The Corporate Transparency Act - What You Need to Know
In 2021, the Federal Government passed the Corporate Transparency Act (the "CTA"), with an effective date of January 1, 2024. The CTA applies to most small businesses in the United States and requires certain disclosures to be made to the Financial Crimes Enforcement Network ("FinCEN") of the Department of the Treasury. Failure to comply with the CTA requirements may have severe civil and criminal penalties to a Company and its owners.
In this Alert we will describe, the basic provisions of the CTA, what must be reported and when, and the penalties for failure to timely file reports. The interpretation of the CTA is ongoing, and we will provide additional guidance in the near future.
I. WHAT IS THE CTA?
The CTA was passed by the United States Congress in 2021 with the intent of curbing illicit activity including tax fraud, money laundering, and financing for terrorism, specifically the activities being conducted through small United States based entities. As such, the CTA requires a "Reporting Company" to disclose certain entity level information, as well as information on such Reporting Company's beneficial owners.
II. WHAT IS A REPORTING COMPANY AND WHAT ENTITY LEVEL INFORMATION MUST BE REPORTED?
Under the Act, a "Reporting Company" is defined as either a domestic or foreign privately held company, and broadly includes entities that were created by the filing of a document with a state (i.e., a corporation, limited liability company, limited partnership, professional corporation, etc.). This broad definition includes nearly all Pennsylvania based entities.
The Act does provide twenty-three separate exemptions from the definition of a "Reporting Company." The most relevant exemptions are likely to be:
- Certain Tax-Exempt Entities.
An organization that is described in Section 501(c) of the Internal Revenue Code of 1986 (the "Code"), and exempt from tax under Section 501(a) of the Code is exempt. However, if any such organization ceases to be described in Section 501(c), then such organization will need to file reports. In addition, a political organization defined in Section 527(e)(1) of the Code, or a trust described in Paragraph (1) or (2) of Section 4947(a) of the Code are also exempt.
- A Large Operating Company.
As the CTA is targeting smaller United States entities, Large Operating Companies are exempt from the disclosure requirements. A Company is a "Large Operating Company" if all of the following requirements are met:
- The Company employs more than 20 full-time employees. Generally, an employee is considered full-time if he or she provides at least thirty (30) hours per week or one hundred thirty (130) hours per month;
- The Company has an operating presence at a physical office located within the United States; and
- The Company filed a Federal Income Tax Return for the previous year demonstrating more than $5,000,000 in gross receipts or sales.
- An Inactive Entity.
An Inactive Entity is one that meets the following requirements:
- The entity was in existence on or before January 1, 2020;
- The entity is not engaged in active business;
- The entity is not owned by a foreign person, directly or indirectly, wholly or partially;
- The entity has not experienced any change in ownership in the preceding twelve month period;
- The entity has not sent or received funds in an amount greater than $1,000 in the preceding 12 month period; and
- The entity does not otherwise hold any kind or type of assets, wherever located, including ownership interests in other entities.
If your Company is a "Reporting Company" you will need to report the company's legal name, trade name, any dba designations, the address of its principal place of business, the jurisdiction of formation, and its tax identification number.
III. WHO IS A BENEFICIAL OWNER AND WHAT INFORMATION MUST BE REPORTED?
One of the primary purposes of the CTA is for Reporting Companies to disclose to FinCEN the ultimate owners and control persons of these small Reporting Companies. As such, a Reporting Company must disclose certain information regarding its "Beneficial Owners." The CTA provides that a "Beneficial Owner" is a person that, directly or indirectly, either: (i) owns twenty-five percent (25%) or more of the Reporting Company's ownership interests; or (ii) exercises substantial control over the Reporting Company.
Determining who satisfies the definition of a Beneficial Owner based on ownership interest is relatively straightforward. For subsidiaries, a Beneficial Owner is the ultimate individual or individuals that own the parent company. The determination of who exercises "substantial control," however, is not as simple.
The CTA provides that an individual exercises "substantial control" over a Reporting Company in four different ways:
- An individual who is a senior officer, such as the company's president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function.
- An individual who has authority to appoint or remove certain officers or a majority of directors (or similar body) of the Reporting Company.
- An individual who is an important decision maker for the Reporting Company. "Important decisions" include decisions about a Reporting Company's business, finances, and structure. An individual that directs, determines, or has substantial influence over these important decisions therefore exercises substantial control over a Reporting Company.
- An individual who has any other form of substantial control over the Reporting Company.
Generally, the Reporting Company must disclose its officers and directors at a minimum. The information that must be reported about a Beneficial Owner includes: the individual's name, date of birth, residential address, and an identifying number from an acceptable identification document such as a United States passport or a driver's license issued by a state government. A copy of the identification used must be submitted with the disclosure form as well.
IV. WHEN ARE REPORTS DUE AND WHERE CAN THEY BE FILED?
- For entities formed before January 1, 2024, the first report to FinCEN is due before January 1, 2025.
- For entities formed on or after January 1, 2024, the first report to FinCEN is due within ninety (90) days of formation.
- For entities formed on or after January 1, 2025, the first report to FinCEN is due within thirty (30) days of formation.
In addition to the initial report, an updated report must be filed within thirty (30) days if there are any changes or corrections to the information contained on any previous report. This would include a change of address for a Reporting Company or a Beneficial Owner. The requirement to file an updated report also applies if a Reporting Company becomes exempt. In such a circumstance, the Reporting Company must file an updated report to claim the exemption.
V. WHAT ARE THE PENALTIES FOR FAILURE TO FILE?
If a Reporting Company fails to timely file a report, the CTA provides for penalties of five hundred dollars ($500) per day. The penalty continues to apply until the report (or updated report) is filed. In addition, if a Reporting Company willfully provides false information or willfully files an incorrect report, criminal fines of up to $10,000 and two (2) years imprisonment may apply.
FinCEN is currently issuing and updating frequently asked questions on the disclosure process. These FAQ's can be found at: https://www.fincen.gov/boi-faqs. The required filings can be made at: https://www.fincen.gov/boi. We also recommend that you review the Small Entity Compliance Guide issued by FinCEN, which can be found at: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf
Rest assured, we will continue to monitor additional guidance and be in contact with additional information in the near future. In the meantime, if you have any questions or concerns or want to discuss the applicability of the CTA to your business or assistance with completing the required disclosure, please feel free to contact us.