In December 2020, Congress passed the Corporate Transparency Act (“CTA”) as part of the National Defense Authorization Act. The purpose of the CTA was to combat money laundering, financing of terrorism, and other illicit activity by creating a federal framework to require the disclosure and reporting of beneficial ownership information of reporting companies. All reports required to be submitted under CTA are sent to the Financial Crimes Enforcement Network (“FinCEN”). A new and final rule was issued in September 2022 and will go into effect on January 1, 2024.
Private businesses need to be aware of the following information regarding their compliance obligations under the CTA:
The CTA requires reporting companies to submit beneficial ownership information regarding beneficial owners and company applicants. A reporting company includes corporations, limited liability companies, or similar entities that are created by filing formation documentation with the secretary of state. Certain entities such as banks, credit unions, insurance companies, 501(c) tax exempt organizations, accounting firms, and certain large employers are exempt from the reporting requirements.
Any company existing or registered before January 1, 2024, is required to submit an initial report by January 1, 2025. The initial report needs to state that the company was created or registered prior to January 1, 2024, along with information regarding the reporting company and its beneficial owners, defined as individuals who control 25 percent of the company or exercise substantial control. A pre-existing reporting company is not required to report information on the company applicants, defined as an individual that directly files the document that creates the reporting company and an individual that is primarily responsible for directing or controlling the filing of the registration document.
All newly formed companies subject to the CTA are required to report information regarding beneficial owners and company applicants. An entity created or registered after January 1, 2024, but before January 1, 2025, must file their initial report within 90 calendar days of the company’s formation, while an entity created or registered after January 1, 2025, must file their initial report within 30 days of the company’s formation.
Reporting companies are required to annually file information on beneficial owners. Additionally, reporting companies must file an updated report within 30 calendar days of any change of information previously submitted to FinCEN regarding the reporting company or any beneficial owner.
The CTA imposes serious penalties for failure to comply with its requirements. Any person or reporting company that fails to report or supplies false information may be subject to civil and criminal penalties. These penalties may include a civil penalty of up to $500 per day until the violation has been remedied (capped at $10,000) and/or up to two years imprisonment.
We recommend all business entities consult their legal counsel with questions about the application of the CTA, and their tax consultants for assistance filing and updating CTA reports.
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