The Corporate Transparency Act

WHAT IS THE CORPORATE TRANSPARENCY ACT?

The Corporate Transparency Act (CTA) is a federal law that requires certain businesses, known as non-exempt “reporting companies,” to report their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). The CTA went into effective January 1, 2024, as part of the National Defense Authorization Act for Fiscal Year 2021.

The purpose of the CTA is to give federal and state enforcement agencies more extensive data concerning small and shell companies, thereby aiding in the deterrence of money laundering, terrorist financing activities or other illegal activity and effectively banning anonymous shell corporations.

HISTORY OF THE CTA

Congress had faced acute pressure to act related corporate transparency and to impose a requirement on companies to disclose their beneficial owners following multiple media leaks, including the Panama Paper, the Paradise Papers and the Pandora Papers. Each leak highlighted the gaps in the tax system and the need for beneficial ownership transparency. Due to this pressure, legislators made multiple attempts to pass bipartisan legislation related to corporate transparency and to mandate disclosure of  their beneficial owners prior to the National Defense Authorization Act for Fiscal Year 2021.

For example, in 2008 the Incorporation Transparency and Law Enforcement Assistance Act was introduced. The 2008 bill sought to establish uniform requirements for disclosure of beneficial owners and to impose additional identification requirements for the beneficial owners of corporations or limited liability companies who are not U.S. citizens or lawful permanent residents of the United States.

Additionally, in 2012, FinCEN proposed a rule to require companies to disclose their beneficial owners. In 2015, the Obama administration issued an executive order mandating financial institutions to report information regarding the beneficial owners of accounts holding over $3 million. The 2015 Executive Order was challenged in federal court and eventually blocked by a federal judge.

Next, Congress introduced the CTA in 2019. The bill was meant to address the shortcomings of the 2012 FinCEN rule and the 2015 Executive Order. Ultimately, the bill did not pass the Senate before the end of the legislative session.

Finally, Congress passed the National Defense Authorization Act for Fiscal Year 2021, which included the Corporate Transparency Act. The final rule was released in 2023.

WHO DOES THE CTA IMPACT?

The CTA impacts “reporting companies,” which are defined as all entities that are formed or registered to do business in the United States by the filing of a document with a secretary of state or similar office and all entities that are formed under the law of a foreign country and registered to do business in any state. Reporting Companies include corporations, limited liability companies, limited partnerships, certain business trusts, and select other entity types. The CTA is designed to primarily target small businesses, with certain exemptions. For example, an entity that meets the following three requirements, is not required to file a CTA Report:

1. Gross receipts over $5 million on the last U.S. tax return

2. Over 20 full-time U.S. employees

3. Operating presence at a U.S. physical office

In total, there are 23 possible exemptions. Even if an entity falls under an exemption, it is important to continually monitor the beneficial owners and entity for a change in status.

WHEN ARE CTA REPORTS DUE?

CTA Reports are filed using FinCEN’s electronic filing system. The deadline for filing the CTA Report is based on the Reporting Companies creation date and can be broken down as follows:

WHAT DATA IS REQUIRED IN A CTA REPORT?

Each CTA Report must include the following specific details about the Reporting Company and each beneficial owner:

A beneficial owner is an individual with direct or indirect ownership exceeding twenty-five percent (25%) of equity or substantial control over the Reporting Company. For newly-formed companies, the personal information of individuals directing formation is also required.

PENALTIES FOR NONCOMPLIANCE

Substantial work must be performed by reporting companies and beneficial owners to file an accurate CTA Report or determine exemption status. There are significant penalties for non-compliance, including fines, civil, and criminal penalties. Therefore, it is critical for reporting companies and beneficial owners to understand the CTA's reporting requirements.