The below is merely informational and does not communicate, whether intentionally or otherwise, any legal, compliance or other advice.
Ostensibly intended as an anti-money laundering tool, the Corporate Transparency Act (CTA) constitutes a significant intrusion by the federal government into the affairs of domestic and foreign corporate entities otherwise excluded from U.S. public disclosure requirements. Effective January 1, 2024, the CTA mandates that “reporting companies” disclose “beneficial ownership information” or BOI to the Financial Crimes Enforcement Network (FinCEN), which includes not only personal identifying information for actual owners of a business, but also of its directors, officers, executives, and possibly key employees and more. Below, we answer some top of mind questions you may have about the CTA and its application against U.S. business:
In a nutshell, what is the Corporate Transparency Act?
The essence of the CTA is its broad applicability and stringent criteria for transparency. It encompasses both domestic entities and foreign entities operating within U.S. borders. However, the CTA carves out exemptions for specific entities already under substantial regulatory scrutiny, including banks, credit unions, and SEC-reporting companies. Additionally, entities that demonstrate a lower risk of misuse for illicit activities, by virtue of their size, revenue, and physical presence in the U.S., are also exempt.
A cornerstone of the CTA is its definition of beneficial owners: individuals wielding substantial control or owning significant equity stakes in an entity. The Act delineates “substantial control” to include senior officers, individuals with decisive influence over key decisions, and those holding a minimum of 25 percent equity interest. This definition covers a potentially wide-range of individuals, well beyond those who are just part of ownership. Necessarily, the “beneficial owner” definition requires the reporting business to make a judgment call as to who falls within its ambit. In crafting this definition, it appears Congress wanted to render visible to FinCen the scope of individuals responsible for corporate ownership and decisionmaking, by peeling away the protections typically afforded by corporate structures employed within the small business context.
What are the reporting requirements and deadlines?
With the CTA, transparency is not just a principle but a detailed procedural mandate. Reporting companies are tasked with providing comprehensive information about those satisfying the beneficial owner definition, including legal names, birthdates, addresses, and identification numbers. For new entities formed post-CTA enactment, additional details regarding the company applicants responsible for their registration are required.
Under the CTA, for entities formed from and following January 1, 2024, initial BOI reports are due 90 days of formation. For all entities formed before that date, the initial BOI report are due by January 1, 2025. To maintain accuracy and current information, companies are obliged to amend reports or rectify inaccuracies within 30 days as an essential component of the CTA’s ongoing compliance framework.
Compliance and Penalties
Non-compliance with the CTA carries potentially steep penalties, which are applied against the individual and not the company. Amongst other liabilities specified for non-compliance, the CTA sets civil penalties fo $500 per day, and criminal penalties can include imprisonment and fines up to $10,000.
Who needs to concerned?
Besides those with a reporting requirement, the CTA imposes new reporting requirements for companies engaged in mergers and acquisitions, whether of target in its entirety or of a division. Tracking and report individuals meeting the beneficial owner definition will be important.
Constitutionality
It is possible that the CTA is unconstitutional, whether in whole or in part. At least one U.S. District Court has already found the CTA does not pass constitutional muster. But at present, the scope of that Court’s decision remains limited to the parties involved in the underlying case, meaning for everyone else, the CTA’s requirements remain active. Caution therefore suggests the better pathway is for subject businesses to comply with the CTA’s reporting requirements.
Working with Baker Jenner
In navigating the new requirements set forth by the Corporate Transparency Act, businesses face the dual challenge of ensuring compliance and leveraging this transparency for strategic advantage. At Baker Jenner, we understand the nuances and implications of the CTA. Our team is dedicated to guiding businesses through this transition, ensuring that your reporting is timely, accurate, and aligned with your broader business objectives.
To learn more about how the CTA affects your business and to ensure your compliance strategies are robust and effective, we invite you to schedule a consultation with us. Together, we can turn the challenges of today into the successes of tomorrow.
Baker Jenner LLLP
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