What is the Corporate Transparency Act?

The Corporate Transparency Act (“CTA”) was signed into law in the United States in 2021 and aims to increase transparency and prevent illicit activities within the corporate sector. The CTA will require businesses to disclose beneficial ownership information to the Financial Crimes Enforcement Network of the Department of the Treasury (“FinCEN”) and has gone into effect as of January 1, 2024.

What is Beneficial Ownership Reporting?

Under the CTA, most small to medium-sized corporations, limited liability companies, and similar entities will be required to report beneficial ownership information to FinCEN.  Although an exception to the law may be available to banks, credit unions, insurance companies, or companies with more than 20 full-time employees and gross receipts or sales of $5,000,000 or more in a single year, including all of the subsidiaries, and has an office within the United States. A full list of exempt businesses can be found at 31 U.S.C. § 5336(a)(11)(B). Beneficial ownership refers to individuals who directly or indirectly own or control a significant percentage of the company. If someone owns 25% or more of the equity in a company or exercises substantial control over the corporation, they will have to report. This includes senior officers such as a president or CEO, CFO, etc. of the company and any governing authority including members of a board of directors or managers. These individuals must disclose their names, dates of birth, addresses, and unique identification numbers, such as a driver’s license or passport number along with a copy of these documents as well.

There is a 30-day grace period to update information changes such as moving residences, name changes, equity sales or transfers, resignations, or if an entity files an assumed name. All this information must be updated with FinCEN and entities must include a physical address in their report. A P.O. Box will not suffice. Additionally, entities with more complex ownership structures must provide detailed ownership chains of parent and subsidiary companies even if the entities are exempt from reporting.

When to report?

Entities In Existence Prior to January 1, 2024

Any reporting entity formed or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial beneficial ownership report.

Entities Formed Between January 1, 2024 and January 1, 2025

If a new entity is formed between January 1, 2024, and January 1, 2025, it will have 90 days after receiving notice of its creation or registration to file its initial report. The 90 days begin from the time the reporting entity receives notice that its creation is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, not necessarily when its owners receive the information.

Entities Formed After January 1, 2025

Any entities created or registered on or after January 1, 2025, will have 30 days from the company’s creation or registration to file their initial reports.

The reporting will be done electronically through a secure filing system available on the FinCEN website and you will receive an identifying number to report any changes.

What is the purpose?

The CTA was enacted to address perceived gaps in corporate transparency, which previously allowed illicit actors to exploit anonymous shell companies for their nefarious activities. These activities included money laundering, fraud, corruption, and financing terrorism. By mandating beneficial ownership disclosures, the CTA seeks to establish a more robust system that enables law enforcement agencies and regulatory bodies to effectively investigate and prevent such crimes.

How will information sharing, and privacy considerations be protected?

To balance transparency with privacy concerns, the CTA restricts public access to the disclosed information. While law enforcement agencies, financial institutions, and other entities can access the data for legitimate purposes, public access is limited. Federal and state agencies will also have protocols they must follow when trying to obtain this information. Furthermore, any officer or employee of these agencies will be prohibited from disclosing this information to the public. Agencies of other countries may be entitled to beneficial ownership information if it is requested as part of an investigation by that foreign country. Lastly, financial institutions subject to due diligence requirements may receive the information with your consent. However, as mentioned above, anyone receiving this information will be bound by the same prohibitions on disclosing such information.

What happens when businesses fail to report?

Like tax filings, there are criminal and civil penalties for providing false information on the report or failing to report in general. Persons will be assessed a $500 fee for each day a violation continues and may be fined up to $10,000, imprisoned for up to 2 years, or both. There is a 90-day safe harbor for you to fix any incorrect information.

Why is this important?

Small to medium-sized entities need to be aware of upcoming reporting requirements and timely file them to avoid any of the penalties mentioned above. Until now, ownership of small companies has not been burdened by significant regulation, making it easy to form these entities and operate them. Even so, many companies in Texas are forfeited each year for failing to file simple forms on an annual basis.  It is unclear at this time how difficult it will be to comply with this regulation; however, given the steep penalties, it would be beneficial to speak with a corporate attorney in advance, to create a plan for timely filing all necessary paperwork and making sure it is properly updated.