The Corporate Transparency Act: What it Means for Your Business and How to Prepare

A standout part of the Anti-Money Laundering Act of 2020, the Corporate Transparency Act (CTA) requires domestic companies (or foreign companies registered to do business in the U.S.) to engage in a new wave of information reporting. Specifically, reporting companies must provide personal information for the company’s “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN).

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Here, we’ll address what these new reporting requirements look like and what companies can do to ensure they are CTA compliant.

What is the Reasoning Behind the Corporate Transparency Act?

The U.S. is considered to be among the most financially secretive countries in the world, according to independent organizations that track tax laws. The federal government has stated that this represents an exploitable hole for bad actors using shell companies to engage in illicit activities.

The CTA is designed to close this hole up, which according to FinCEN, will allow law enforcement agencies to better track potential money laundering, securities fraud, drug and human trafficking, and terrorism.

What Companies are Required to File a CTA Report?

The CTA applies to both domestic and foreign reporting companies. The definition of each is as follows:

• Domestic reporting companies – Any corporation, LLC, or any other business entity created through filing documentation with the secretary of state (or a similar position).
• Foreign reporting companies – Any foreign business entity created under the laws of its home nation and registered to do business in the U.S. through filing documentation with the secretary of state (or a similar position).

As you can see, this includes the vast majority of entities doing business in or with the U.S., but there are exceptions. We’ll address those further on.

When Does the CTA Go Into Effect?

The CTA’s reporting requirements are set to go into effect starting January 1, 2024. Any reporting entity formed after this date must report its information to FinCEN within 30 days following the entity’s creation.

For reporting companies formed before January 1, 2024, they have until January 1, 2025 to provide their CTA information.

There are Some Exceptions to the CTA’s Reporting Requirements

The CTA’s definition of reporting entity is purposefully broad, given the act’s objective. There are, however, several exceptions. They include:

• Companies that already report to the SEC.
• Regulated financial companies, including banks, credit unions, registered investment agencies, capital venture and investment advisors, securities brokerage firms and depository holding companies.
• Accounting firms registered through the PCAOB.
• Insurance companies.
• Tax-exempt companies.
• “Inactive” companies. An inactive entity is one formed before January 1, 2020, is not owned by a foreign person, is not engaged in active business, and had not had a change in ownership or engaged in a transaction of $1,000 or more in the last 12 months.

These exceptions to the CTA follow a pattern – entities that aren’t active or are already regulated under separate reporting measures.

There is another broad exception to CTA reporting. Any business that employs 20 or more people, has an active office in the U.S. and reports more than $5 million in gross receipts on its tax return is also exempt. If any of these requirements are no longer met, the business has 30 days to file a CTA report.

What Information Must be Included in a CTA Report?

CTA reporting must include information about the reporting business entity, its beneficial owners, and the company applicant(s). The company applicant is the person charged with submitting the CTA report. In many cases, this will be an attorney or an accountant.

Information about the reporting entity must include:

• The business’s full legal name, or any trade name or “doing business as” name.
• The company’s current address.
• The company’s federal taxpayer ID number.
• Where the business was formed (the company’s jurisdiction of incorporation or formation).

Information about all beneficial owners and company applicants must include:

• Full legal name and date of birth
• Current address
• The person’s unique ID number (driver’s license, passport, etc.) and the photo associated with the ID.

In this way, FinCEN’s approach is to mimic know-your-client (KYC) measures that many industries already utilize.

What Constitutes a Beneficial Owner, and Are There Any Exceptions?

Beneficial owners are the true target of the CTA’s new reporting measures, as FinCEN wants to know who (whether foreign or domestic) is really operating any reporting entity.

The definition of a beneficial owner includes:

• Any shareholder that owns at least 25 percent of the company’s equity.
• Or, anyone who exercises “substantial control” of the company.

For someone to exercise substantial control of the business, one of the following must be true:

• The individual is a senior officer with the company. This means someone may be a beneficial owner even without equity shares.
• The individual has the authority to replace any senior officer or member of the board.
• The individual has influence or determination over any of the company’s operating decisions.

There are exceptions to who may be considered a beneficial owner. They include:

• Any minor children, though their guardian’s information must be included in the report.
• Anyone acting as an agent or intermediary for someone else. In this instance, the represented individual must be included in the report.
• A company employee with no ownership stake and acting only as an employee on behalf of the reporting entity.
• Any individual whose ownership interest is only available upon inheritance.
• One of the company’s creditors.

Who Has Access to the Information Contained in a CTA Report?

Information contained in a CTA report is not publicly available and is not subject to Freedom of Information requests. According to FinCEN, CTA reports will only be made available for the purposes of investigating potential criminal activity. Therefore, only the following agencies are granted access to CTA information:

• Federal, state, and local law enforcement agencies.
• Federal national security and intelligence agencies.
• The Department of the Treasury, to facilitate tax enforcement duties.
• Financial institutions, if the reporting entity consents.

What Reporting Companies Should Do Now To Prepare For CTA Reporting

There are major penalties associated with CTA noncompliance. Willfully providing false information in a CTA report or failing to provide complete information may result in fines up to $10,000 and up to two years of imprisonment. There is a grace period for mistakenly filing information to FinCEN, as long as it’s voluntarily corrected within 90 days.

As compliance is critical, it’s also critical for reporting entities to establish their reporting measures now. Given the potential legal consequences involved, many reporting companies will trust their CTA reporting to an experienced Houston tax attorney or accountant. By partnering with an experienced Houston tax professional, reporting businesses will have a go-to CTA expert that will properly file and update all required information.

FinCEN states that an online reporting portal is coming, termed the Beneficial Ownership Secure System. Currently, there aren’t any drafts of the portal available, but by partnering with a Houston tax attorney or accountant, reporting entities can remain aware of any developments.

CTA Reporting Is On The Near Horizon, So Reporting Companies Are Encouraged To Prepare Now

The CTA goes into effect in less than six months. That gives businesses just enough time to organize their reporting measures and identify who will serve as the company’s applicant. For many businesses, that will be a trusted Houston tax professional – either an attorney or accountant who has experience reporting information to relevant state and federal agencies.