The Corporate Transparency Act (CTA) will go into effect on January 1st, 2024. The purpose of the CTA is to prevent money laundering through shell companies by requiring current and future businesses to comply with new reporting requirements regarding their beneficial ownership. Although the CTA offers a number of exceptions from these reporting requirements, many small- and medium-sized businesses will be required to comply with the new reporting requirements or will be subject to severe penalties.
The CTA mandates that every corporation, limited liability company, or other entity created by state filings (such as limited partnerships) file the required reports to the Financial Crimes Enforcement Network (FinCEN), unless they qualify for an exemption. These exemptions include:
If a business does not qualify for any of these exemptions, it will be required to satisfy the CTA reporting obligations. Businesses formed after January 1, 2024, must file their initial report within 30 days of formation; however, FinCEN offers a grace period for businesses that were formed before January 1, 2024, these businesses must file their initial CTA report by January 1, 2025. After a company submits its initial report, if any of the reported information changes (including beneficial owner information), the company must report the change within 30 days. Similarly, if a reporting company has a change in its reporting status, such as becoming exempt from reporting as a “large operating company”, it must also report this change within 30 days.
Under the CTA, companies must report specific identifying details of their “beneficial owners.” A beneficial owner is an individual who, directly or indirectly, holds 25% or more ownership of the company or exercises “substantial control” over the reporting company. Most small business owners will be deemed “beneficial owners” due to the 25% ownership prong of the definition. However, the determination of substantial control may require analysis of additional factors, including whether an individual is a senior officer of the company, whether such individual has the power to appoint or remove officers or directors of the company, or whether such individual influences important company decisions, such as selling company assets or entering into contracts on behalf of the company. The rules promulgated by FinCEN provide additional indicators and examples of substantial control, however the rules do not cover all facts and circumstances. If a company has any questions about whether an individual has “substantial control” of the company, it should consult a corporate attorney for advice. Additionally, entities cannot be the beneficial owners under the CTA; therefore, any interest or control held by an entity is attributed to the ultimate individual beneficial owner(s) of that entity.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
