, 2023 | Business Practice, News |

Co-Authored By: Beth Fishman, Esq. and Nathan Morgan

On January 1, 2021, Congress enacted a new law called the Corporate Transparency Act (CTA or the Act). The main purpose of the CTA is to prevent United States’ business entities from committing monetary crimes such as money laundering, which is the transfer of illegally obtained money via foreign bank accounts or even through legitimate businesses. Money launderers can often conceal their identities behind these bank accounts or businesses.

To curb such illicit activities, the CTA imposes various reporting requirements on certain businesses called “Reporting Companies” (also called “Domestic Reporting Companies”), whom will be required to submit a report to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). The Act’s reporting requirements take effect on January 1, 2024.

 

What are “Reporting Companies?”

The Act classifies any corporation, limited liability company (LLC), limited partnership (LP), or other similar entity formed with the Secretary of State and that conducts business solely in the United States as a Reporting Company. In Pennsylvania, this would include filings for registered Fictitious Names.

Exempt Entities

The CTA contains provisions that exempt certain businesses from needing to report information to FinCEN.

Entities already required to file reports with the Securities Exchange Commission (SEC), such as investment advisors, security brokers, insurance companies, state-licensed insurance producers, among others, do not qualify as a Reporting Company and are exempt from the requirements of the Act.

The Act exempts what it calls “Large Operating Companies,” which it defines as companies whom:

  1. Employ over twenty (20) full-time employees in the United States;
  2. Operate through a physical, domestic office; and
  3. Have record of a federal income tax or an information return showing that the entity has over $5 million in gross receipts and/or sales (These specific records are found on IRS Form 1120 or other applicable IRS forms and must be from the previous year).

The Act also exempts:

  1. Pooled investments;
  2. Entities that are owned by otherwise exempt businesses; and
  3. Dormant entities, meaning those that have had no client-initiated activity within 180 days.

CTA Requirements for Reporting Companies

All Reporting Companies are required to file what, under the Act, is identified as “Beneficial Ownership Information” (BOI) with FinCEN. However, there is a specific distinction in what BOI is required of Reporting Companies formed prior to January 1, 2024 (the CTA’s effective date) versus for those formed afterward. Namely, any pre-CTA entity must share information regarding their “Beneficial Owners” and other key entity details by no later than January 1, 2025. Post-CTA entities must also include details regarding their “Company Applicants” (more on “Company Applicants” later in this article).

Who are “Beneficial Owners?”

The Act deems anyone who either, directly, or indirectly, exercises “substantial control” over their Reporting Company or owns or controls at least 25% of its ownership interest as a “Beneficial Owner.”

Those who exercise “substantial control” must:

  1. Serve as senior officers;
  2. Have authority within an entity to appoint or remove at least 50% of its senior officers or board of directors; and
  3. Have significant or total authority concerning important entity-related decisions.

Business decisions that Beneficial Owners make include, but are not limited to:

  1. Exercising control over the nature, scope, and specifics of business asset transfers, including sales, leases, and mortgages;
  2. Business reorganization, dissolution, and/or merging decisions;
  3. Oversight of major business expenditures, investments, equity issuances, debt accrual, and operating budgets;
  4. Selecting or terminating business ventures or business lines;
  5. Determining details of senior officer compensatory and/or incentive programs;
  6. The entry, termination, fulfillment, and/or nonfulfillment into/of significant business contracts; and/or
  7. Amending governmental procedures and/or operating documents.

Beneficial Ownership Exemptions

Those who are not considered Beneficial Owners under the Act:

  1. Minor children;
  2. Nominees, intermediaries, custodians, or agents merely associated with an entity;
  3. Employees acting solely as employees;
  4. Individuals whose sole interest in a Reporting Company is through future inheritance; and
  5. Reporting Company creditors.

What Information does FinCEN need for Beneficial Owners?

For each Beneficial Owner, Reporting Companies must provide:

  1. Full legal names;
  2. Dates of birth;
  3. Complete, current addresses (meaning full residential addresses); and
  4. Unique identifying numbers.

