The Corporate Transparency Act (CTA) is U.S. legislation aimed at preventing the misuse of shell companies for illicit purposes. It requires certain business entities to report the identities of their beneficial owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). The goal is to enhance national security by reducing opportunities for money laundering, terrorist financing, and other illegal activities. Non-compliance with the CTA’s provisions can result in significant penalties.
The implications for your business due to the CTA depend largely on your entity type and ownership structure. If your business falls under the specified entities (subject to specific exemptions described below), you will be required to disclose the identities of your beneficial owners to FinCEN. This means added compliance and potential reporting responsibilities. Thus, it’s crucial for businesses to be aware of their obligations under the CTA and ensure they are in full compliance to avoid any legal and financial repercussions.
To begin, it is essential that we determine if your business meets the definition of “Reporting Company” as provided in the CTA.
A Reporting Company is:
- A corporation
- A limited liability company
- Or any other entity formed under the law of a State, Indian tribe, or foreign country that is registered to do business in any State or tribal jurisdiction by filing a document with the secretary of state or any other similar officer under the law of a State or Indian tribe
A Reporting Company does NOT include:
- General partnership
- Trusts not involving a creation filing
- Any foreign entity that does not choose to register to do business in a State or Indian tribe
If you are a Reporting Company, the next step is to determine whether you fit into any “exemptions”. If you are exempt, you do not have to follow the disclosure requirements under the CTA since you are likely already covered under a different reporting regime. The exemptions are as follows:
- “Large Operating Company” – defined as a company that (i) employs more than 20 full-time employees in the U.S., (ii) has an operating presence at a physical office within the U.S., and (iii) filed a tax return for the prior year for more than $5 Million of gross receipts or sales
- A subsidiary of a Reporting Company
- An inactive entity
- Regulated financial services companies
- Insurance entities
- Tax exempt entities
Additional information on what qualifies as an exemption can be found on the FinCEN resources page.
If you are a Reporting Company and are not covered by the listed exemptions, you will be required to provide specific information to FinCEN. While the CTA becomes operative on January 1, 2024 for new companies, existing Reporting Companies have until January 1, 2025 to submit their details to FinCEN. We will continue to share what information will need to be reported, how, and when. Note that a substantial lack of clarity remains on the nuances of how the tests for “Large Operating Company” will be defined as well as the exact reporting requirements. We will update you with new developments in real time. If you have any questions on whether or not your company is a Reporting Company, please reach out to your trusted Kleinbard advisor.
Be sure to also check out our handy Pocket Chart to help determine if you are considered a Reporting Company.
