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The Corporate Transparency Act (CTA) was originally passed back in 2020 and went into full effect on January 1 of this year. CTA represents a significant effort by the United States Congress to combat money laundering, terrorist financing and tax fraud, among other illicit activities.

Nearly every business entity formed or registered to do business in the United States, excluding sole proprietorships and general partnerships, is subject to these requirements – an estimated 30 million entities!

In this article, we will review at a high-level the reporting requirements, compliance deadlines, fines, exemptions, and the impact on various stakeholders. And, as you might expect, the CTA has not gone unchallenged.

Objectives:

The primary objective of the CTA is to enhance transparency by requiring companies to disclose information about their “beneficial owners” and “company applicants” to the Financial Crimes Enforcement Network (FinCEN). A beneficial owner is someone who exercises substantial control over the entity or owns 25% or more of an entity. A company applicant is the individual involved with filing the formation or registration documents of the company. By collecting, storing, and maintaining this information in a centralized database, the FinCEN and other agencies gain valuable insights to investigate and prosecute illegal activities they uncover within these corporate structures.

Reporting Requirements:

The CTA mandates reporting companies to file a "Beneficial Owner Report" with FinCEN, containing detailed information about the individuals who ultimately own or control the entity. This includes their full legal name, date of birth, residential address, identifying number from a valid document (e.g., driver’s license or passport) along with uploading an image of the identification document.

After the initial report is filed, it must also be kept current. Should there be any change to this information (or a change of beneficial owners altogether), it’s the company’s responsibility to update their filing within 30 days from when it became first aware of the new information.

The Beneficial Owner reporting is accomplished online through the FinCEN website. They intend to maintain this information in a secure database that will only be accessible by certain law enforcement agencies, taxing authorities and a limited number of other potential users who can apply for access upon request.

Compliance Deadlines and Fines:

There are important deadlines for compliance. Reporting companies formed on or after January 1, 2024 are required to report beneficial ownership information within 30 days of formation. Those formed prior to this year must file their initial report before January 1, 2025.

Failure to comply with these requirements can result in significant fines of up to $500 per day and (in some cases) criminal penalties, including up to 2 years imprisonment.

Exemptions and Exceptions:

While the CTA casts a wide net, there are a few exemptions and exceptions. The new rules do not apply to charities, publicly traded companies and large private operating companies (defined as those with more than 20 full-time employees, revenue greater than $5 million, and have a physical presence within the U.S.). There are more exemptions for companies where disclosure and reporting requirements already exist such as banks, credit unions, accounting firms, broker dealers, investment advisors, etc.

It is important to note that trusts by themselves do not have to file under the new law. However, if a trust is a beneficial owner of a reporting company such as an LLC or corporation, that company’s registration will need to disclose information about the trust’s grantor, trustees and beneficiaries.

Legal Challenges:

On March 1st a U.S. District Court of Alabama found the CTA to be unconstitutional and “cannot be justified as an exercise of Congress’s enumerated powers.” The ruling thus far seems to only cover the plaintiffs in this particular case – the 65,000 members of the National Small Business Association (NSBA). The Justice Department promptly filed an appeal. The argument could ultimately make its way to the Supreme Court if not addressed or repealed by Congress.

In the meantime, FinCEN is enforcing the filing requirement. We recommend filing within the prescribed 30 day deadline for any newly formed entities this year. For those existing entities that have until Jan 1st to file, waiting a little longer (until we know more) would be prudent.

Tanglewood is not making these filings on behalf of clients. However, your Wealth Advisor stands ready to work with your Estate Attorney or other legal advisor to help determine filing requirements and to provide necessary information.

Disclosures