Financial Planning

The Corporate Transparency Act: A Comprehensive Guide

The Corporate Transparency Act (CTA) is set to come into effect on January 1, 2024, imposing new disclosure obligations on most entities operating in the United States. In an effort to combat illicit activities such as money laundering, terrorist financing, corruption, and tax fraud, the CTA requires businesses to report their beneficial ownership information (BOI) to the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN). This comprehensive guide aims to provide a thorough understanding of the CTA and its implications for businesses.

What is the Corporate Transparency Act?

The Purpose of the CTA

The primary goal of the Corporate Transparency Act is to prevent and combat various forms of illicit activity while minimizing the burden on entities doing business in the United States. By requiring businesses to report their beneficial ownership, the CTA aims to enhance transparency and accountability in corporate structures.

Reporting Requirements

Under the CTA, business entities are required to report their beneficial ownership information to FinCEN. This includes disclosing information about the entity itself, as well as information about the individuals who created or registered the entity. Additionally, entities must update any previously reported information as changes occur.

Who is Required to File Reports?

Reporting Companies

The CTA mandates that all reporting companies file beneficial ownership reports. A reporting company is defined as any U.S. entity that was formed by filing a document with a Secretary of State or similar office. This includes limited liability companies, limited liability limited partnerships, business trusts, and most limited partnerships. However, sole proprietorships and general partnerships are generally excluded from the reporting requirements. Foreign entities that register to do business in the U.S. are also considered reporting companies.

Exclusions from Reporting

Certain entities are exempt from the definition of reporting companies. These exclusions typically apply to highly regulated entities or those subject to different ownership reporting requirements. Examples of excluded classes and categories include large operating companies, public companies, investment companies, insurance companies, certain "highly regulated" entities such as banks and credit unions, and subsidiaries of certain exempt entities.

What Information Must be Reported?

Reporting Company Information

Reporting companies must disclose various pieces of information about themselves. This includes their legal name, trade name(s), corporate address, jurisdiction of formation, the location where they first registered in the U.S. (for foreign entities), and any relevant tax identification numbers.

Beneficial Owners

Reporting companies are required to provide information about their beneficial owners. Beneficial owners are individuals who directly or indirectly own or control at least 25% or more of the ownership interests in the reporting company or exercise substantial control over the company. The CTA provides specific criteria to determine substantial control and ownership interests. Beneficial owners must be identified by their legal name, date of birth, street address, and a unique identifying number or a FinCEN identifier.

Company Applicants

The CTA also requires reporting companies to disclose information about their company applicants. Company applicants are individuals who file an application to form an entity or register a foreign entity to do business in the U.S. Company applicants must provide the same information required for beneficial owners, but this information is only necessary for entities created or registered on or after January 1, 2024.

Who Qualifies as a Beneficial Owner?

Definition of a Beneficial Owner

A beneficial owner is an individual who directly or indirectly owns or controls a significant portion of the ownership interests in a reporting company or exercises substantial control over the company. The CTA provides specific criteria to determine substantial control and ownership interests.

Examples of Beneficial Owners

Beneficial owners can include individuals who hold stock or equity ownership, profits interests, voting rights, convertible instruments, options, put rights, call rights, or any other arrangement used to establish ownership of an entity. However, there are exclusions for minors, intermediaries, certain employees, heirs, and certain creditors of a reporting company.

Exclusions from Beneficial Ownership

Certain individuals, such as minors, nominees, intermediaries, custodians, agents, and certain employees who are not senior officers, are excluded from being considered beneficial owners.

Who is Considered a Company Applicant?

Definition of a Company Applicant

A company applicant is an individual who files an application to form an entity under the laws of a state or Indian Tribe or registers a foreign entity to do business in the U.S. by filing a document with the Secretary of State or similar office. If multiple individuals are involved in the filing, the company applicant is the individual primarily responsible for directing or controlling the filing.

Reporting Requirements for Company Applicants

Only businesses formed or registered on or after January 1, 2024, are required to disclose information about their company applicants. Two company applicants must be included in the report, along with the same information required for beneficial owners. However, company applicant information does not need to be updated.

