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The Corporate Transparency Act (CTA), a groundbreaking legislation, exemplifies this shift towards greater openness. Its enactment marks a pivotal moment in the United States’ efforts to combat illicit activities such as money laundering, fraud, and the financing of terrorism.   

Understanding the Corporate Transparency Act

At its core, the CTA is designed to peel back the layers of anonymity exploited in the corporate world to maintain anonymity, and while most businesses are legitimate, unfortunately a few bad actors have used anonymity as a way to conceal illicit activities. By mandating specific corporations, Limited Liability Companies (LLCs), and similar entities to disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), the Act aims to illuminate the often opaque corporate structures and the people behind them. 

Specifically, the CTA requires certain corporations, LLCs, and similar entities to REPORT their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). This includes the identities of individuals who own, control, or derive significant benefits from these companies. The primary goal of the CTA is to prevent the misuse of complex corporate entities for illegal purposes such as money laundering, fraud, and financing of terrorism, thereby shedding light on the true ownership of business entities and making it more difficult for individuals to conceal their identities behind corporate veils.

Impact in the Small Biz and Middle Market Companies

The CTA’s implications for businesses, especially small and middle-market companies, are substantial. Entities that qualify as reporting companies must provide detailed information about their beneficial owners to FinCEN. This requirement adds a layer of compliance and due diligence for businesses. Companies must identify and verify the identities of their beneficial owners, maintain updated records, and report changes.

The Definitions that are the Backbone of the CTA

  1. Beneficial Owner: A beneficial owner refers to individuals who, directly or indirectly, exercise substantial control over a company or own a significant percentage (usually 25% or more) of the company’s interests. Identifying and reporting these individuals is a fundamental requirement of the CTA, as it aims to uncover the true ownership of companies to prevent illicit financial activities.
  2. Reporting Company: The term “Reporting Company” encompasses those entities that are obligated to provide beneficial ownership information under the CTA. These entities are defined by specific criteria outlined in the legislation, such as companies formed under state law, foreign entities registered to do business in the United States, and limited liability companies (LLCs), among others. Understanding whether your company falls under this category is vital to ensure compliance with the CTA.
  3. FinCEN: The Financial Crimes Enforcement Network, or FinCEN, plays a pivotal role in implementing and enforcing the CTA. This federal agency is responsible for creating the necessary regulations, collecting beneficial ownership information, and maintaining a secure database of reported data. Understanding the role of FinCEN is essential for businesses to navigate the reporting process effectively.
  4. Substantial Control: The CTA defines “Substantial Control” as the authority to direct, manage, or influence a company’s activities or policies, either directly or indirectly. Identifying individuals or entities with substantial control is a key aspect of determining beneficial ownership. It’s important to understand the nuances of what constitutes substantial control to ensure accurate reporting.
  5. Reportable Information: To comply with the CTA, reporting companies must provide specific “Reportable Information.” This includes the full legal name, date of birth, address, and unique identifying number (such as a Social Security Number or driver’s license number) of each beneficial owner. Understanding the information that must be reported is critical to meeting compliance requirements.
  6. Compliance Deadlines: The CTA sets forth deadlines for compliance, with significant consequences for non-compliance. Staying informed about these deadlines and ensuring timely reporting is crucial to avoid potential penalties and legal repercussions.

 

Exemptions from Reporting

While the CTA casts a wide net in its reporting requirements, several exemptions have been built into the legislation, some of which have a more pronounced impact on small and middle-market private companies. Understanding these exemptions is essential for such entities to determine their reporting obligations accurately and efficiently.

Publicly Traded Companies: One of the most significant exemptions under the CTA applies to publicly traded companies. These companies, whose ownership is already subject to rigorous reporting requirements by the Securities and Exchange Commission (SEC), are exempt from the CTA’s additional reporting obligations. 

Financial Institutions: Financial institutions, such as banks, credit unions, and investment firms, are also exempt from reporting under the CTA. This exemption recognizes that these entities are already subject to comprehensive regulatory oversight by agencies like the Office of the Comptroller of the Currency (OCC) and the Federal Reserve. 

Entities Already Subject to Stringent Reporting: The CTA acknowledges that certain entities are already subject to stringent reporting requirements under other federal laws. These entities, such as registered investment companies, registered investment advisors, and pooled investment vehicles, are exempt from additional reporting under the CTA. This exemption is particularly relevant to middle-market private equity firms and investment funds, as it allows them to maintain confidentiality regarding their investors and investment strategies.

