What is the Corporate Transparency Act?

The Corporate Transparency Act will affect millions of small businesses, so it needs to be understood. However, trying to read the full version of the CTA filing would be a daunting task unless you have several free hours on your hands and/or possibly a law degree. Since most small businesses owners have neither thing, we are undertaking a series of articles to help convert the CTA rules into easily-understandable segments. 

The Corporate Transparency Act (CTA), ratified into law on January 1, 2021, is part of the 2021 National Defense Authorization Act (NDAA), which is an annual congressional bill that guides defense agencies’ policies and funding. Congress enacted the CTA as part of the Anti-Money Laundering Act (AMLA)of 2020, to further advance its agenda of deterring criminals from infusing their illicit funds into the U.S. financial system.

What is the Corporate Transparency Act’s purpose?

Often, criminals “launder” their money to hide the illegal activity through which they accumulated it. The Corporate Transparency Act of 2021 requires certain companies to report beneficial owner and company applicant information (BOI—more on this later) to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). This information can aid the government in preventing such activity.

While legitimate business entities play a pivotal role in the U.S. and global economies, they can also be set up as fronts, or “shells” to engage in unlawful activity and “clean up” its proceeds. The current lack of a corporate transparency framework allows nefarious actors to hide illegal activity behind these corporate entities. 

Congress estimates that more than two million corporations and limited liability companies are formed in this country every year. That number opens up a lot of potential avenues for criminals to put a clean public face on felonious activities like human trafficking, drug and arms dealing, and terrorist financing.  The CTA’s purpose is to put names behind business faces and thereby make it harder for anyone to use their company to anonymously carry out criminal intentions.

What does the Corporate Transparency Act require companies to do?

The solution is fairly simple. Certain companies (we’ll discuss which ones in the next section) will now be required to turn in a CTA report to FinCEN disclosing basic information, including:

  1. The company’s full name
  2. Any trade name or DBAs
  3. The business street address
  4. Jurisdiction of formation
  5. IRS taxpayer ID.

In addition, they must report each beneficial owner and company applicant’s:

  1. Name
  2. Birthdate
  3. Address
  4. A unique identifying number from an acceptable official document (such as a passport or state-issued driver’s license)

The CTA defines a “beneficial owner” as an individual who directly or indirectly:

  1. Exercises substantial control over the reporting company – Senior officers, those with authority over senior offices, those who have practical influence over substantial company matters, etc., OR
  2. Owns or controls at least 25% of the reporting company’s ownership interests

A company applicant, whose information must also be reported, is the individual who “filed the application to form a corporation, limited liability company, or other similar entity under the laws of a State or Indian Tribe” (Foley & Lardner LLP). In the case of foreign companies, an applicant would be the person who files the document that registers the company to conduct business in the United States.

Which Companies Need to File?

According to Global Financial Integrity, “The number of legal entities already in existence in the United States that may need to report information on themselves, their beneficial owners, and their formation or registration agents pursuant to the CTA is very likely in the tens of millions” (Federal Register). Are you one of them? Well, that question is more easily asked than answered, but here’s the broad view.

The CTA identifies companies required to file a corporate transparency act report (referred to as “reporting companies”) as “any corporation, limited liability company or similar entity that is (i) created by the filing a document with the secretary of state or a similar office under the law of a State or Indian Tribe; or (ii) formed under the law of a foreign county and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a State or Indian Tribe” (SchellBray).

But that’s everybody, right? Well, not quite. It’s actually a bit easier to figure out which companies ARE required to file by pinpointing the companies that do NOT have to file. Following is the list of CTA exceptions:

  1. Large operating companies (see below)
  2. Securities issuers
  3. Banks
  4. Insurance companies and producers
  5. Brokers or dealers in securities
  6. Registered investment companies and advisers
  7. Venture capital fund advisers
  8. Accounting firms
  9. Tax exempt entities (or those assisting tax exempt entities)
  10. Special pooled investment funds

“Large operating companies” refer to companies that:

  • Employ more than 20 full-time employees in the U.S.
  • Accrued more than five million dollars in gross receipts or sales, as demonstrated on their prior year’s federal income tax returns, AND
  • Operate from a physical office in the U.S.

These corporate bodies are exempt because they’re already subject to federal and/or state regulation.

If you’re still not sure whether you need to report, try taking a free quiz here.

What Are the Penalties for Not Filing?

The Corporate Transparency Act is a law, and as with any law, if you don’t comply you’ll realize penalties. In this case, not filing may result in substantial fines and/or jail time. Any party found guilty of intentional non-compliance with the CTA’s reporting requirements may accrue fines of no more than $500 for each day they deliberately fail to report. They can accumulate fines of up to $10,000 and/or be sentenced to a prison stint of up to two years.

In the next article, we’ll do a deeper dive into the information that needs to be reported on a beneficial ownership report.

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