Compliance Deadlines

Domestic Reporting Companies

Domestic reporting companies must file their initial reports based on different timelines. Companies in existence before January 1, 2024, must file their reports on or before January 1, 2025. Companies created between January 1, 2024, and December 31, 2024, must file within 90 calendar days of receiving actual or public notice of their creation. Companies created on or after January 1, 2025, must file within 30 calendar days of receiving notice of their creation.

Foreign Reporting Companies

Foreign reporting companies also have specific deadlines for filing their initial reports. Entities that became reporting companies before January 1, 2024, must file their reports on or before January 1, 2025. Entities that become reporting companies between January 1, 2024, and December 31, 2024, must file within 90 calendar days of receiving notice of their registration. Entities that become reporting companies on or after January 1, 2025, must file within 30 calendar days of receiving notice of their registration.

Changes in Exemption Status

Entities that no longer meet the requirements for an exemption must file their initial reports within 30 days of losing the exemption. FinCEN will only accept reports from reporting companies starting from January 1, 2024.

Updating Reports

Reporting Changes in Information

Reporting companies are required to update and correct their reports when there are changes to the previously reported information. If the change is related to accurate information, it must be reported within 30 days of the change. If there was an inaccuracy in the original report, it must be corrected within 30 days of discovering the error.

Safe Harbor from Liability

The CTA provides a safe harbor from liability for filing a false report if the reporting company files a corrected report within 30 days of discovering the inaccuracy and within 90 days of submitting the inaccurate report.

Access to Reported Information

The Beneficial Ownership Secure System (BOSS)

FinCEN will maintain the reported information in a secure nonpublic database called the Beneficial Ownership Secure System (BOSS). The reported information will be securely stored to protect the confidentiality and security of the data.

Authorized Disclosures of Information

Reported information may be disclosed by FinCEN on request for statutorily authorized purposes. This includes sharing information with U.S. federal agencies engaged in national security, intelligence, or law enforcement activities, state and local law enforcement agencies with court authorization, federal agencies on behalf of non-U.S. law enforcement or foreign prosecutors, financial institutions for compliance with KYC requirements, and federal and state regulators assessing financial institutions for compliance with due diligence obligations. However, the reported information will not be made public.

Penalties for Unauthorized Disclosure

Unauthorized disclosure or use of reported information is subject to penalties. Violators may face civil penalties of up to $500 per day for each continuing violation or a fine of up to $250,000 and 5 years imprisonment (or $500,000 and 10 years imprisonment if violating another U.S. law or involved in a pattern of illegal activity exceeding $100,000 in a 12-month period).

Penalties for Non-Compliance

Reporting Violations

Penalties for non-compliance with the reporting requirements of the CTA can be significant. Reporting violations, such as providing false or fraudulent BOI or failing to report complete or updated information, may result in civil penalties of up to $500 per day for each continuing violation or a fine of up to $10,000 and 2 years imprisonment.

Importance of Compliance

Compliance with the CTA is crucial for businesses to avoid penalties and ensure transparency in their operations. It is essential for companies to understand their obligations under the CTA and implement custom compliance programs to meet the reporting requirements.

Ensuring Compliance

Understanding Obligations

To ensure compliance with the CTA, businesses should familiarize themselves with the reporting requirements and deadlines. It is important to accurately gather and report the necessary information about the entity, beneficial owners, and company applicants. Staying informed about any changes in reporting obligations is also crucial to maintain compliance.

Creating Custom Compliance Programs

Creating custom compliance programs tailored to the specific needs of the business can help streamline the reporting process and ensure ongoing compliance. Legal experts can assist businesses in understanding how the CTA may impact their operations and guide them in developing effective compliance programs.

The Corporate Transparency Act introduces significant changes to reporting and compliance obligations for most companies operating in the United States. By requiring businesses to disclose their beneficial ownership information, the CTA aims to enhance transparency and combat illicit activities. It is crucial for businesses to understand their obligations, meet the reporting deadlines, and implement effective compliance measures to ensure adherence to the CTA. By doing so, companies can contribute to the prevention of money laundering, terrorist financing, corruption, tax fraud, and other forms of illicit activity.

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©2024 Elevatus Wealth Management. All rights reserved. Investment advisory services offered through Elevatus Wealth Management, a Registered Investment Advisor with the U.S. Securities and Exchange Commission. This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.