Entities with a Physical U.S. Presence: Private companies with a physical presence in the United States are subject to a more limited reporting requirement under the CTA. If a company has 20 or more full-time employees in the U.S., filed gross receipts or sales in the country exceeding $5 million in the previous year, and maintains an operating presence within the country, it is exempt from reporting beneficial ownership information. This exemption is crucial for small and middle-market private companies that have substantial U.S. operations, as it reduces their reporting burden.

Exemptions Based on Size and Structure: The CTA also takes into account the size and structure of companies. Small and middle-market private companies may qualify for exemptions if they have fewer than 20 full-time employees and reported gross receipts or sales below $5 million in the previous year. Additionally, companies that operate in specific industries with existing regulatory oversight, such as nonprofits or certain insurance providers, may find relief from reporting requirements. These exemptions acknowledge the limited resources and unique characteristics of smaller entities, ensuring that they are not unduly burdened by compliance efforts.

Penalties for not reporting

Entities or individuals who willfully fail to provide accurate beneficial ownership information, or willfully submit false or fraudulent reports, can face stringent consequences. These include financial penalties of up to $10,000 and criminal penalties that may involve imprisonment for up to two years. This underscores the seriousness with which the U.S. government treats the issue of corporate transparency and the lengths to which it is willing to go to combat financial crimes like money laundering and fraud. The substantial nature of these penalties serves as a strong deterrent, emphasizing the importance of adherence to the CTA’s reporting obligations for all applicable businesses.

The Corporate Transparency Act (CTA) specifies clear penalties for non-compliance in its statute. According to 31 U.S.C. Section 5336(h)(3) of the CTA, the penalties are as follows:

  1. For Reporting Violations: Any person who violates the reporting requirements of the CTA is liable to a civil penalty of not more than $500 for each day that the violation continues or has not been remedied. Additionally, they may face criminal penalties including a fine of not more than $10,000, imprisonment for not more than 2 years, or both.
  2. For Unauthorized Disclosure or Use Violations: If a person violates the provisions related to unauthorized disclosure or use, they shall be liable to a civil penalty of not more than $500 for each day the violation continues or remains unremedied. The criminal penalties in such cases are more severe, with a fine of not more than $250,000, imprisonment for not more than 5 years, or both. However, if the violation occurs in conjunction with another law of the United States or as part of a pattern of illegal activity involving more than $100,000 in a 12-month period, the fines can increase to not more than $500,000 and imprisonment for not more than 10 years.

When to Report

Reports will be accepted starting from January 1, 2024. Depending on your company’s creation or registration date, the following deadlines apply:

  • If your company was established or registered before January 1, 2024, you will have until January 1, 2025, to report Beneficial Ownership Information (BOI).
  • If your company was established or registered on or after January 1, 2024, but before January 1, 2025, you are required to report BOI within 90 calendar days from the date of receiving actual or public notice of your company’s creation or registration being effective, whichever occurs earlier.
  • If your company was established or registered on or after January 1, 2025, you must file BOI within 30 calendar days upon receiving actual or public notice that your company’s creation or registration is effective.

 

Closing Notes

The Corporate Transparency Act (CTA) represents a significant shift in the regulatory landscape for small and middle-market companies in the United States. This Act mandates these businesses to disclose beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). The intent is to prevent the misuse of corporate structures for illicit activities like money laundering, fraud, and terrorism financing. It’s crucial for businesses, especially smaller ones, to understand the CTA’s implications, as non-compliance can lead to substantial penalties. Companies should be proactive in assessing their reporting obligations under the CTA to ensure compliance. For small and middle-market companies seeking clarity on the CTA and its impact on their business, it’s advisable to seek expert legal advice. GNS Law offers specialized guidance in this area. To learn more about your company’s responsibilities under the CTA and for tailored legal advice, contact GNS Law at info@gnslawplllc.com.

 

The information provided on this blog is for educational purposes only and is not intended as legal advice. While we strive to provide accurate and up-to-date information, the legal field is constantly evolving, and the material shared here may not reflect the most current legal developments. The contents of this blog should not be relied upon as a substitute for the advice of a licensed attorney. We encourage readers to consult with a qualified attorney for advice regarding specific legal issues or concerns. The use of this blog and any information obtained from it does not establish an attorney-client relationship. For more detailed and personalized assistance, please contact an attorney. 

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