On January 1, 2024, the federally enacted Corporate Transparency Act (“CTA”) came into effect. The CTA requires certain entities to disclose information regarding their beneficial owners to the Financial Crimes Enforcement Network by the end of the year. These reporting requirements seek to prevent private use of shell entities as a tool to facilitate money laundering and other financial crimes.
As the deadline quickly approaches, closely held businesses should examine their reporting requirements.
Who is required to report?
Reporting companies are corporations, limited liability companies, limited liability partnerships, and other similar entities created by, or registered to do business under, “the filing of document with a secretary of state or similar office under the law of a State or Indian Tribe.”[1] This definition includes non-profit corporations and trusts that have secretary of state filings.
What companies qualify for exemption?
The CTA provides several exemptions which generally cover entities already subject to other federal reporting requirements.[2]
- Public companies that issue securities registered under the Securities Exchange Act.
- Any entity registered with the Securities Exchange Commission, such as brokers, exchange dealers, investment companies, investment advisors, and clearing agencies.
- Pooled investment vehicles that are operated or advised by an entity exempt from the CTA.
- Any company registered under the Commodity Exchange Act.
- Any government agency established under federal, state, or tribal laws.
- Registered public utility companies and designated market utility companies.
- Banks, federal and state credit unions, bank holding companies, and other money transmitting businesses registered with the Secretary of Treasury.
- Public accounting firms registered under the Sarbanes-Oxley Act.
- Insurance companies.
- Entities that (1) employ more than 20 full-time employees within the United States, (2) demonstrate more than $5,000,000 in aggregate gross receipts or sales in the previous year federal income tax return, and (3) has physical operating presence within the United States.
- Subsidiaries of other entities exempt from the CTA.
- Certain inactive entities.
- What must be reported?
- A reporting company, unless exempt, must provide (1) its full legal name, (2) any trade or “doing business as” names, (3) a complete current street address of its principal place of business, (4) its jurisdiction of formation, and (5) its taxpayer identification number.[3]
- A beneficial owner of a reporting company must provide his or her (1) full legal name, (2) date of birth, (3) current residential or business street address, and (4) copy of a current U.S. passport, state identification, driver’s license, or foreign passport if no other document is available.[4]
- Entities formed after January 1, 2024 must provide information about its “Company Applicant” – this is the same information required of beneficial owners.[5]
- Who is a beneficial owner?
- A beneficial owner is an individual who, directly or indirectly, owns or controls at least 25% of the ownership interests of the entity or exercises substantial control over the entity.[6] An individual exercises “substantial control” over a reporting company if the individual (1) serves as a senior officer of the entity, (2) has authority over the appointment or removal of any senior officer or a majority of the board, (3) directs, determines, or has substantial influence over important decisions made by the entity, such as decisions regarding the sale, lease, or transfer of any principal assets, the reorganization, dissolution, or merger of the entity, major expenditures or investments of the entity, the selection or termination of business lines or ventures, compensation schemes and incentive programs for senior officers, the entry into or termination of significant contracts, and amendments of any substantial governance documents.[7]
- This definition expressly excludes minor children, individuals acting as nominees, custodians or agents, employees who are not senior officers, and creditors of a reporting company.[8] The parent or legal guardian of a minor child will be required to disclose instead.[9]
- Who is a Company Applicant?
- A Company Applicants is an individual who files, or is primary responsible for the filing of, the document creating the reporting company.[10] This definition includes the business owner, the entity’s hired lawyer or agent acting on the client’s directions, and employees designated to file the formation documents. Although many may fall within the definition only a maximum of two individuals will be considered the Company Applicant.[11]
- Entities existing before January 1, 2024 are not required to designate a Company Applicant.
- When is the deadline to file?
- Entities formed before January 1, 2024 will have until January 1, 2025 to file the report. Entities formed between January 1, 2024 and December 31, 2024 will have 90 days from incorporation to file the report. Entities formed after January 1, 2025 will have 30 days from incorporation to file the report.
- Where will the disclosures be filed?
- Filing will be done through the Financial Crimes Enforcement Network’s website.
- Estate Planning Implications
- Reporting Company
- Entities formed for the purpose of estate planning are not exempt from reporting requirements if formation required the filing of a document with the secretary of state, or other similar government agency. Although trusts generally do not require secretary of state filings, estate plans formed under limited liability companies may trigger reporting requirements.
- Beneficial Ownership
- A revocable or irrevocable trust may be implicated if it has a beneficial ownership interest in a reporting company. In these situations, beneficial ownership reporting is required (1) by the trustee if the trustee has the authority to dispose of the trust assets, (2) by the beneficiary if the beneficiary is the sole permissible recipient of income and principal from the trust, or has the right to withdraw or cause distribution of substantially all the trust assets, and (3) by the grantor or settlor of a revocable trust.[12]
- Current Status
- On March 1, 2024, a federal district court in Alabama ruled that the CTA is unconstitutional, citing lack of Congressional authority. As part of the judgment, the court issued a limited injunction, preventing enforcement against the only case plaintiffs. At this time, the U.S. government has filed an appeal.
- In light of the ruling, the Financial Crimes Enforcement Network has announced that it will comply with the court’s order. Meaning, other than named plaintiffs in the court case, CTA enforcement will continue.
- If you have more questions regarding your CTA reporting requirements, contact a counselor today.
