July 18, 2022
Written by Cynthia S. Gillard, partner
The Corporate Transparency Act (CTA) is a federal law originally passed by Congress in 2020 that was vetoed by President Trump.
The CTA is set to take effect in late 2022-early 2023 on the date that the final regulations take effect.
The stated purpose of the CTA is to “discourage the use of shell corporations as a tool to disguise and move illicit funds,” part of a broader federal initiative to prevent and combat money laundering, terrorist financing, and tax fraud.
The Act requires written disclosure of the owners and beneficial owners of all forms of legal entities organized by a filing with the state. Large entities are exempted under the Act if they meet certain requirements. Failure to file carries severe monetary penalties and imprisonment.
What is this law designed to accomplish?
The law requires disclosure of the true ownership and control of business entities to combat the use of shell entities to engage in improper or illegal conduct.
Who is required to report?
Domestic and foreign entities, including corporations, limited liability companies, and any other entity that is formed by filing a document with a secretary of state or similar office under the law of any State or Indiana Tribe and that derive limited liability.
Exemptions
There are roughly 22 different exemptions from the reporting requirement, which include companies that report to other forms of government regulators, such as the SEC, banking regulators, insurance regulators and public companies issuing securities under Section 12 of the Securities and Exchange Act of 1934, to name a few. Most notably, “large operating companies” are exempt from the reporting requirement. A “large operating company” must have more than 20 employees, a physical office in the United States, and have filed a federal income tax return reporting more than $5 million in gross receipts or sales, excluding foreign receipts or sales. If you do not fall into one of these categories, you are required to file this report.
What do you report?
Reporting companies must disclose the full name of the company, any dbas, address, jurisdiction of formation, and taxpayer identification number. The company must also provide information on every individual who is a beneficial owner or company applicant. A beneficial owner exercises substantial control over the company or owns/controls 25% of the ownership interests of the company. A company applicant means any individual who files the document that creates the domestic reporting company or registers a foreign reporting company. This includes not only the lawyer or paralegal who files the articles of incorporation for example, but also the person or lawyer directing that activity. For these individuals who are beneficial owners or company applicants, the company must provide the name, date of birth, address, passport number or driver’s license number, along with a picture ID. The regulations refer to a FinCEN identifier that can be obtained for lawyers, but do not cover how to do that. This information must be filed within 14 calendar days of the date of formation or registration of the entity. Pre-existing entities have until one year after the effective date of the final regulations. There is also an obligation to update the reports.
Where do you report?
FinCEN.
For more information and counsel on business law, please contact the attorneys at Warrick & Boyn, LLP.