A Beneficial Owner’s unique identifying number can be found within any of the following document types:

  1. An active, valid passport issued by the United States government;
  2. An active, valid identification document issued by a state or local government;
  3. An active, valid driver’s license;
  4. An active, valid passport issued by a foreign government (for individuals who do not possess the aforementioned three document types); or
  5. A verifiable image of an active, valid document containing an individual’s unique identifying number.

BOI Reports: Other Mandatory Information

When Reporting Companies initially relay information to FinCEN, they must also share:

  1. The full legal name of their entity;
  2. Any other names the company goes by, including under which it trades or “does business as;”
  3. A complete and current entity address;
  4. The full and accurate name of the jurisdiction of the entity’s formation; and
  5. The entity’s IRS Taxpayer Identification Number (TIN) (Documentation containing the entity’s TIN will also show its Employer Identification Number (EIN), which FinCEN needs too).

Additional Requirement for Reporting Companies Created After January 1, 2024: “Company Applicants”

Reporting Companies formed following January 1, 2024, must also share information about their “Company Applicants.” The Act defines Company Applicants as those who have filed the forming documents for their Reporting Companies. In cases where there is more than one document filer, the law considers those who are the primary filers as Company Applicants.

BOI reporting requirements for Company Applicants are identical to that of Beneficial Owners (legal names, birth dates, addresses, and unique identifying number documentation; see, What Information does FinCEN need for Beneficial Owners?).

When a Reporting Company must Change their Report:

If any changes are made to any aspect of the initial BOI report shared with FinCEN, then a Reporting Company must file what the Act calls an “Updated Report” within thirty (30) days. For an Updated Report, entities can simply reuse their initial reports and adjust the information accordingly. If there are any name, date of birth, address, or unique identifying number changes to an entity, then Reporting Companies must share an Updated Report containing images of any correspondingly altered documentation within thirty (30) days.

In the unfortunate event that a Beneficial Owner passes away, the strict thirty (30) day rule does not apply. Instead, an Updated Report must be filed within thirty (30) days following the settlement of the Beneficial Owner’s estate. In other words, once the deceased individual’s financial affairs are fully resolved, an entity will then have thirty (30) days to file for the changes.

Entity Status Changes

If an entity is currently exempt from the CTA’s definition of a Reporting Company, but its status changes to fit the law’s definition, then said companies must file a complete BOI report with FinCEN within thirty (30) days of the status change.

If an entity’s status changes from a Reporting Company to an exempt status, these entities must file an Updated Report with FinCEN containing proof of their newly exempt status. Once an entity does this, they no longer need to file any reports with FinCEN, although they may choose to do so if desired.

Updated Reports vs. Corrected Reports

The above instances requiring Updated Reports are distinct from instances where “Corrected Reports” are needed. Corrected Reports are required if FinCEN or a filing entity discovers that any BOI was incidentally inaccurate; a new report must be filed with corrected information. As with Updated Reports, entities can simply reuse the documents from their initial filings, so long as they adjust the inaccurate portions.

Lastly, if there are any alterations to Company Applicant information, Reporting Companies are not required to file for these specific changes (as mentioned, this pertains only to post-CTA businesses).

Penalties for Noncompliance

Reporting Companies that willfully fail to share complete or updated BOI or deliberately relay false information with FinCEN could be subject to $500 in civil fines per day. Criminal penalties of up to $10,000 in criminal fines or two (2) years imprisonment (or in the most extreme noncompliance cases, both fines and imprisonment) may also be imposed. Penalties may also be imposed for any unauthorized information disclosures by an entity.

 

What can Dornish do for You?

Dornish Law Offices will be available to assist you in all matters necessary to comply with this new regulation. To reiterate, any Reporting Company formed prior to January 1, 2024 (the enactment date of the CTA) must file their BOI report by January 1, 2025. We suggest that you contact our office no later than January 1, 2024, in order to begin this filing process.

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