Corporate Transparency Act (CTA) Resource Page

The Corporate Transparency Act (“CTA”) was enacted as part of the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”). The CTA is intended to combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, thereby protecting U.S. economic prosperity. The database that will be created as a result of the CTA’s requirements is intended to aid law enforcement with investigations and mitigate risks as quickly as possible. For additional information on the background of why the CTA came to be, check out the full rule published here.

Millions of new corporations, limited liability companies, and other entities are created annually. Many jurisdictions do not require entities to disclose much, or any, information about their owners. FinCEN (the Department of Treasury’s Financial Crimes Enforcement Network) has explicitly stated that the CTA’s requirement to report information about beneficial owners is intended to make it more difficult for bad actors to conceal their financial activities through entities with opaque ownership structures.

While these intentions are good, the impact of the CTA is expected to be drastic and jarring. The number of legal entities already in existence in the U.S that may now need to report information on themselves, their beneficial owners, and their formation or registration agents is in the tens of millions.

Beginning January 1, 2024, newly created companies that fall under the umbrella of the CTA will be required to report immediately. Existing entities will have one year to report, meaning that the deadline for existing entities will have until January 1, 2025 to report the required information.

WHAT COMPANIES ARE COVERED BY THE CTA?

The CTA defines “domestic reporting company” as any entity that is a corporation, limited liability company, or was created by filing a document with the secretary of state or any similar office under the law of a state or Indian tribe.

The CTA defines “foreign reporting company” as any entities that is (1) a corporation, limited liability company or was created by filing a document with the secretary of state or any similar office under the law of a state or Indian tribe; (2) was formed under the law of a foreign country; and (3) registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a state of Indian tribe.

There are 23 exemptions to Reporting Companies designed to relieve companies from reporting under the premise that they likely report similar information through other channels.

WHAT ARE THE EXEMPTIONS TO REPORTING COMPANIES?

The CTA exempts 23 specific types of entities. The idea is that many of these entities are already subject to substantial federal/state regulations and have to provide beneficial ownership information to a governmental authority through such requirements. The exempted entities are listed below:

1. Securities reporting issuer
2. Governmental authority
3. Bank
4. Credit Union
5. Depository Institution Holding company
6. Money services business
7. Broker or dealer in securities
8. Securities exchange or clearing agency
9. Other Exchange Act registered entity
10. Investment company or investment advisor
11. Venture capital fund advisor
12. Insurance company
13. State-licensed insurance producer
14. Commodity Exchange Act registered entity
15. Accounting firm
16. Public entity
17. Financial market utility
18. Pooled investment vehicle
19. Tax-exempt entity
20. Entity assisting a tax-exempt entity
21. Large operating company*
22. Subsidiary of certain exempt entities
23. Inactive entity

The CTA provides additional guidance for each of these entity types, so a facts and circumstances analysis must be completed to determine if a specific entity does or does not qualify for an exemption.

We note the large operating company exemption above because it is a big exemption that will exclude a number of entities. A large operating company is any entity that:

(A) Employs more than 20 full time employees in the United States,

(B) Has an operating presence at a physical office within the United States; and

(C) Filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales, as reported as gross receipts or sales (net of returns and allowances) on the entity's IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under Federal income tax principles.

WHO MUST REPORT?

The CTA requires reporting of two categories of individuals: (1) the beneficial owners of the entity and (2) the individuals who have filed an application with specific governmental authorities to create or register it to do business.

A beneficial owner is defined in the CTA as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.”  Beneficial owners who satisfy either of those two components must report, unless they are subject to an exclusion.

There are five exclusions to beneficial owner:

1. A minor child, provided that a parent or guardian’s information is reported,
2. An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual,
3. An individual acting solely as an employee of a reporting company in specified circumstances,
4. An individual whose only interest in a report company is a future interest through a right of inheritance, and
5. A creditor of a reporting company.

A “Company Applicant” under the CTA is an individual who files the document that forms the entity. This means individuals who are responsible for the creation of a reporting company through the filing of formation documents, and the individual that directly submits the formation documents (if that function is performed by a different person). In the case of a foreign reporting company, however, a company applicable is an individual who files the document that first registers the company to do business in the U.S.

WHAT INFORMATION MUST BE REPORTED?

For each beneficial owner and each individual who files an application to form a domestic entity or registration of a foreign entity to do business, there are four pieces of required information:

1. The individual’s full legal name,
2. The individual’s date of birth,
3. The individual’s current residential or business street address, and
4. A unique identifying number from an acceptable identification (e.g., a passport, nonexpired state, local, or Tribal identification document, driver’s license) or the individual’s FinCEN identifier.

Note that a FinCEN identifier is a unique identifying number that FinCEN will issue to individuals or reporting companies upon request, subject to certain conditions. For individuals, FinCEN will issue a FinCEN identifier if an individual submits to FinCEN the same four pieces of identifying information as would be required in a beneficial ownership information report. For reporting companies, FinCEN will issue a FinCEN identifier only at or after the time the reporting company files an initial report.

It is expected that FinCEN will permit an individual or business to use its FinCEN Identifier when submitting materials rather than submitting the four pieces of information outlined above for each report.

WHEN MUST THE INFORMATION BE REPORTED?

The rules become effective January 1, 2024. New entities will have 30 days from creation to report to FinCEN. There is also a 30-day deadline for entities filing updated and corrected reports. The deadline for corrected reports begins when the company becomes aware or has reason to know that reported information is inaccurate.

For existing entities, the final rule requires those reporting companies that exist at the time of the effective date to submit an initial report within one year of the effective date. That means, existing entities will have one year from January 1, 2024, to report.

For entities that were in existence prior to the effective date, the entity will not be required to report applicant information. Rather, the entity will be permitted to report that it was created prior to the effective date and to report the information required for reporting companies and beneficial owners. 

We note also that the CTA requires a certification that the information reported is “true, correct, and complete.”

WHERE WILL THE INFORMATION BE STORED?

The CTA directs the Secretary of the Treasury to maintain the reported information “in a secure, nonpublic database, using information security methods and techniques that are appropriate to protect non-classified information security systems at the highest security level.” FinCEN developed the Beneficial Ownership Secure System (“BOSS”) to receive, store, and maintain the information. It is expected that all reports will be made electronically directly to the BOSS system.

WHAT ARE THE PENALTIES FOR NOT REPORTING?

There are potential civil and criminal penalties if a person fails to report or fails to update beneficial ownership with FinCEN. FinCEN is in process of writing these rules.