Corporate Transparency Act Effective on January 1, 2024

The Corporate Transparency Act (the “New Law”) went into effect on January 1, 2024. The New Law requires certain entities to submit “beneficial ownership” information to the Financial Crimes Enforcement Network (“FinCEN”). Failure to comply with the Rule’s reporting requirements carries both civil and criminal penalties.

Our firm is sending you this communication to provide you with some general information regarding the new reporting rules.

Please note, as the CTA is not a part of the tax code our firm will not be completing or submitting this information.  You are the responsible party for compliance. We are happy to be a resource and provide general guidance, but we will not be providing technical advice. You should check with your attorney for technical advice and filing assistance.

Which Entities are subject to the new CTA reporting requirements?

Entities required to comply with the CTA (“Reporting Companies”) include corporations, limited liability companies (LLCs), and other types of companies that are created by a filing with a Secretary of State (“SOS”) or equivalent official. The CTA also applies to non-U.S. companies that register to do business in the U.S. through a filing with a SOS or equivalent official. Since the definition of a domestic entity under the CTA is extremely broad, additional entity types could be subject to CTA reporting requirements based on individual state law formation practices.

There are a number of exceptions to who is required to file under the CTA. Many of the exceptions are entities already regulated by federal or state governments and as such already disclose their beneficial ownership information to governmental authorities.

Another notable exception is for “large operating companies” defined as companies that meet all of the following requirements:

• Employ at least 20 full-time employees in the U.S.
• Gross revenue (or sales) over $5 million on the prior year’s tax return
• An operating presence at a physical office in the U.S.

Who is considered a “beneficial owner” of a Reporting Company?

A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” or owns or controls at least 25% of the company’s ownership interests.

An individual exercises “substantial control” if the individual (i) serves as a senior officer of the company; (ii) has authority over the appointment or removal of any senior officer or a majority of the board; or (iii) directs, determines, or has substantial influence over important decisions made by the Reporting Company. Thus, senior officers and other individuals with control over the company are beneficial owners under the CTA, even if they have no equity interest in the company. 

In addition, individuals may exercise control directly or indirectly, through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control.

CTA regulations provide a much more expansive definition of “substantial control” than in the traditional tax sense, so many companies may need to seek legal guidance to ultimately determine who are deemed beneficial owners within their organization.

Phase-in of reporting requirements

As currently promulgated, the CTA’s reporting requirements will be phased-in in two stages:

• All new Reporting Companies — those formed (or, in the case of non-U.S. companies, registered) on or after January 1, 2024 — must report required information within 90 days after their formation or registration.
• All existing Reporting Companies — those formed or registered before January 1, 2024 — must report required information no later than January 1, 2025.

Note that penalties for willfully violating the CTA’s reporting requirements include (1) civil penalties of up to $500 per day that a violation is not remedied, (2) a criminal fine of up to $10,000, and/or (3) imprisonment of up to two years.

For additional information regarding the beneficial ownership reporting requirements under the CTA, refer to FinCEN’s Frequently Asked Questions document at https://www.fincen.gov/boi-faqs.

Please feel free to contact us if you have any general questions on this matter.